萊德系統 (R) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Ryder System First Quarter 2018 Earnings Release Conference Call. (Operator Instructions) Today's call is being recorded. If you have any objections, please disconnect at this time.

I would now like to introduce Mr. Bob Brunn, Vice President, Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's first quarter 2018 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. Conference call also includes certain non-GAAP financial measures. You'll find reconciliations of each non-GAAP measure to the nearest GAAP measure in the written presentation accompanying this call, which is available on our website in investors.ryder.com.

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; 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 first quarter 2018 results, discuss the current outlook for our business and highlight the progress on some of our strategic initiatives. Then we'll open the call for questions.

But before we do that, I'd like to take a moment to acknowledge the tragic event that occurred in Canada yesterday involving a Ryder rental van. Our deepest sympathies go out to the victims and their loved ones. As all of you know, we take safety and security very seriously, and we are fully cooperating with the authorities during this investigation.

Now let's turn to an overview of our first quarter results. Comparable earnings per share from continuing operations were $0.91 for the first quarter 2018, up 10% or $0.08 from the prior year, reflecting a lower federal tax rate due to tax reform. Comparable earnings per share for the quarter were just above the high end of our forecast range of $0.83 to $0.90, primarily reflecting stronger-than-expected performance in rental, Supply Chain and Dedicated, partially offset by lower-than-expected used vehicle sales results. Our contractual businesses, ChoiceLease, Dedicated and Supply Chain all grew nicely during the quarter and benefited from secular trends that favor outsourcing as well as our ongoing sales and marketing initiatives. Continuing our momentum from record company-wide sales in 2017, we achieved record sales again in the first quarter. We also continue to make progress on our strategic initiatives that leverage disruptive trends in transportation to drive longer-term revenue and earnings growth.

First quarter 2018 comparable results exclude a $0.29 U.K. goodwill impairment charge and a $0.02 net benefit from nonoperating pension, acquisition, restructuring and tax-related items. Last year's comparable earnings excluded $0.08 of nonoperating pension cost and an operating tax charge of $0.03. Operating revenue, which excludes fuel and subcontracted transportation revenue, increased by 7% to a record $1.5 billion for the first quarter, reflecting higher operating revenue in all 3 business segments. Total revenue increased by 10% and benefited from a higher operating revenue and increased subcontracted transportation activity.

Page 5 includes some additional financial information for the first quarter. The average number of diluted shares outstanding for the quarter decreased to 53 million shares from 53.4 million shares last year. We began repurchasing shares under a new 2-year 1.5 million share anti-dilutive repurchase program in February of 2018. During the quarter, we bought approximately 171,000 shares at an average price of $75.43. Excluding the pension costs and other items, the comparable tax rate was 25.6% for the first quarter of 2018, significantly lower than the prior year rate of 36.6%, primarily reflecting the net benefit to the federal income tax rate from U.S. tax reform.

I'll turn now to Page 6 and discuss key trends that we saw in the business during the quarter. Fleet Management Solutions operating revenue, which excludes fuel, increased 8% from the prior year, driven by growth in all product lines. ChoiceLease revenue increased 5% due to fleet growth and higher rate on replacement vehicles reflecting their higher cost. The lease fleet increased by 1,700 vehicles since year-end 2017. ChoiceLease continues to benefit from favorable outsourcing trends as well as our sales and marketing initiatives. We achieved record lease sales during the quarter and continue to effectively penetrate the non-outsourced market. In addition, we're encouraged to see growth from customers who, for the first time in many years, are expanding their fleet sizes due to the strong freight environment. Given continued strong sales and a robust pipeline, we've increased our full year forecast for lease fleet growth to 7,500 vehicles, up by 1,000 units compared to the prior forecast. This will be a new record for the company.

ChoiceLease results benefited from fleet growth, although this was partially offset by higher depreciation, maintenance cost in certain older model year vehicles and weather-related expenses during the quarter. Miles driven per vehicle per day on U.S. lease power units declined by 1% versus the prior year, reflecting a mix change in vehicle types and continue to run at normal historical levels.

SelectCare revenue increased 7%. The average SelectCare full-service and preventive fleet grew by 4,100 vehicles from the prior year, reflecting new customer wins. During the quarter, 8,100 vehicles were serviced under SelectCare On-Demand maintenance agreements. This is a decrease of 13% from the prior year, primarily reflecting lower activity in certain accounts. Unit service were unchanged sequentially.

Commercial rental revenue was up 18% year-over-year, driven by higher demand and pricing. Global rental demand was up by 14%, reflecting a strong freight environment. Global pricing was up 3%. Rental utilization on power units was 74.8%, up 760 basis points on a 3% larger fleet. This is the highest first quarter utilization rate we've realized in the past decade. These vehicle results for the quarter were down year-over-year, primarily due to higher inventory valuation adjustments and, to a lesser extent, fewer vehicles sold. I'll discuss those results separately in a few minutes.

Overall, FMS earnings decreased due to higher depreciation of $10 million from residual value changes, used vehicle sales results and overhead spending. The impacts were partially offset by higher commercial rental and ChoiceLease performance. Earnings before tax in FMS decreased 5%. FMS earnings as a percent of operating revenue were 4.8%, down 60 basis points from the prior year.

I'll turn now to Dedicated Transportation Solutions on Page 7. Total revenue grew 12% due to higher subcontracted transportation and operating revenue. Operating revenue was up 4% due to increased volumes and new business. We anticipate this growth rate to increase as the year progresses due to strong sales in late 2017 and early 2018. DTS earnings increased 17% due to revenue growth and operating performance as well as favorable development related to self-insurance claims from the prior years. Segment earnings before tax as a percent of operating revenue were 6.5%, up 70 basis points from the prior year.

I'll turn now to Supply Chain Solutions on Page 8. Total revenue grew 10% due to higher operating revenue and increased subcontracted transportation from new business. Operating revenue grew 6%, primarily reflecting new business. SCS earnings before tax were down 7% due to lower volumes in the automotive business as well as ongoing performance in 1 customer account. These impacts were partially offset by earnings from operating revenue growth in the CPG retail and technology health care verticals and lower insurance cost. Segment earnings before tax as a percent of operating revenue were 6.8% for the quarter, down 90 basis points 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 9. Gross capital expenditures for the quarter totaled $711 million, up by $275 million from the prior year. This increase reflects higher planned investments to grow and refresh the rental and lease fleets. We realized proceeds primarily from the sale of revenue-earning equipment of $90 million, down $7 million from the prior year. The decrease primarily reflects a lower number of vehicles sold. Net capital expenditures increased by $281 million to around $620 million.

We are increasing our forecast for full year gross and net capital expenditures by around $130 million, primarily due to the increase in our ChoiceLease fleet growth outlook of 1,000 vehicles. Our new forecast for gross capital is $3 billion, and our forecast for net capital is now $2.6 billion.

Turning to the next page. We generated cash from operating activities of $315 million for the quarter, down 5%. The decrease was driven primarily by increased working capital requirements, partially offset by higher cash-based earnings. We generated $425 million of total cash, down $19 million from the prior year, primarily reflecting lower operating cash and sales proceeds. Cash payments for capital expenditures increased by around $300 million to approximately $660 million. Company's free cash flow was negative $238 million for the quarter versus the prior year of positive $83 million, reflecting higher capital spending. Our revised full year forecast for free cash flow has decreased $150 million to negative $750 million, reflecting the expected increase in our ChoiceLease and rental fleet.

Page 11 addresses our debt-to-equity position. Total debt of around $5.7 billion increased by $268 million from year-end 2017, driven by higher capital spending. Debt-to-equity at the end of the first quarter increased to 199% from 191% at the end of 2017 and is just below the low end of our target range of 200% to 250%. Our revised forecast for balance sheet leverage at year-end is now 210%, up from our prior forecast of 199%, reflecting additional growth capital expenditures and the acquisition of MXD Group earlier this month. Equity at the end of the quarter was just under $2.9 billion, up $17 million from year-end 2017 due to earnings and foreign exchange, partially offset by dividends and net share repurchase.

At this point, I'll hand the call back over to Robert to provide a used vehicle sales update.

Thanks, Art. Page 13 summarizes key results for global used vehicle sales. Used vehicle inventory held for sale was 6,000 vehicles at quarter end and at the low end of our target range of 6,000 to 8,000 vehicles. Used vehicle inventory was unchanged from year-end 2017 but declined significantly year-over-year, reflecting our initiative last year to reduce our used vehicle exposure. Prior year inventory excludes an elevated number of leased vehicles being prepared for sale. However, we no longer have elevated levels in 2018. Including these vehicles in the prior year provides a more relevant comparison and shows a year-over-year decline of used vehicle inventory of 2,400 vehicles. We sold 4,200 vehicles during the quarter, down by 7% from the prior year. Vehicles sold increased by 200 units sequentially.

Proceeds per vehicle sold were up 5% for tractors and up 2% for trucks compared to a year ago. This reflects the greater use of retail sales channel, where we receive better pricing as well as the change in the mix of vehicle types sold. From a sequential standpoint, tractor pricing was up 3%, but truck pricing was down 3%. We realized lower-than-expected pricing in certain truck classes and tractor models during the quarter.

I'll turn now to Page 15 to cover our outlook. We expect year-over-year pretax earning to be higher for the balance of the year. This reflects growth from contractual and rental revenue and cost reductions, which will more than offset the impact from used vehicle sales and higher depreciation. Overall, our earnings forecast for the balance of the year remains generally in line with our prior expectations. We expect strong rental performance and contractual sales results to continue, driven by a healthy freight environment and our ongoing sales and marketing initiatives. We're encouraged by record contractual sales results for the first quarter following record sales in 2017. Based on our sales pipeline, we see the potential for upside to our upwardly revised lease fleet growth forecast of 7,500 vehicles. Due to longer production lead times, however, we expect the incremental vehicles above our original forecast to be mostly delivered late this year and primarily benefit earnings starting in 2019. We're forecasting the used pricing we saw in the first quarter on certain truck classes and tractor models to continue for the balance of the year. The used vehicle inventory is expected to be around the midpoint of our target range, and proceeds are expected to benefit from a greater use of the retail sales channel versus the prior year.

In rental, we expect strong demand conditions to continue. We now anticipate rental fleet growth of 7% for the full year average and at the year-end, with a 3% price increase. Utilization is expected to be up for the full year, although with greater -- with a greater increase in the first half due to easier comparisons versus 2017. Dedicated revenue growth should ramp up as the year progresses due to strong sales in late 2017 and early 2018. In addition, we're excited about the opportunity to leverage the growth opportunities in e-commerce and last-mile delivery following our recent acquisition of MXD Group. We expect double-digit operating revenue growth in both DTS and SCS for the second half of 2018. Based on our first quarter results and current outlook, our full year comparable EPS forecast range is now $5.45 to $5.70, reflecting an increase to the lower end of our prior range of $5.40 to $5.70. Our second quarter comparable EPS forecast is $1.20 to $1.30, an increase of 20% to 30% from the $1 in the prior year. We're forecasting a much higher sequential EPS growth from Q1 to Q2 in 2018 than we realized last year, but at a comparable growth rate as to what we saw a couple of years ago. Second quarter results this year are impacted by accelerated depreciation expense, which will be higher in the first half of the year than the second half as well as our assumption that used vehicle pricing -- used vehicle sales results will not improve sequentially from the first quarter.

Before we begin taking questions, I'd like to provide you with a brief update on the progress that we're making on some of our strategic initiatives. First, we continue to focus on driving long-term profitable growth and are very encouraged by the record contractual sales results we delivered during 2017 and the first quarter of 2018. In addition to benefiting from increased marketing -- market outsourcing, we're realizing success in our initiatives to expand the size of our sales team, increased collaborative selling across the organization and roll out new products. Our investment in customer-facing technology also continues to pay dividends and enhance satisfaction with current customers and winning new prospects. We're particularly pleased with what we expect will be our seventh consecutive year of organic lease fleet growth at a record 7,500 leased vehicles this year. We're focused on ways to improve used vehicle sales performance and are encouraged by the initial results from our newly established inside sales team for used vehicles. The insight expanding our market reach as most of the used vehicle sales from this channel are coming from new customers. We also see this as a great opportunity to sell more vehicles at good rates with minimal overhead investment and to extend our customer base. We're also continuing to make strategic investments in order to leverage disruptive trends in transportation and generate long-term earnings from new products.

Earlier this month, we announced the acquisition of MXD Group, which significantly expands our e-commerce fulfillment network and adds new last-mile capabilities for big and bulky goods. The combination of Ryder's prior business with MXD puts our annual e-commerce and final-mile revenue for SCS and DTS in the mid-$300 million range with additional revenue in FMS supporting e-commerce activity. We believe the growth opportunity in e-commerce and last mile can be very significant and look forward to cross-selling these services to our large customer base as well as taking our expanded suite of services to new prospects.

Following a pilot phase, we fully launched COOP in the Atlanta market this month, the first truck-sharing platform for commercial vehicles. This new product will provide customers with the opportunity to monetize underutilized vehicles and create a new asset-light revenue stream for Ryder. We expect to expand the geographic footprint of COOP starting in 2019.

Lastly, we announced 3 strategic partnerships with manufacturers of electric vehicles. Since last year, we've had electric vehicles available in our rental fleet in select California markets. And in the first quarter, we signed our first ChoiceLease customer. The electric vehicle technology we've deployed is in light- and medium-duty vehicle classes.

Slide 18 provides our current year expectations for each of the 3 -- of our 3 financial targets. All segments are now expected to reach or exceed their operating revenue growth targets. FMS is forecast to beat the target, while Dedicated should be on target. Supply Chain is expected to be well above the target when including the MXD acquisition. We now expect full year SCS total revenue growth of 15% and operating revenue growth of 11%. Note that the smaller portion of MXD revenue will be reported in operating revenue in the retail and CPG vertical, while the larger portion of the revenue will be reported as subcontracted transportation.

Earnings before tax as a percent of operating revenue for FMS is expected to come in below the target this year due to the impact of used vehicle sales. Dedicated is planned to come in just below target, and SCS is expected to reach their target EBT percent. Return on capital spread is forecast to break even this year, below our target of 100 to 150 basis points, primarily reflecting the impact from used vehicle sales. We are focused on improving used vehicle sales results, leveraging revenue growth, expanding non-asset-based earnings and continuing cost reduction opportunities to drive ROC to the target range over the 3-year period. Leverage is forecast to be in the lower end of our target range, which provides additional room for capital to support growth and/or acquisitions in the near term.

That concludes our prepared remarks this morning. At this time, I'll turn it over to the operator to open up the line for questions. (Operator Instructions) Operator?

(Operator Instructions) We'll go first to Ben Hartford with Baird.

Robert, some perspective on commercial rental utilization this quarter. You talked about some of the lengthening lead times with the OEMs and obviously healthy growth on the ChoiceLease side. But how are you thinking about that relationship relative to commercial rental utilization in the second quarter and the back half of the year? Should we think about rental utilization remaining healthy as spot continues to be strong? And given some of these lengthening lead times, do you expect people to lean more on rental for the time being? How do you expect that to play out in the second quarter and the back half of the year?

Yes. We're expecting the demand that we saw -- the strong demand we saw in the first quarter to continue through the balance of the year. Clearly, the year-over-year comps may tighten up a little bit just because rental started improving really in the back half of last year, but we're expecting -- considering what we're seeing in the freight environment, which is really, really healthy right now, the extended lead times from the OEMs, we would expect rental to continue to perform strongly.

And then to touch on the used equipment pricing topic, could you give us the mix of retail and wholesale in the quarter, if you didn't give it already, and what the expectations are for 2Q and the back half of the year in the context of what you said expected continued challenges to used equipment pricing?

Yes. I think, Dennis, you got the retail mix?

Yes, Ben. Globally, retail was at 66% and in the U.S., 72%.

That was the first quarter?

Yes.

And any thoughts on whether that'll change in 2Q and the back half of the year?

We actually expect it to improve.

Okay. Improve in favor of retail, I assume?

Correct.

Right. So kind of what we said at the beginning -- in the original forecast. We expect to be kind of in our target range of upwards of 70%.

We'll go next to Todd Fowler with KeyBanc Capital Markets.

Maybe just to take a step back on the used vehicle market. Robert, can you talk a little bit about -- is the market worse, I mean, than where we were just in mid-February when you provided your guidance? And if so, what's driving that? It really seems like that the volume piece is okay, but maybe it's more on the pricing side. So can you help us kind of square what you're seeing with respect to used vehicle? And the $0.14 loss that you gave in your initial guidance, is that still the right number that we should be thinking about for 2018? Or has that moved to what you've been experiencing over the past couple of months?

Yes. I'd tell you, we saw -- volumes were generally in line with what we thought. Pricing came in slightly below what we thought. I mean, I'd tell you pricing was a little bit lighter now -- there's a whole mix of vehicles also that we're selling. But I would tell you, apples-to-apples, slightly lower than what we expected. I would think -- I would tell you the gains that we -- the losses that we originally forecasted, about $14 million, $10 million -- $0.14 is now probably around $0.25 -- $25 million. So we'll have more -- we're expecting now more losses based on this pricing. But the market is not easy to predict right now. I think you're hearing in the marketplace pricing improving on some of the newer model year used trucks. So that's encouraging for us, yet we have not seen that really impact yet the older model years that we sell. However, you could -- you would expect over time that, that should trickle down as people trade down as prices move up on the newer model used, they would trade down to the older. So we haven't seen that yet. That's not built into our forecast, but that's something that's out there still.

And I guess, that's very helpful. And so how do we think about -- I mean, with we're sitting right now, the risk that there's continued downward pressure to the numbers or to what you're seeing on used truck. I mean, is there any sort of way that we can get comfortable that you kind of have baked in -- if the market continues to slide, or you don't see that improvement? Or is it, to your point, that the visibility is just difficult right now, and it could be kind of a quarter-to-quarter type thing if we don't see things step up, that there could be a little bit more pressure to the used vehicle results?

Yes. I think -- look, I think you've seen stabilization in the marketplace. We've -- obviously it moves. We saw it slightly coming lower than what we had expected and that impacts our earnings. But I would expect that where we're at now continue to see it kind of bouncing around this level for the balance of the year. That's really what -- that's really our view of it. It all -- it is all dependent on supply and demand, as you know. So supply is really -- demand, it seems to be very strong right now. There's a lot of freight moving. There's a lot of demand for vehicles. Obviously, people are looking for the newer ones right now. I think that trickles into the older used ones over time. And then the question is supply: how many vehicles are going to come into the marketplace over the second half of this year? And will the demand be able to outpace that?

We'll go next to Scott Group with Wolfe Research.

So sorry, one more on used. So your proceeds are going higher. Are you saying that's all mix, and underlying price is not improving? Is that what you're saying? And then can you just be clear, the guidance is assuming no underlying pricing improvement from here in used truck? Or are you counting on some pricing improvement? And then maybe just the last thing on used. So there's a worry about like all these truck orders and then it's going to flood the market with more used trucks. Do you have a view on the trucks that are going to enter the market? Or the -- as new trucks enter the market and then other trucks get put up on the used truck market, are those going to be relatively younger trucks or older trucks like you guys deal with? If that makes sense.

Yes. Well, okay. I'll answer both. The first question is, what we're expecting for the balance of the year is basically a flat market. We're not expecting any improvement. We're expecting it to be flat from where we were in the first quarter. So you're going to have -- we're going to have more retail versus wholesale, so you're going to see some improvement in that. But other than that, the overall market, I would tell you, we're assuming it's flat. In terms of the new -- in terms of the vehicles coming into the used truck market, I think it depends on what age vehicles come in. If you get more of the newer equipment, the newer model used vehicles, that may have less impact than if you get more of the older model year, which is what we typically sell. We are seeing the volume move through, so it's not like we're in an environment where there's not a market for it, it's just the pricing hasn't picked up yet. So that piece we have not -- we haven't called that yet. I think it's too early, but that's what it boils down to. As we're assuming flat, if there's any pickup, it'll be upside, but we're not calling that yet.

Okay. I guess, that's what I was asking. Do you have any view or insight into what's going to be coming into the used truck market? Is it going to be the younger or older trucks?

You're going to have a mix of them. No, we don't have that -- we don't have -- we do have -- we do see what -- we can model out what's coming in, but it just -- to translate that into what's going to happen to pricing is not a perfect science. So I wouldn't venture to give you any guidance on that.

Okay. And then on MXD, is there any color you can provide on sort of the margin profile of this business? And how much -- I think in the press release, you said slightly accretive, but any way to put some numbers on how much that's helping the guidance?

Yes. It's -- like I said, it's slightly accretive. So it's kind of -- I would view it as really kind of a wash right now. It is a profitable business. So -- and in that business is a difficult business. So we're very encouraged by that. We think there's great opportunity to cross-sell and Steve can add a little more color to what some of that looks like. But I think it really fits very nicely with our customer profile and our portfolio and gives an opportunity to really cross-sell and then get into new markets.

Yes. I'll just add a little bit of color. As we've met here over the last, let's say, several months, I've talked to a couple of their customers, the majority of their customers. Conversations have been very positive on the cross-selling opportunities. In the last couple of weeks with our existing customers, we've actually had some face-to-face meetings with clients that have been looking for this capability. So there's tremendous interest there. So we expect, as we go forward, to see new opportunities that we haven't seen in the past by having this capability.

We'll go next to David Ross with Stifel.

Just real quick on the MXD, just to follow up there and then one on Class 8s. You said the annual e-commerce funnel of all business is about $350 million now, including MXD. What was it prior to MXD?

Yes. We haven't given that -- those figures out. But the majority of the e-commerce that we're seeing now is, I would tell you, more than half of it is coming from MXD.

Okay. And then on the Class 8 side, when you look at the new orders coming in, the lease fleet growth, is that from some of these private fleets growing? Another way to look at it is are the renewals, as the contracts come up, adding trucks to their total fleet as they renew?

Yes. I think -- look, I think the first quarter was probably the most encouraging lease sales quarter we've had, certainly, in the years I've been with the company. We saw not only conversions of -- ownership conversions from customers that had or prospects that had owned their own fleet to now are leasing, but we also saw growth within our customer base. So the customer that has 10 trucks needing 11. So that is the phenomena we have not seen in a very, very long time. So it's extremely encouraging what we're seeing in the marketplace and the demand -- on the demand side. I think that bodes very well for earnings, primarily that vehicles are going to come in, in the second half of this year really helping us start 2019 with a really nice earnings uplift on that side of the business. So yes, we're seeing growth not just from new customers coming in and leasing, but also from existing fleets now beginning to grow.

We'll go next to Justin Long with Stephens.

So thinking about your contractual revenue guidance over the remainder of 2018 across your different businesses, could you give us a ballpark on how much of that is locked in? I just wanted to get a sense for your level of visibility at this point.

Yes. I'd tell you, visibility is pretty high at this point. The needs of the business, especially Supply Chain and Dedicated, have relatively long lead times. And we've had very encouraging results on the sales side now for certainly 2 quarters, 3 quarters almost. On the leasing side, lead times are typically a little tighter. But even now with some of the OEM production slots taken up, lead times have been extended a little bit. So we are really selling into a lot of that stuff in the second half already. So I would tell you, the visibility has been good. I think there's potential for upside on the lease fleets -- on the lease fleet growth side just because we still have a very healthy pipeline, and if we can lock in some of that, you'll see our lease fleet grow even more this year. Earnings impact to that, will be some in the second half of the year, but also really primarily hit and help 2019. I would say that one thing to make sure we take away from this is that you look at what's going on in the business right now, we do have this -- we have a lot of headwind from the used truck side. We've had it now for a couple of years. What's different now is that the earnings in the rest of the business is going to more than offset the earnings headwind from used vehicle sales and depreciation. I think that's a very important point to take is that, whether it's -- this thing turns around in '19 or '20 or whatever it is, we believe we now are at a point where we can offset and really grow our earnings meaningfully, even in the face of continued softness on the used truck side.

I guess, secondly, I wanted to ask about the guidance you gave for the year-over-year maintenance headwind last quarter. I believe you said that number would be around $30 million in 2018. Any update to that forecast? And any initial thoughts on what the year-over-year impact from maintenance could look like in 2019 based on the replacement schedule you have in place?

Yes. I don't think it's changed much from the original guidance. We're probably looking at about $30 million this year. And then as you look at 2019, that number will be significantly less. And then obviously, start to -- we expect that to turn into a tailwind as we get into 2020. So that is just assuming the normal flow of vehicles through the life cycle. But yes, we're really kind of on track with what we had originally given you.

We'll go next to Brian Ossenbeck with JPMorgan.

So I want to go back to MXD for a second. I mean, as last mile (inaudible) indicated, there's clearly been a growth area, still pretty fragmented. So I just wanted to see if you could give us a little bit of context as to the bidding environment for that asset, if you could. And then as we've seen some challenges with other of your peers rolling out, not getting initial traction, so if you can comment also in terms of just the scale of what you acquired beyond what was in the release and if you think there's any other investments you need to kind of get that up and running and to be able to cross-sell across your portfolio.

Yes. I won't comment on the bidding environment, but I'll talk to you a little bit about the scale from our perspective. As we talked about, they've got 21 last-mile hubs and then 16 dedicated warehouses. We think there's capacity to sell into those with existing and new customers. I would say that the growth here in this area is -- we think, is probably low teens as far as the growth perspective but certainly, a good opportunity for us.

Okay. And then any thoughts on the bidding environment when it was up for sale or when you're going to purchase the asset?

No, we don't comment on that topic.

Okay. No problem. And then Art, maybe for you on the residual impact, clearly, a headwind this year. If -- is there any way to give us some sensitivity as we look into next year in some of the puts and takes with the lease fleet growth continuing with some momentum into '19. What -- if we were to see pricing stay where you think it is right now, is there any way to give us a sense of what the residual adjustment would be for 2019?

Yes. We talked about a little bit of this last time. That hasn't changed too much. As we go forward, directionally, we would have another depreciation policy change. It could be a little bit less than what it was this year. But I think if you are modeling, I would be modeling in that $30 million to $40 million range, probably similar to what it was this year because we'll have to see how the year plays out. That's on the policy piece. I think on the accelerated depreciation aspect, that's more dependent on what pricing does. Clearly, we need some improvement in pricing for the accelerated impact to not be there in 2019.

We'll go next to Matt Reustle with Goldman Sachs.

You referenced a bit about how the longer lead times of the manufacturing side are having an impact on the leasing business. Are you seeing any impact on the used sales market there? And is there any readthrough -- I mean, if there's not necessarily an impact, I mean, is there any readthrough in terms of what's driving the overhang on the used market?

Well, I think what we've been hearing in the marketplace is pricing on the newer model year, used equipment is going up. So you can't get your hands on a brand-new vehicle, so you go to the used market and you get something that's a year, 2, 3 years old. So we don't sell typically vehicles in that -- of that vintage. So we have not seen that yet trickle down to the vintage that we sell, which is more the 6- to 8-year-old vehicles. But you would expect over time if that continues, you would see some trickle down and people trading down to -- as the price of the -- as the newer model years moves up, you might have some folks trading down to the older model years and start to see some price improvement there. We haven't seen that yet, but I think that's -- all of that is probably driven by 2 things: Number one, the very robust freight environment that we have; and number two, the shortage of vehicles in the marketplace and really, the lead times from the OEMs really been extended out.

Got it. I guess has the trickle-down time line, has that differed materially from past cycles in your view?

Yes. I really couldn't -- I couldn't comment on that because all these cycles are very different. I would tell you, I've never -- in the years I've been with the company, I don't think I've seen a freight environment this strong. So this will probably behave a little differently maybe than others have. So we just got to kind of let it play out and see where it ends up.

Got it. Okay. And just one more from my end, if I could. Just if we were to piece everything together here, if we excluded the used sales market, I mean, is it fair to say that your expectations for 2019 are improving everywhere outside of that piece of the business relative to where you were just a few months ago?

Yes. So if you think about our move from $10 million in losses on used vehicle sales to now saying $25 million, that additional $15 million, that's being offset by other parts of the business that are really -- whether it's rental, ChoiceLease, Dedicated, Supply Chain, all those are contributing to help offset this and keep us on track for the balance of the year. So we can -- to the extent used vehicle stabilizes, this growth continues in the other pieces, you've got a model then that really can provide nice earnings growth going forward.

We'll go next to Matthew Brooklier with Buckingham Research Group.

A couple on DTS. You called out having an insurance benefit in first quarter. Are you able to talk to how much benefit that was in terms of the margins?

Yes. That was a benefit from prior claims from prior years. But in terms of the...

Yes, Matthew. If you look at the results, the team actually had a solid first quarter. And if you look at the year-over-year improvement on a dollar basis, about half of that improvement year-over-year from prior year accident claims.

Okay. That's helpful. And then the year's starting off maybe a little bit lighter from a growth perspective, the expectations are you're going to see acceleration as we move through the year. Is that just a function of when you anticipating -- when you anticipate onboarding new accounts? Or is there a gating factor that maybe is proving a headwind? I guess what I'm getting at is, is the tight driver market potentially a headwind here in terms of trying to grow the DTS top line?

Yes. So what I would say is we actually see the tight labor market actually helping us, and we started seeing that in the second half of 2017. I think you heard from Robert, we had great sales activity in the second half of 2017, and then the first quarter 2018's been tremendous as well. So what you are seeing is what you said, which is we're ramping up some of these launches from last year or early 2018 that starts contributing in the second half.

We'll go next to Todd Fowler with KeyBanc Capital Markets.

Most of what I had has been addressed at this point, but Robert, I just wanted to ask, on the lease fleet additions that you're expecting this year, if I go back a couple of years ago when you had big lease growth in '14 and '15, I think that there was some difficulty in prepping the vehicles and getting them into service. Can you talk about how the network's positioned to handle the amount of vehicles that you're expecting to come through this year? And anything that we should think about from a cost perspective or from a timing perspective in getting those vehicles into service at this point?

Yes. No, I don't see any issues there at all. I mean, we've got our tech headcount where it needs to be, these vehicles come in. The issue is really OEM slot dates and OEM production dates. As you know, we secure those dates ahead of time, so we've got more dates than, I think, most people in the marketplace for those targets to extend out a little bit even for us. But we're certainly ready on our side and Dennis' team to bring those vehicles and get them ready to move in with our customers and start generating revenue.

So from a network standpoint, there's not a lot of additional cost that you need to bring in to facilitate the growth that you're seeing, either from a technician or in hours or from an infrastructure standpoint, you have all that in place. It's just a matter of getting, the timing of when you get the trucks?

Absolutely, yes. There's not a lot of work that goes into them when they first come in. A lot more work goes on the way out than on the way in. So typically, it's not an issue. I think the -- what you may be thinking about were some challenges we had around getting rental trucks ready when rental demand came up probably 3 or 4 years ago. But no, this is a different situation. These are brand-new units that are going to be coming in. We identify them with the customers' -- customers' logo and markings and put them out with a customer.

And then from the slide that you have with kind of the expectations for this year versus the full year guidance, I don't know if you want to be this granular, but for the FMS segment, would you be within the targeted margin range within the back half of the year if you're not in it for the full year? Can you speak to maybe the quarterly margin progression this year based on the timing of the fleet growth?

Yes. It goes up clearly from where we are today just seasonally also. And again, accounting for the growth, it starts to get us, I think, close. But again, it's not a fair way to look at it because our targets are really full year, which take into consideration the lower first quarter. So I tell you we'll end the year still short of that -- of our target range, again, really completely due to the used vehicle challenges. But I think the important thing is we continue to grow, and we really are now at new levels in terms of our ability to contribute earnings from our -- the contractual side of our business, rental doing well. So as we go into 2019, you'll see us starting making some good progress there. I think even in light of the headwinds from used vehicle sales and depreciation.

We'll go next to Ben Hartford with Baird.

Robert, when you think about the rollout of COOP and where we are in the cycle, obviously, rental utilization is healthy, and you described the market as strong as you've seen. There's probably an inevitability of that moderating at some point whenever that takes place. But how do you think about the rollout of COOP and what it can do to the rental product the deeper that we go into the cycle in terms of being able to insulate that offering from some of the negative operating leverage that does naturally develop? What's realistic to think about this cycle with regard to COOP and perhaps the next cycle? How does that product play in terms of insulating some of the cyclicality of rental versus providing growth avenues, et cetera?

Yes. If you think about it, what COOP could do over time is really provide us with a significant supply of surge capacity vehicles in the marketplace, which means Ryder and others may not have to go out and purchase as many surge capacity vehicles during the upturns. So you're not having as much volatility on the downside. So I think that's a longer-term outcome. Right now, we're very encouraged by what's going on in Atlanta. Still in the early, early innings of this, but it is a tool that I believe over time, as we start to -- as we finish and really burn it in, if you will, in Atlanta and then over time roll it out to other markets, it will become a very nice source of surge capacity vehicles for the marketplace, a nice source of income for many of our customers who may have idle vehicles and a nice source of asset-light revenue and earnings for Ryder. So it's very encouraging. It's still early, so I don't want to get ahead of myself on that. But I think, to the point you just made, over time, it could also mitigate our reliance on making capital investments for rental or certainly to the extent that we've been making them over the history of the company.

How many years do you think will be required to fully roll out COOP?

Yes. I think it's too early for me to speculate on that because I think, first of all, we have to make sure that this thing continues to progress as we expect it. But it is -- I will just tell you, it's a multiyear rollout. How fast we do it maybe depends on the results that we're seeing and how promising we believe it is. We could throttle that back and forth depending on what we see.

We'll go next to John Cummings with Copeland Capital.

Just curious if you guys could comment on the competitive environment on the leasing side just in general and then also what you're seeing from competitors in terms of pricing and if you're seeing any competitors lower their leasing rates due to tax reform.

Yes. I think overall, the leasing market continues to be a relatively rational market. Competition is seeing a lot of the same things that we're seeing, I think, with a healthy freight environment, and we're seeing pricing really holding its own. I don't think it was a big move due to tax reform, and pricing has just kind of held on.

Okay. And then maybe one other question on the ELD mandate. I know there's been some debate there about how that will impact the used vehicle market, so I'd just love to hear your opinion on the impact there.

Yes. That -- obviously, it's something that we've been monitoring. And some of our buyers are the owner-operators, who -- where everybody is forecasting maybe impacted by the ELDs. We have not seen, I think, one -- a move either way, I think positive or negative, from that. But again, as you know, this is recently being enforced. But I think whatever owner-operator was going to get out, has probably already gotten out, and the folks that are in are the ones that believe they can stay in it. So I think we probably are already seeing whatever impact that is. And again, as I mentioned earlier, our volume on the used truck side is on track. So we're selling the volume that we need. We just are looking for a pickup on price now.

Okay. And then one other question actually on your pricing and just curious how you adjust your pricing based on sort of the used vehicle residual values that you're seeing today. And I'm just curious, because given the big decline we've seen in the used vehicle pricing, I would have thought we would've seen a more meaningful pickup in sort of your pricing of the new leases based on the current residual values.

It's not about -- the way we price on our lease?

Yes, yes. On new leases.

Yes, yes. Well, we've typically used a rolling average for pricing our lease vehicles. Based on the market we've seen the last couple of years, I'll tell you, we have lowered the residual, probably more in line with what we're seeing right now just to protect ourselves in terms of what could happen with the used truck market going forward. So the pricing model that we have is currently including the existing lower used truck pricing on the residual side.

We'll take our last question from Scott Group with Wolfe Research.

So Robert, a few years ago when you first started talking about the leasing growth opportunity, I think we talked about 25% sort of incremental margins. Does that still seem like the right way to think about margins on all this growth coming?

Yes, I think it is. I think, clearly, what we haven't contemplated back then was some of the headwinds that we're seeing on used vehicle sales and on depreciation. But if you just look at the incremental growth of a new lease that we're signing, it already had all that built into it, I think that's still a fair way to model it.

Okay. Helpful. And then lastly, on rental, can you say as you're raising the leasing fleet guidance, are you also raising the rental fleet guidance? And then if you have it, can you give us rental, either utilization or demand, by month in the quarter?

I think we do have that. I would tell you, we are slightly raising the average rental fleet, I think, for the year. We're looking now at, what's the -- 7% versus, we originally said 6%. So we're holding onto some vehicles longer than we had maybe originally expected. If you want utilization by month, January was 75.5%, February was 73.8%, March was 74.9%.

Do you have April by any chance?

April, 75.6%. So all of those are year-over-year improvements.

Okay. Is it normal that January is the best of the quarter?

No. No, it's very not normal. January is typically weaker, I think, than March. But this year, that's the way it played out.

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

Okay. Thank you, everyone, and thanks for your interest in the company. Have a great day. We'll see you out on the road.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.