萊德系統 (R) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Ryder System Third 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, Investor Relations, Corporate Strategy and Product Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's Third 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.

This 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 at 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; 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 2018 results, discuss the current outlook for our business and highlight progress on some of our strategic initiatives. 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 $1.64 for the third quarter 2018, up 22% or $0.30 from the prior year, reflecting a lower tax rate from tax reform and improved operating performance.

Comparable results were towards the upper end of our forecast range of $1.55 to $1 65. Better than expected performance in commercial rental and used vehicle sales was largely offset by startup costs on a new Dedicated account and higher-than-anticipated maintenance costs.

Pretax earnings grew by 6%, despite used vehicle sales and depreciation headwinds of $18 million or 17% of prior year pretax earnings. Sales activity remained strong and we're on track with our second -- for our second consecutive year of record sales, driven by ChoiceLease and Dedicated. We delivered double-digit revenue growth with strong increases in all segments, benefiting from new outsourcing wins and a favorable freight environment.

Operating revenue, which excludes fuel and subcontracted transportation revenue, increased by 13% to a record $1.7 billion for the third quarter. Both total revenue and operating revenue increased due to new business and higher volumes.

Page 5 includes additional financial information for the third quarter. Comparable EBITDA was $526 million, up 12% from the prior year, primarily reflecting growth in our contractual businesses and strong rental performance. The average number of diluted shares outstanding for the quarter was $52.8 million, unchanged from the prior year. We began repurchasing shares under a 2-year $1.5 million share anti-dilutive repurchase program in February of 2018.

During the quarter, we bought approximately 134,000 shares at an average price of $77.82. Excluding pension costs and other items, the comparable tax rate was 26.2% for the third quarter 2018, significantly lower than the prior year's rate of 36.2%, reflecting a lower federal tax rate from U.S. tax reform. Page 6 highlights key financial statistics on a year-to-date basis. Operating revenue increased 10% to $4.9 billion.

Comparable EPS from continuing operations were $3.97, up 25% from last year. Comparable EBITDA was $1.49 billion, up 10% from last year. The return on capital spread was breakeven, up from a negative 30 basis point spread in the prior year. ROC spread has been impacted by lower used vehicle sales results and related depreciation due to the significant multi-year downturn in the used vehicle market. We expect full year return on capital spread to be 10 basis points above our original forecast of breakeven.

I'll turn now to Page 7 and discuss key trends that we saw in the business during the quarter. Fleet Management Solutions operating revenue, which excludes fuel, increased 9% organically from the prior year, driven by growth in all product lines.

ChoiceLease revenue increased 6% due to fleet growth and higher rates on replacement vehicles, reflecting their higher cost. The lease fleet increased organically by 5,600 vehicles since year-end 2017.

ChoiceLease sales activity remained very strong, and was a record for third quarter sales. We continue to effectively penetrate the non-outsourced market, with around 1/3 of our recent fleet growth coming from customers new to outsourcing. We also continue to see growth from customers expanding their fleet sizes. We remain on track to achieve organic lease fleet growth this year of 8,500 vehicles, which would be a new record for the company.

ChoiceLease results in the quarter benefited from fleet growth, although this was partially offset by higher depreciation due to residual value changes and higher maintenance costs on certain older model year vehicles.

SelectCare revenue increased 8%. The average SelectCare full-service and preventative fleet grew by 3,300 vehicles from the prior year, reflecting new customer wins. Commercial rental revenue was up 19% year-over-year, driven by higher pricing and demand. Global rental demand was up 17%, reflecting a strong freight environment. We are -- we experienced very strong sequential rental demand throughout the quarter and continue to see the strong sequential demand trends into October.

Global pricing was up 3%, as expected. Rental utilization on power units was 80.4%, up 240 basis points on a 13% larger average fleet. Used vehicle results for the quarter were down year-over-year, primarily reflecting lower gains and challenging prior year comparisons on valuation adjustments. I'll discuss those results separately in a few minutes.

Overall, earnings before tax and FMS decreased 6%, driven by used vehicle and depreciation hundreds of $18 million or 18% of the prior-year earnings. These headwinds offset higher commercial rental and ChoiceLease performance. FMS earnings as a percent of operating revenue were 8.5%, down 130 basis points from the prior year.

I'll turn now to Dedicated Transportation Solutions on Page 8. Total revenue increased 25%, and operating revenue was up 12% this quarter due to new business and higher volumes. Favorable outsourcing trends, including a very challenging driver market and tight freight conditions, contributed to record DTS sales results again this quarter. Our sales team continues to focus on upselling our lease customers to Dedicated, which remains a significant ongoing growth opportunity for this business. In addition, we continue to see strong growth with dedicated services provided as part of a multiservice solution, which is reported in our supply chain segment. Dedicated operating revenue within our reported supply chain segment grew by 28% for the third quarter and 19% year-to-date.

DTS earnings increased slightly this quarter due to the benefit of revenue growth, which was largely offset by an unusually high start-up cost in a new customer account. The start-up challenge resulted from the need to hire a large number of drivers in a short period in a location experiencing particularly tight labor market conditions.

Additionally, this was a new greenfield operation for the customer, and we did not have the opportunity to transition any drivers from their current operation. In the fourth quarter, we expect considerable sequential improvement in the account's performance, as we've already made substantial progress and working through these startup issues.

Due to this unusual startup issue, segment earnings before tax as a percent of operating revenue were 6.3% this quarter, down 60 basis points from the prior year.

I'll turn now to Supply Chain Solutions on Page 9. Total revenue grew 29%, and operating revenue grew 23% due to higher volumes and new business. Revenue growth includes Ryder Last Mile business, with the second quarter acquisition of the MXD Group, a provider of e-fulfillment and last mile delivery services for the big and bulky e-commerce market. Excluding the acquisition, supply chain total and operating revenue grew organically by 18% and 17%, respectively.

Supply chain earnings before tax were up 69% due to revenue growth, better operating performance across all industry verticals and improved performance on a prior-year start-up account. Segment earnings before tax as a percent of operating revenue were 8.1% for the quarter, up 220 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 10, year-to-date gross capital expenditures totaled just over $2.3 billion, up by around $920 million from the prior year. This increase primarily reflects higher planned investments to grow and refresh the lease and rental fleets. We realized proceeds, primarily from the sale of revenue-earning equipment, of around $300 million.

Net capital expenditures increased by around $930 million to just over $2 billion. Our forecast for full-year gross capital expenditures and net capital expenditures is unchanged at $3.1 billion and $2.7 billion, respectively.

Turning to the next page, we generated cash from operating activities of $1.2 billion year-to-date, up 4%. The increase was driven primarily by higher cash-based earnings, partially offset by higher working capital needs. We generated around $1.6 billion of total cash year-to-date, up $40 million from the prior year, reflecting higher operating cash.

Cash payments for capital expenditures increased by almost $900 million to just over $2.2 billion year-to-date. The company's free cash flow was negative $638 million year-to-date versus the prior year of positive $210 million, reflecting increased net capital spending. Our full year forecast for free cash flow remains unchanged at negative $750 million.

Page 12 addresses our debt-to-equity position. Total debt of just under $6.3 billion increased by around $870 million from year-end 2017, primarily reflecting higher capital spending and acquisitions.

Debt-to-equity at the end of the third quarter increased to 215% from 191% at the end of 2017, and reflects investments in fleet growth, as well as 2 acquisitions earlier in the year.

Our balance sheet leverage is toward the low end of our target range of 200% to 250%. Our year-end forecast for balance sheet leverage remains unchanged at 210%. Equity at the end of the quarter was just over $2.9 billion, up from year-end 2017 due to earnings, partially offset by dividends.

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

Thanks, Art. Page 14 summarizes key results for global used vehicle sales. Used vehicle inventory held for sale was 6,200 vehicles at quarter-end, around the low end of our target range of 6,000 to 8,000 vehicles and below prior year. Adjusted for an elevated number of leased vehicles that were being prepared for sale last year, used vehicle inventory declined year-over-year by 500 vehicles. Sequentially, inventory increased by 600 vehicles.

We sold 4,100 used vehicles during the quarter, down by 13% from the prior year and sequentially. Proceeds per vehicle sold were up 22% for tractors, and up 15% for trucks compared to a year ago. This reflects a greater use of our retail sales channel, where we receive better pricing and also reflects a younger age -- a younger average age of vehicles sold. Retail proceeds were up 11% for tractors and 6% for trucks. From a sequential standpoint, tractor pricing was up 11%, and truck pricing was up 7%. The improvement partially reflects age and mix differences, but prices on similar vehicles were still up by mid-single digits sequentially.

Compared to peak prices realized in the second quarter of 2015, tractor proceeds were down 16% and truck proceeds were down 5%.

I'll turn now to Page 16 and cover our outlook. Our overall earnings outlook for the fourth quarter remains on track with our prior expectations. We anticipate year-over-year earnings growth will be positive in FMS, driven by strong operating performance and a lower impact from used vehicle sales and depreciation headwinds.

Based on robust sales activity and a strong sales pipeline, our organic ChoiceLease fleet growth forecast remains at a record 8,500 vehicles for the full year. We expect a continued strong rental demand environment and favorable results, although to a lesser extent than earlier in this year due to more challenging prior year comparisons. We anticipate rental fleet growth of 9% for the full year average and 10% for the year-end fleet with a 3% price increase. The forecast in used vehicle pricing to remain generally consistent with recent trends. We anticipate Ryder's used vehicle inventory to remain near the low end of our target range, positioning us well for 2019.

Dedicated Transportation Solutions is anticipated to deliver continued double-digit revenue growth and improved earnings performance as compared to the third quarter. We also expect strong year-over-year improvement in Supply Chain Solutions results consistent with year-to-date performance. In light of these factors, we are narrowing the full year comparable EPS forecast range to $5.72 to $5.82 versus the prior range of $5.62 to $5.82. Our first quarter comparable EPS forecast is $1.75 to $1.85, an increase of 29% to 36%, from $1.36 in the prior year.

Turning to Slide 17. I'd like to provide you 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 pleased that the momentum from record contractual sales in 2017 has continued into 2018 with record sales year-to-date. In addition to benefiting from strong secular trends driving core outsourcing, we're realizing success from our initiatives to expand the size of our sales team, increased collaborative selling across the organization and launch new products.

We're on track to deliver our seventh consecutive year of organic lease fleet growth. We are expecting record organic lease fleet growth from 8,500 vehicles this year, as I mentioned, strong sales activity and extended OEM lease -- OEM lead times means that we're having -- we have been signing new lease businesses for deliveries well into 2019. We're pleased with the integration and better-than-expected performance of MXD, the last-mile service provider for big and bulky goods that we acquired in April.

Sales activity and volumes for Ryder Last Mile have been strong, and we recently expanded the network in 11 markets. With this acquisition, we are a leading last mile provider in the fast-growing big and bulky e-commerce space. We continue to invest in customer-facing technology and recently launched our second release of RyderGyde, our mobile fleet management app. This app already has over 4,000 users who can now rent vehicles from their mobile devices, as well as browse used vehicle inventory. With RyderGyde, we expect to enhance customer retention and increase our share of wallet through users' daily engagement with the system to manage their fleets and purchase existing and new services.

Finally, we're on track to achieve full year cost savings expected from our new Zero Based Budgeting process. We expect additional opportunities to lower cost and drive efficiencies in the future.

Page 18 provides our expectations for 2018's results as compared to our longer-term financial targets that we discussed earlier in the year. There are no changes to this outlook from the last quarter. All segments are expected to organically reach or exceed their operating revenue growth target this year.

FMS and Supply Chain are expected to beat their targets, while Dedicated should be on target. Earnings before tax as a percent of operating revenue for FMS is expected to come in below the target this year, primarily due to the impact of used vehicle sales and higher maintenance costs on certain older model year vehicles. We expect these older model year vehicles to be mostly out of the operating fleet by mid-2019, benefiting maintenance cost after that, and to be largely sold by the end of 2019.

Dedicated is forecast to come in somewhat below their target, 83%, while Supply Chain is expected to be at the bottom end of their target this year. The return on capital spread is forecast to be 10 basis points this year, below our target of 100 to 150 basis points. Again this primarily reflects the impact of used vehicle sales and higher maintenance costs on certain older model year vehicles. We're focused on realizing operating leverage on our current maintenance facility network as we grow, lowering maintenance cost through fleet turnover and initiatives, improving used vehicle sales results, expanding non-asset-based earnings and continuing cost-reduction opportunities to drive ROC to the target range.

Balance sheet leverage is forecast to be in the lower end of the target range, which provides room for capital to support growth and/or additional acquisitions in the near term.

Now I'll turn the call over to Art, so that he can provide you with an overview of the upcoming lease accounting changes.

Thanks, Robert. As many of you know, the FASB has issued new guidance around lease accounting. This standard will be adopted by Ryder effective January 1, 2019 and be reflected in our first quarter 10-Q. The new guidance requires that Ryder separate the recognition of lease and non-lease components of our ChoiceLease products. The non-lease component, which is maintenance service and in our case, will be recognized as the services are provided on a more back-end loaded basis, rather than as customers make payment, which is more on a straight-line basis over the duration of the contract. This will result in a timing adjustment for revenue and earnings recognition for maintenance-related revenue. It will have no impact on cash flow or the lifetime earnings of a lease contract.

A deferred revenue account will be established to reflect the timing difference between cash received and revenue recognized with the maintenance portion of our customer leases. There will be no impact to current or future cash flow resulting from the accounting change. As such, we do not expect to make any change to our capital allocation as a result.

We will see a significant one-time reduction in shareholders' equity upon adoption of the new guidance, but expect to increase our debt-to-equity target accordingly. In addition to these one-time impacts, there will be ongoing impacts as well, that are shown on the next page.

The accounting change, again, will not impact total earnings over the life cycle of a lease. Moreover, we expect earnings volatility associated with the fleet age will be reduced following adoption of the standard, as maintenance revenue will be a more aligned with maintenance costs. Given typical maintenance patterns, more revenue will be recognized during the second half of the lease since maintenance costs increase with age. The annual impact to our results may be significant and will vary depending on, among other factors, the volume of new sales, timing of in-service, average fleet age, lease term, lease early terminations and equipment class. Most importantly, higher revenue deferrals would typically be expected during periods of declining fleet age.

The estimate of the impact to 2019 EPS is dependent upon our 2019 forecast assumptions. As such, this estimate will be provided in conjunction with our 2019 forecast conference call in February. The new standard does not impact the overall economics of our ChoiceLease product and based on customer discussions, we do not anticipate any material impact on our ability to sell new business or retain existing business as a result of the new standard.

Let me now turn the call back over to Robert for closing comments.

Thanks, Art. 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. In order to give everyone an opportunity, please limit yourself to one question each. If you have additional questions, you're welcome to get back in the queue, and we'll take as many calls as we can.

(Operator Instructions) And our first question will come from Todd Fowler of KeyBanc Capital Markets.

Maybe just to -- Robert, just to start, can you talk a little bit about the visibility that you have on the rental fleet going into the fourth quarter? I think in your prepared remarks you said that you're seeing a continuation of the strong demand into October that you saw in the third quarter. But can you give us a little bit of a sense of what you're hearing from the customer base and how much of the rental fleet might be locked up? And then also some thoughts going into 2019, if the freight environment normalizes from where we've been, what would the approach of the rental fleet be going into next year?

Yes. Todd, I can tell you that the rental market has been very strong this year. As you might expect, as we got into the second half of the year, which is when you get into kind of more of a peak rental demand period, we're red lined at this point. I mean we are renting every vehicle we can possibly get our hands on. So I would tell you it's extremely strong, certainly going into October and that the expectation is that, that will continue through the fourth quarter. As we look into next year, I think all indications are that at least the first half of the year should be -- should continue to be strong, as vehicles are still going to be getting in-service, the new vehicles are coming in for customers. And then beyond that, obviously the visibility gets a little bit murkier. Maybe things slow down a little bit going into the second half, but it's probably a little too early to tell. I think the key is for us to be able to adjust our fleet accordingly as these changes happen, which I'll let Dennis kind of give a little bit of color on kind of how that works. But it's really the process we go through to redeploy and do different things with the vehicles.

Yes, Todd. Just adding to what Robert said, as we head into Q4, we'll see seasonal decline in the -- as we head into first quarter, so we're preparing for first quarter. We'll take the fleet down by about 1,000 units. And then if we see any impact, up or down, then we use our asset management techniques to either increase the fleet or decrease it throughout 2019. So we're ready for that to happen either way.

Great, that helps. And just for a quick follow-up, can you remind us how much of the rental revenue is kind of pure transactional? I think there's a big component that's tied to the lease fleet and then you've got some contract piece, but how much of the rental revenue at this point is just transactional?

Yes, Todd, you got about 40% that's supporting the lease fleet and 60% that is transactional.

Todd, I would remind you of one other stat. We've always said that rental, we want to keep between 20% and 25% of our FMS revenue. It peaked at about -- it peaked at 25% back in 2015. Even this year, with a strong of demand as we've had, we're still going to be around 22%, 23%. So we're still not -- we're not chasing rental all the way to the top because we know that there can be some movements up and down, so we are refreshing the fleet. But again not becoming too overly dependent on rental as a source of earnings growth.

Yes, that makes sense, and we understand that relationship. It's obviously, I think, just some broader concerns with what people are thinking about, just the environment going into next year. So that's where the question is coming from.

Right, okay.

(Operator Instructions) We will now move to Jeff Kauffman with Loop Capital Markets.

Quick question. When we've been sitting on other companies' calls, particularly truckers, they talk about how there's been delayed deliveries of vehicles from the OEMs, and they also mentioned that they were seeing 10% increases in what they were realizing on their trades. Now that seemed to be consistent, the 10%, with what they were saying on the used proceeds. But I was just wondering, are you seeing delays in your vehicle deliveries as well, and if so, where is that impact more concentrated?

Yes, so Jeff, this is Dennis. We have seen delays with the spike in demand. And just kind of give you some color on it, we have about 800 units right now that are overdue and the lead times have extended out longer than we normally see. But I've got to tell you, the overdue units are coming down. they've been declining, and that's what we're working with the OEMs on every day.

All right. And is that -- just following up on the same question here. How is that impacting you from the utilization or a P&L standpoint? Because you've got vehicles that you're looking to trade back in, and then arguably, these are vehicles you assumed you would have in service. So is that affecting the rental fleet? Where is that having a larger influence?

So with our lease customers, it does lead to them running older units longer. We are seeing that, as we wait for the new units to come in. From a rental point of view, as Robert said earlier, the demand has been so high that we've had the rental units coming in earlier to support our lease customers, frankly, along with the demand we're seeing in rental.

Okay. So that's...

The other thing I would add, Jeff, is that we're really not trading a whole lot of units in. So from a trade standpoint, but it doesn't impact us. I think the -- your comment about the pricing and the trade values that some of the truckers are getting, remember, they're turning over their fleets earlier so maybe 3, 4 years. Ours is a 7-year holding period. So as we -- as I said in the prepared remarks, if you look at like-for-like used vehicles, we did see an increase in the quarter of maybe mid-single digits, not that 10% or 12% that you're hearing from some of the other folks. So what we're seeing is on the older model year vehicles, we're still not seeing the big uptick in pricing. We did see some uptick after the last couple quarters have been relatively flat, so early signs, but -- of maybe some improvement, but nothing material yet.

We will all move to a question from Amit Mehrotra of Deutsche Bank.

So obviously, the company has endured, I guess the challenges associated with the used truck market, but we've had just a record amount of new truck orders as well. And so I'm just trying to understand if those go disproportionately for replacement as opposed to growth, how do you think about the used truck market? I mean, could we see maybe another let-down in used values, given those record orders? Or just any help there in terms of -- I know you've updated your residual values quite a bit, so you might be somewhat protected against that, but just help us think about the relationship a little bit.

Yes, Amit, it's hard to tell exactly what's going to happen in the market. I think you're right that we should see some additional inventory coming into the market as these units gets replaced. However, I would tell you there's probably some upward pressure on pricing in the market right now on used trucks. So as we look at next year, we kind of are viewing those 2 as probably offsetting forces because you're going to have, again, uplifting -- up pressure on pricing because of more demand, and then maybe some down pressure more -- from more inventory coming in. So we kind of view those as probably offsetting as we sit here today going into next year, and maybe looking at a continued stable used truck environment going into next year.

And can you just, as a follow-up to that, I mean can you just update us on where the lead times are today with the OEMs? I think that's obviously a factor in thinking about what the used truck market could do over the near term at least.

Yes, Amit, this is Dennis. Typically, it's in the 3-month range and running about 2x that right now, about 6 months.

Okay. One -- the second one for me is just on the lease accounting change. Art, I understand that '19 impact is still being worked through, but any help on what the impact would be in '18, if you pro forma the ChoiceLease revenue and earnings streams? I'm not sure if that's the right way to look at it, given the higher level of new leases this year. And then just a little bit of an accounting lesson, if you will, on the impact to book equity because the cumulative catch-up adjustment, I guess to the equity, is just a reflection maybe of the current mix of the lease? Or is there anything else I'm missing? I'm just trying to understand why it would be a debit to the equity of the company.

Right. Okay, first on the -- just the accounting piece. It's going to be always a deferral because our -- remember, our maintenance costs are incurred more on the back end. So you start deferring under this new guidance effectively in the very first month of a lease because the maintenance costs are very low in the first couple years. So really every asset has a deferred revenue balance after their first year. It grows for a period of time and then it will start to unwind over the last half. So really, that's why there's going to be deferred revenue. As far as 2018, right now we're in the finalizing everything, so really not in a position to talk about that yet. The thought is because it is going to vary, there's a lot of factors that I highlighted in my prepared remarks, that drive the calculation. So I think we're going to be in a better position come February to give a view into '17 and '18, as well as a forecast on '19.

Is there -- I understand the deferral of the revenue piece. I just, I guess any help on the new lease? What the, maybe the allocation is between the lease payments and what's being accrued for maintenance, I mean, any help there?

Yes. No, right now I would tell you it's primarily -- there's more associated with finance. That's just typically how you would expect, just given the amount of investment. But we'll probably provide more clarity here in a few months.

We will now take a question from Matt Reustle of Goldman Sachs.

Just wanted to follow up on ChoiceLease a bit. You mentioned lead times of about 6 months now, and you have vehicles being delivered well into '19. How -- I mean, I guess how far you out of you booking business at this point? And it seems like there's some nice acceleration in that top line there. Is there any reason that shouldn't continue through at least the first half of next year?

Yes. I -- to your question, Matt, I don't see any reason why it doesn't continue. I mean we're continuing to see very, very healthy sales. As I mentioned, we had a record third quarter sales for our lease business. The pipeline is still very active. There are not enough trucks on the road for the number -- for the amount of freight that's moving and there's also replacement that's going on. So we see -- we expect this to continue certainly, as I mentioned, at least through the first half of next year. We're now selling vehicles into late first quarter, early second quarter of next year. So if you think about it, historically we usually have about a 3-month lead time. We now have a 6-month lead time. So as we end December, we'll have half of our years -- if things continue the way they are, we'll have half of our year's lease business already locked in contractually with the customer. So we'll have a lot more certainty, I think, as we go into 2019 around our contractual lease business than we typically do.

Understood. And then just a follow-up on the used sales. In terms of the sequential decline there, I mean was there -- I mean is there anything strategic there? Is there any consideration for selling into the environment or the uptick that we've seen in pricing recently, just to reduce the risk of a double-dip as some of these new vehicles come online? And just in terms of as you look forward, is the -- in terms of accelerated depreciation for next year, I know you haven't finalized anything. But are you still seeing the same environment that would imply that $40 million to $45 million for next year? That would be helpful.

Matt, this is Dennis. I'll take the first part of the question and then, Art, if you want to take the second. First part is, we started the quarter with 5,600 units in inventory, which is below our target range. And frankly, our teams were looking for more units to sell. And one of the things we started to do, by the way, is for our rental fleet, we'll actually put the fleet online while it's still running and we'll presell it before it actually gets to the Used Truck Center. What happened is with that lack of inventory, we weren't selling as much and now we've rose where we're at 6,200 units or 600 units up, that pretty much came to the Used Truck Center in September. So now we have more inventory available for our teams to sell. So that was the reason for the decline.

So I think the key is, we are keeping -- think about it, we're keeping inventory at the low end of our target range, so we're not taking our foot off the pedal and just selling as many of these units as we can in this environment. And Art, you want to address the...

Yes, Matt, last quarter, as you mentioned I did discuss that we were looking at depreciation headwinds of $40 million to $45 million. Right now where we stand, I would tell you that was just on the depreciation side. Now we're looking at a total of about $45 million for next year, and that would include the depreciation headwinds, as well as any change in used vehicle sales results. So there's kind of been a slight move to the top end, but that does include our view around used vehicle sales.

We will now take a question from Scott Group of Wolfe Research.

It's actually Christian Theodoropoulos on for Scott. Could you guys just provide a ballpark estimate around the lease change for '19? Could it be 5% of EPS, bigger, smaller?

Yes, we're not ready right now, Chris, to do that. We're still -- there's a lot of moving parts in the calculation. There's a lot of work we have to do internally in our systems, make sure that we test a lot of controls before we go out with any specific right number right now. That's kind of where we are.

Okay. And then, how many years out before this lease accounting change becomes more of a tailwind?

Yes, it's going to be -- obviously as we talked about, it's going to be -- it's a tailwind if you just separate the business when fleet age is going up in that sense, right. So if you think about it, it's all dependent on what happens in the future from a growth perspective also, right. We're going to grow 8,000 units this year. If we stay on the track of growing 8,000 units every year, then it probably levels out and doesn't do anything. So it depends on what happens with the fleet itself, so it's hard to really tell you when the thing moves. I think over time, this should just become part of our normal results. It's going to actually make the business, I know it's a little confusing now, but once it's implemented, it's going to give us less volatility, less discussion about fleet age in our business. And it's more going to be how much are we growing the fleet, right, and that's going to drive earnings growth.

Yes, I think there's a couple things to keep in mind with this. Number one, it doesn't impact the cash flow of the business. Number two is it doesn't impact the overall earnings from any deal over the life of the deal. I think that the third thing that's very important is in the long run, this is actually a good thing from the standpoint of we've had periods where we've had to talk about earnings impact from the fleet getting older or the fleet getting younger. That kind of goes away with this new accounting treatment because the revenue will better match the maintenance costs as the vehicle ages. So some of the discussions we've had in the not-too-distant past and even before that, where we had to say, hey, our margins are down because the fleet has aged or our margins are better because the fleet is younger, those kind of go away. This kind of equalizes all that, and what you're going to get his just earnings growth from the growth that you get and earnings growth from operational improvements, but not so much having to do with what happens with the age of the fleet at any given time.

Helpful. And then can you guys just provide an update in terms of residual values looking into 2019? And then does your fourth quarter guidance assume any accelerated depreciation? Or if there is more accelerated depreciation to come, will that be a potential additional headwind?

Yes, I would say as it relates to next year, I think you got that from Art earlier. Bottom line is we're assuming that there's a continuation of the current used truck market going into next year. Again the upward -- some of the upward benefits that we've seen recently, probably offset by more volume and kind of keep us flat. So that's really the assumption. As it relates to the fourth quarter, we do not have accelerated depreciation in there, so I think we don't -- no incremental. We would expect that to really, if we've got to do that, it's in the number that you've got for 2019 that Art gave you earlier. So that's for the accelerated depreciation that would happen.

We will now go to Ben Hartford of Baird.

Robert, just sticking on the topic of used equipment prices. As you look at the various models, you alluded to this, I think in your prepared remarks about older trucks, largely mid-'19, fully out by the end of the year. As you look at these model years, the 2012s exiting, looking at the 2013s, any read on what the residual value profile looks like? Or I should say, the proceeds profile looks like for these '13 model year trucks relative to '12? In the context of what you've talked about with regard to stability overall and a little bit of upward bias to you to [take] prices through the quarter?

Yes, I would tell you that we -- our view is the '12s are probably the most challenged of the vehicles. I can tell you from a maintenance cost standpoint they have been. So I would expect, if anything, to get some uplift as we get into the '13s. But again, what we'll be selling through next year is probably mostly 2012s, which is kind of what we've been selling some of that already this year. So yes, I would expect, once we get past the '12s, you might have some, if you just compare apples-to-apples, some uplift of the '13s versus the '12s.

And then as you look at the 3-year target for FMS, what is -- what would drive risk to the downside on the 10% number? And what would it take to reach the 12% level as it stands today? What's the risk? What's the upside?

I think it's the 2 -- look, we're -- in the FMS business we're seeing really strong earnings benefits from the contractual growth in ChoiceLease. So the things that could keep it from going up and the things that we've been challenged with so far in last couple years and as we go into the future, used vehicle sales and the depreciation are obviously, going to continue to be some headwind. And then rental, if rental -- we're expecting rental to be -- rental was a -- it was a bang-up year this year. I'm not -- we're not expecting it to be a bang-up year every year. But just stable rental, some growth that is consistent with lease, I think would get us there also. So short of a big dip in rental or some incremental headwinds from UBS, we know we're going to have some of that, that's really what keeps it from getting, as you mentioned in your question, how do we get to the 12%. You need those 2 to really come back for us to get to that higher end.

We will now take a question from Brian Colley with Stephens.

So thinking about the ROC spread target 3 years from now, how much do you think the used truck pricing environment needs to improve, compared to the current levels, in order to hit that objective?

Well, I can give you a number that we discussed, I think on the last call was how much pricing needs to go up for accelerated to go away, so that's about 35% -- 25%, 30%. So I think that's probably the kind of move we would need to be able to really see the headwind that we're getting from used vehicle sales to go away. So I just -- since we're getting toward the end of the year, I wanted to kind of put something in perspective for everybody as it relates to that. If you look at the range that we're expecting to come in this year, what we just talked about, our earnings for this year should be up 11% to 13% when you exclude the benefit of tax reform. So we're going to be up a lot more than that, but it's tax reform that is helping us. So 11% to 13% if you exclude tax reform. In order to get that, we overcame 11% headwinds from used vehicle sales and depreciation. So you think about the used vehicle market impact is 11% headwind and 9% headwinds from maintenance costs on the older model year vehicles. So if you look at it and say we started the year 20% in the hole from prior-year earnings, and we're going to be up 11% to 13%. So I think you've got to keep that in mind, as we look at the -- our ability, as we continue to grow the contractual parts of the business, we are replacing earnings from depreciation and used vehicle sales-driven, I should say, with contractual earnings of new business. So I think we're -- it puts us in a better place from an earnings standpoint, but I don't -- I want to make sure we don't lose sight of the fact that there's -- we're really -- there's a big headwind that we have been overcoming and we expect to continue to overcome, as we move into 2019.

Got it, that's helpful. And then also just wondering if you could talk about how demand in the rental business trended month-to-month, and maybe any update for October on where demand is?

Yes, Brian, let me give you kind of month-by-month what the year-over-year demand changes were. So in July, 17% up; August, 18% up; September, 17% up; and in October, we're seeing about a 17% increase year-over-year also.

Great, that's helpful. And then lastly, just wanted to ask about the sales pipeline across the different businesses, how this trended throughout the quarter. And then also the level of visibility you have around growth into 2019 for the contractual businesses? I know you talked about FMS, ChoiceLease, but maybe Dedicated and SCS color would be helpful as well.

Yes, I think it -- as I mentioned on the call, Dedicated had a record sales quarter. I'd say they're going for a record sales year this year, so we're very excited about that. And the nature of Dedicated and Supply Chain is a long lead time from when you sign to actually start -- you've got ramp-ups and you got start-ups. So we've got good visibility, as we normally do into next year. We feel very good about the growth that we're seeing, especially in Dedicated. Supply Chain, again, a kind of bang-up year this year. I mean earnings in Supply Chain this year, as you saw, in the quarter were up 68%. I think we're going to be up over 30% for the full year. So great earnings growth this year. We expect earnings growth next year will probably come down some to a more normalized level. But again, good sales activity across all 3 of the contractual businesses, and we expect that going into 2019.

(Operator Instructions) We will now go to Kristine Kubacki of Mizuho Securities.

My question is on Dedicated and a little on the issues that you talked about in the quarter. Was that in their original guidance? Was it worse than you expected on that start-up? And then I guess my follow-up question would be to that is, as you've learned through that and you talked about the pipeline is robust in Dedicated, should we expect kind of as you're talking up more and more new customers, is it -- we'll expect underperformance from a margin perspective in that segment?

Yes. Well, Kristine, I'll tell you that -- was it in the guidance? No, it wasn't in the guidance. So clearly had it not been for that challenge, we would have been considerably higher in terms of our results. The question is do we -- because we're growing, do we plan on this going forward? No. We learn from each of these. This was an anomaly, as I mentioned in the prepared remarks. It happened to be a location that was a great deal location for the customer, and it was kind of a perfect storm. Very difficult driver recruiting market and a very short start-up period. So the combination of those things really led to this challenge. We've got it -- we feel that we've got it under control as we ended the quarter and learned from that and do not expect this is the sort of thing we'll be dealing with. Just to put it in perspective, across Supply Chain and Dedicated, we have over 100 start-ups in any given year. You don't hear from 99% of them but every once in a while, we run into a challenge and we deal with it. So I think John and his team have done a great job of getting their arms around it quickly and really making it so it's not an issue going into the next quarter.

We will now take a question from Brian Ossenbeck of JPMorgan.

So just wanted to see if you could just talk about pricing and residual risk, if there's any sort of updated thoughts on how you look at that with newer contracts? Is this a stronger part of the cycle, where outsourcing is pretty robust and you're able to make some changes that might be a little bit more favorable, either in managing the stub as it relates to the truck at the end? Is that -- going back to a little accounting discussion, is it something that you'd want to try to maybe separating, smooth out a bit, if you were to put a fairly low residual in there? Just curious how the thought process works. I know a lot of it is mechanical on accounting, but I think some of it is strategic. And will this process start to change, as we get perhaps closer to EVs that become more widespread potentially in adoption?

Yes, I think to your first part of your question, from a pricing standpoint, I think we mentioned this in the last call, we have lowered the residuals from a pricing standpoint. We've moved away from the 5-year rolling average and really brought it down to the current levels that we were seeing at the beginning of the year. And really using that as, we kind of view this as obviously, it's a lower number and I think we've derisked the leases quite a bit from a cash flow standpoint. So that's the way we've handled that. I think in terms of the accounting for it, we are continuing with the process that we've always had of doing the 6-year average, just to try to keep the residuals in the middle of the fairway as best we can. So as you know, as a result of that, we're dealing with accelerated depreciation at this point and depreciation policy changes.

Yes, it doesn't sound like there is anything further you would make on those adjustments with the used truck market sort of flattening out here?

No, I mean, if you think -- if your question is about electric vehicles and all, I think the more we dig into that, especially around the heavier duty equipment which is what we're talking about here, we're probably a decade away at least from really having any impact from that, I think if you talk to the folks that are working on this, before it became more mainstream and started really impacting the pricing of this. But we're keeping an eye on it. Obviously, if we start to see some progress in that area, we would start to bring them down. And remember what -- those vehicles would have to be -- would have to take a meaningful presence in the new market first, and then start impacting the used markets. And we do have some visibility to it before we need to react to it.

Okay, understood. And as a quick follow-up, you haven't mentioned it and be curious to get your thoughts on ton mile MXD, the recent expansion. Looks like some of them are expanding their own fulfillment facilities, but you've got some partnerships in another city. So if you could just put into some context the growth that you're expected there and what areas you're targeting next? And is that sort of a structure, as I read it, being sort of own expansion with partnerships? Is that how you would look to grow that business in the future as well?

Yes, Brian, this is Steve. We added specifically in 3 geographies, new locations. So we now have 40 hub locations in our network that we operate. We also expanded 8 partnerships in other cities across the U.S. So yes, really our strategy is to build up density in those markets. And when we get the density, we convert those into hub locations. So I think it's a really good model to sell into and our customers are buying it.

We will now take a question from David Ross of Stifel.

On the equipment side of things, we talked about the 2012 engines and their problems and the maintenance costs. How did your approach to pricing change after you realized that the maintenance costs were much more expensive? Because obviously, it's kind of fool me once, shame on you. What's been, I guess, the approach to pricing new technology, engines and equipment with uncertain maintenance costs ahead?

Yes, we started making those adjustments back in 2013. So when we saw the 2012s coming in, because they're -- even from the beginning, we started having some challenges. So we started making those adjustments as we began to see them, and I can tell you that we have put them in. I mean there's -- we talk about the 2012s, but that was really the one that probably caught us without making the adjustment that we needed to make. So we started making those adjustments early on.

And then just a follow-up on Last Mile, Steve. I mean, when you think about the network, you said 40 hub locations. I guess what's the timetable or when do you think you might have national coverage? Are you doing that with all company drivers or owner-operators?

Yes, we have national coverage today. We can hit 95% of U.S. and Canada within about a 2-day service level. So again a combination of our hub locations and agent partners out in the network, so it's, I think a really good coverage. Same-day service right now in big and bulky has not really been on demand in the market, but we're always thinking about new services and capabilities to add.

And how would you say the Ryder Last Mile strategy is different from some of your competitors like J.B. Hunt, Schneider that are also looking at building out national big and bulky networks?

Yes, I think our carrier model is a bit different. We use a network of carriers across, again, across U.S. and Canada. So we've got a lot of great companies out there that are delivering on behalf of us. Again we are focused on deluxe and white glove services, which is a higher-end demand and service that our customers are asking for. And I think that really, those 2 things differentiate us against the competition.

And we will now go to Kevin Sterling of Seaport Global Securities.

Art, congratulations on your pending retirement. I've enjoyed working with you over the years.

Yes, absolutely. Thank you.

Yes, best of luck to you. Robert, maybe directionally, as we think about 2019 and CapEx as it to relates to 2018, could you kind of maybe not pinpoint here exactly, but directionally help us think about CapEx for 2019? Is that possible?

Sure. I mean let me give you -- I'll give you some color, I think, without giving you the full guidance for FY '19. But as it relates to CapEx, I would expect another rental CapEx year similar to what we saw this year. We've got a -- even though we may not be always growing the fleet the same as we're going to be making some adjustments, we do have some refresh that we need to do so we should be in the same ballpark. I think lease would probably be a little bit higher, because even though this was a strong lease sales year, some of those vehicles aren't coming in until next year, plus we expect that to continue. So I would tell you CapEx probably up some next year. I think as it relates to the earnings and some of the puts and takes, I'll give you a little bit of color. All of this, by the way, is prior to any impact from lease accounting, which as I mentioned, we're still working on. So based on all the deals that we've signed this year in the pipeline that we're seeing going into 2019, I would expect to have more earnings from the growth in contractual and ChoiceLease and Dedicated than we had this year. So more of the growth will be from contractual businesses than what we saw this year. I would again expect to see some benefits from our Zero Based Budgeting process, maybe not as much as we saw this year, but still some positive there. So contractual earnings growth will accelerate. Zero Based Budgeting will see some benefits. Now assuming I don't see a pick-up in the used truck pricing, I would expect the same headwind that is generally the same headwind as we saw this year. So we start off with about an 11% to 12% headwind from depreciation and used vehicle sales, and you're either going to get an improvement in the used truck market or we're going to have a couple more years of this headwind that we're going to be facing. From a maintenance cost standpoint, remember when we talk about 2012s leaving the market, we do expect them to start leaving the market next year. So we'll get some -- we'll get less headwind, I would say, because of that. Maybe cut that headwind in half. So what's this year was a 20% headwind between used vehicle sales and maintenance might be 15% going into next year, so that should be some benefit in terms of what we have to work our way through. However, I'm probably not going to count on the same rental growth that we saw -- that we're seeing this year. We're seeing 18% year-to-date. And again, we're not going to chase every rental transaction that we can, so I don't -- I wouldn't expect going into the year to see that type of growth again. And I also, with Supply Chain's year-to-date growth, the 68% earnings growth we saw in the quarter, the 30% year-to-date -- over 30%, I wouldn't expect that to repeat. I'd expect a more normalized growth rate from Steve and his team. So some headwind there, in terms of the growth rate. Also insurance and interest, overall the market on those would probably create some additional headwind next year, too. So the positives that I might see on some of the maintenance and the positive from contractual and ZBB may have -- may be offset by some of these are the things. So when you put all the puts and takes together as we sit here today, I would expect to again be able to offset the headwinds and show earnings growth into next year. Now that earnings growth is likely not going to be double-digit again, again because of some of these, but nonetheless it will be growth. And I think the more important part of the story is more of the growth will be coming from the contractual parts of the business. So as we're building up these contractual revenue and earnings streams, it is much more dependable and much more steady. I think you're going to start to see more of the earnings in each year that are coming from that, which is a very good thing. So again, that's sort of how -- at this point, we're not done with our plans, so none of it is locked in and written in stone. But I would tell you, that's kind of how we're seeing the business, which we're excited. We're excited that we are, considering all the headwinds we still have, we're still going to be showing growth on the earnings line. And depending on what happens with rental and UVS, I mean that growth could be a little bit higher. But right now, not assuming benefits in used truck sales, not assuming rental really repeating itself, you're still going to have a year where Ryder can grow earnings and give you ongoing value that way.

Robert, that was very helpful. It just sounds like the move toward more contractual will take out, I guess, some of the lumpiness of your businesses that we've seen in the past. Is that fair?

That's been the goal all along, is really getting this model to really act like a more contractual business and less dependent on some of the other items that we've historically been dependent on.

Okay, got you. And then can I ask one big picture question here? And obviously, there's been talk of a housing slowdown and historically when I look at you guys, you have been tied to the housing market in one way or another. And is that still the case and are you seeing any impact from a possible housing pause in your business? I'm just curious as we think about if housing does slow, what's the potential impact, if any at all?

Yes, I think one of the benefits is that we're very diversified in terms of our customer base. So we're not married to any one single industry vertical. Now as the economy moves around, you do have periods of time where housing might be a bigger portion of the overall GDP growth and as such, we might have that kind of exposure. We have not seen big impact from any changes in the housing market but I'll let, probably Dennis would have the most color because of the make-up of this customer base on that.

Yes, Kevin. What I'd say, I'd just refer to rental, which a lot of times is a leading indicator. And just to kind of the give you sense for the various industry segments and the growth we've seen, transportation warehousing is up 41% in Q3 year-over-year; food and beverage, up 5%. Housing actually was up 8% from what we saw, from a rental point of view. The industrials were up 23%, the industrial segment. Retail is actually up 13%. So to Robert's point, if you go -- but automotive was only 3%. But so when you look at it, it's kind of we're seeing growth throughout all the segments and when it comes to housing, I wouldn't say we are as dependent on that because of our broad diversification of our customer base.

We will now go to John Cummings of Copeland Capital.

Just one question on, just given where your stock is trading and where you are in terms of leverage being a bit below your target, just love to hear your thoughts on the potential for a more significant buyback going forward.

So the -- yes, John, when we've been kind of out there, our position has been historically, we would look at discretionary share buyback when we fell below our target leverage range. Right now we're kind of at the lower end of it, but we're still within the range. As Robert said, we're looking -- the prospects for 2019 around capital spending are going to be continued high rental spend, replacement, hopefully a lot of lease growth in there too. So I think all that has to get factored in and once we see where we are, that kind of would drive any decision about share buyback.

We will now go back to Scott Group of Wolfe Research.

Just really quickly to clarify, does that $45 million of expected depreciation headwind next year already assume an additional accelerated depreciation? Or if you guys decide to do more accelerated depreciation, that number could go higher?

It assumes some additional accelerated. Obviously it's always subject to final review and conclusion, but it did include some incremental relative to this year, Chris. I think that's Chris.

And now we'll go back to Brian Ossenbeck with JPMorgan.

You already talked about some of the vintages 2013, 2012 to '13 rather, and how that was affecting pricing and your reactions to it. Is there -- as you look at the pipeline and things, especially the newer trucks with collision avoidance, AMT, things of that nature, is there anything that you would think has a similar impact? Probably not as much as the engine issues you're working through now, but are there any other I guess step changes in terms of the types of trucks that are coming on and how you would expect that to impact your realization of the residual value in your pipeline?

Yes, Brian, this is Dennis. What I would say is we have seen is literally from model year 2006 up through model year 2012, we saw an increase in maintenance costs every year. Since 2012, we have continued to see a decrease in the maintenance costs on a monthly or annual basis when you go apples-to-apples for a 1-year-old to 1-year-old, 2-year-old to 2-year-old and so forth. So the answer is, we're not seeing it. We've actually seen improvements since the 2012s. Now the '13s and '14s, some will have high maintenance costs, but they're less than what we saw with the '12s. And we've continued to see that decline.

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

All right, thank you. We're a little past the top of the hour. So I think we got everybody's call, we got them. So thanks, everyone, for your interest in the company, and we look forward to seeing you as we hit the road here in the fourth quarter. So thank you.

And that concludes today's conference. We thank you all for your participation.