萊德系統 (R) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Ryder System Fourth 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 Fourth Quarter 2018 Earnings and 2019 Forecast Conference Call. I'll like to remind you that during this presentation, you will 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 economics, business, competitive, market, political and regulatory factors. More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website.

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 highlight some of our key accomplishments during 2018, provide a brief overview of the fourth quarter results and discuss our outlook for the current year.

Turning now to our results. Let's begin with an overview of full year 2018 versus the initial forecast we issued last February. Overall, we're pleased that we delivered across the board in terms of accomplishing our 2018 key financial targets. We're also encouraged by the progress that we made last year on our strategic initiatives to drive long-term profitable growth.

Full year comparable EPS of $5.79 exceeded our initial outlook of $5.40 to $5.70 primarily due to rental outperformance and the benefits of multiyear contractual revenue and fleet growth. Operating revenue growth exceeded our expectations in all 3 business segments, reflecting ongoing secular trends that favor outsourcing and the results of our sales and marketing initiatives. Our lease fleet grew by a record 9,600 vehicles, 40% higher than our previous record achieved in 2015. 2018 is our seventh consecutive year of organic lease fleet growth with around 40% of new lease sales from customers who are new to outsourcing. Used vehicle inventory was at the midpoint of our target range while we expanded our retail and online sales capabilities in order to maximize sales proceeds. Free cash flow was lower than forecast, primarily reflecting our outperformance in contractual lease sales. Finally, our ROC spread inflected to positive and came in ahead of our forecast for the year.

Page 5 highlights some of the key strategic initiatives we undertook last year to drive long-term profitable growth and capitalize on disruptive trends in transportation and logistics. During 2018, we generated our second consecutive year of record contractual sales growth. With an average lease contract term of 6 years, the recurring revenue and earnings from these contracts positions us well for 2019 and beyond.

We expanded our last mile capability for big and bulky goods through our acquisition of the MXD Group, making us a leader in this fast-growing e-commerce space. We launched COOP by Ryder, the first and only commercial truck-sharing platform. Building off of the success and learnings from our pilot in the Atlanta market, we're expanding into Florida -- into the Florida market in 2019. We continue to leverage our strategic partnership with new electric vehicle OEMs and executed a customer agreement for 1,000 commercial electric vehicles, the largest deal of its kind in the U.S. We're also leveraging innovative technologies to provide improved capabilities and efficiencies for our customers. For example, in-cab camera technologies resulting in better safety performance; RyderGyde, providing our customers with access to a suite of fleet management activities from a mobile device; and smart warehousing capabilities to improve productivity and drive cost savings for our supply chain customers. Lastly, we successfully implemented a new Zero Based Budgeting process, which drove significant cost saving in 2018 and which we'll continue to leverage to achieve further savings in the years ahead.

Overall, we're very pleased that we were able to exceed our key financial objectives in 2018 while at the same time making significant investments to support our long-term success for the business.

I'll now turn the call over to Art for a brief recap of our fourth quarter results.

Thanks, Robert. Starting on Page 7, comparable earnings per share from continuing operations were $1.82, up 33% from $1.37 in the prior year. Comparable results were also above the midpoint of our forecast range of $1.75 to $1.85 driven by better-than-expected performance in ChoiceLease, commercial rental and a lower tax rate, partially offset by additional accelerated depreciation.

Based on our near-term outlook for used vehicle pricing, we extended accelerated depreciation on vehicles we expect to make available for sale through the middle of 2020, which impacted Q4 '18 results by $10.6 million more than our forecast. Previously, accelerated depreciation extended through the middle of 2019. Operating revenue grew by 13% to a record $1.8 billion for the quarter. We achieved double-digit revenue growth in all 3 segments, reflecting new business and higher volumes. Sales activity was strong and we realized record contractual sales for the second year in a row.

Page 8 includes some additional information for the fourth quarter. Comparable EBITDA was $555 million, up 17% from the prior year, primarily due to growth in our contractual businesses and strong rental performance. The average number of diluted shares outstanding was relatively flat, reflecting our anti-dilutive share repurchase program.

Comparable tax rate was 20.5%, down from the prior year's rate of 30.4%, reflecting a lower federal tax rate from U.S. tax reform. Finally, the spread between adjusted return on capital and cost of capital increased to positive 10 basis points, up by 30 basis points from the prior year.

I'll turn now to Page 9 to discuss key trends we saw in the business segments during the quarter. Fleet Management Solutions operating revenue grew 10% with growth in all product lines. ChoiceLease revenue increased 8% due to fleet growth and higher rates on replacement vehicles. The lease fleet increased by 4,000 units sequentially. Commercial rental revenue was up 19% for the quarter, driven by 17% higher demand and 3% higher pricing. Rental utilization on power units was 81.6%, up slightly from the high levels we saw in the prior year and reflecting strong demand from our lease customers. Overall, FMS earnings improved significantly due to higher lease and commercial rental performance. Earnings before tax increased 16% while pretax earnings on operating revenue were up 40 basis points to 9.1%.

Page 10 summarizes key results for used vehicle sales. Used vehicle inventory held-for-sale was 6,900 units at quarter end, near the middle of our target range. Inventory increased by 700 vehicles sequentially, reflecting a greater number of units coming off lease. We sold 4,500 units during the quarter, up 13% versus the prior year and up 10% sequentially. For the full year, we sold 17,500 vehicles, in line with the prior year.

Proceeds for vehicles sold were up 18% for tractors and up 8% for trucks compared to a year ago, reflecting modest market price increases and a younger age of units sold. Adjusting for a younger average age sold, comparable pricing was up low single digits sequentially.

I'll turn now to Page 11 to discuss the dedicated business. Operating revenue grew 18%, reflecting new business and higher volumes. DTS earnings increased 2% due to revenue growth, partially offset by continued and unusual startup costs on a customer account that we highlighted last quarter. We've made operational and contractual changes to this account and expect results on this account to significantly improve in the first quarter and be on track beginning in the second quarter.

Segment earnings before tax as a percent of operating revenue were 6.8%, down 100 basis points from the prior year.

I'll turn now to supply chain on Page 12. Operating revenue grew 19%, largely reflecting increased volumes, new business and higher pricing. Revenue growth also reflects the 2Q acquisition of the MXD Group, now rebranded as Ryder Last Mile. Excluding the acquisition, operating revenue was up 13%. SCS earnings before tax were up 18%, primarily due to revenue growth. Segment earnings before tax as a percent of operating revenue were 6.6% for the quarter, down 10 basis points from the prior year.

Turning to Page 13, full year gross capital expenditures were $3.2 billion, up $1.2 billion from the prior year. This increase primarily reflects higher investments to grow and refresh the lease and rental fleets. We realized proceeds, primarily from the sale of revenue-earning equipment, of nearly $400 million, generally in line with the prior year.

Page 14 summarizes cash flow. We generated $2.1 billion of total cash for the year, up by around $60 million from the prior year. Free cash flow was negative $944 million, down significantly from the prior year, primarily reflecting capital spending to support record contractual lease sales. Debt-to-equity at the end of the year increased to 228%, up from 191% at the end of 2017 and reflects investment in fleet growth as well as 2 acquisitions. Year-end leverage is also above our prior estimate of 210% due to year-end tension in foreign exchange impact and to a lesser extent, lower free cash flow. Balance sheet leverage was near the midpoint of our 2018 target range.

At this point, I'll turn the call back over to Robert to discuss our 2019 outlook.

Thanks, Art. Pages 16 and 17 highlight some of the key assumptions for our 2019 earnings forecast. Overall, we expect higher earnings driven by contractual revenue growth following a record sales year in 2018 and a strong pipeline going into 2019. These benefits will be partially offset by our strategic investments and somewhat lower expected net used vehicle results. We expect moderate growth for the overall economy with a rising interest rate environment.

In fleet management, we are forecasting lease fleet growth of 11,000 vehicles, 15% higher than the record growth we achieved in 2018. We have a high degree of visibility to this growth as extended OEM lead times have pushed the delivery of more of the second half 2018 sales into 2019. We expect rental to grow nicely driven by rental activity from new lease customers as well as expansion of our light and medium duty truck capacity to leverage e-commerce driven growth. We expect rental demand to increase by 7% consistent with our lease fleet growth, pricing to increase by 3% and utilization to be more normalized following a very robust 2018. We plan to grow the average rental fleet by 3,000 vehicles or 7%.

Higher capital spending to fund record lease fleet growth more than offset lower rental spending, resulting in negative free cash flow. Total cash generated is expected to increase 22.5% to $2.6 billion, reflecting returns from several years of contractual growth. We are expecting year-over-year headwinds of $11 million from elevated maintenance costs on model year 2012 vehicles. This is less than the $30 million headwind we had to overcome in 2018. These vehicles are expected to mostly exit the operating fleet by year-end.

Separately, we're implementing a new initiative in our maintenance operations through improved shop and parts supply efficiency. This maintenance initiative is expected to generate $75 million in cost savings over a multiyear period with a $20 million benefit expected in 2019. Used vehicle sales results are forecast to be modestly lower in 2019. This reflects slightly lower pricing expectations given higher expected volumes, especially in the second half of the year. We're lowering residual value estimates for vehicles in operation and have extended accelerated depreciation to vehicles expected to be sold in mid-2020.

Looking ahead past 2019, if used vehicle pricing remains stable over the next couple of years, we expect the impact from used vehicle sales results and depreciation in 2020 and 2021 to be similar to the impact that we expect to see this year, 2019. By 2022, pricing and book values will have largely reached parity, and we would no longer expect to need any accelerated depreciation nor see headwinds from used vehicle sales.

Turning to Page 17. Record 2017 (sic) [2018] sales activity, higher pricing and volumes are expected to drive double-digit revenue growth in DTS. Dedicated earnings will benefit from revenue growth and improved operating performance, partially offset by favorable insurance developments realized in 2018 that are not currently forecast for 2019. We expect supply chain to realize full year revenue growth with strong growth in the first half, tempered in the second half by some no-loss business and lapping growth from a large account that ramped up in mid-2018. The team is strongly focused on new sales to help address this issue. Earnings are expected to benefit from revenue growth, higher pricing and improved operating performance, partially offset by strategic investments. We are expecting continued savings from our Zero Based Budgeting program that will help fund strategic investments in sales and marketing, new product development and technology, which are focused on driving long-term revenue and earnings growth.

Finally, we plan to continue to purchase shares under our 1.5 million share anti-dilutive repurchase program. I'll now turn the call over to Art to discuss the impacts from the new lease accounting standard.

As we discussed on our third quarter call, the FASB issued new guidance on lease accounting, which Ryder will adopt effective January 1, 2019, and be reflected in our first quarter Form 10-Q. At a high level, the new guidance requires that we separate the lease and non-lease components of our ChoiceLease product. The nonlease or maintenance component, which is typically 35% of total revenue, will be recognized as services are expected to be provided instead of how they're billed. As such, rather than recognizing the maintenance portion of revenue on a straight-line basis, maintenance revenue will increase during the life of the lease contract. Importantly, this change to the timing of revenue recognition will not impact the cash flow or total earnings over the life of a lease contract. We will incur a material onetime after-tax cumulative adjustment to recognize deferred revenue. This adjustment will reduce shareholders' equity and increase leverage. As this is a noncash charge, we are revising our debt-to-equity target range to 250% to 300% to reflect the impact from the accounting change. The revised range will allow us to maintain a solid investment grade credit rating.

On an ongoing basis, we expect the earnings volatility associated with changes in fleet age to be reduced as maintenance revenue will be better aligned with maintenance costs. Given typical maintenance patterns, more revenue will be recognized during the second half of a lease since maintenance costs increase with age. The annual impact to our results will vary depending on, among other factors, the distribution of lease fleet by age, vehicle type and lease term and the percentage of leases filled with new versus used equipment. Based on these factors, a $0.20 decrease to earnings is included in our 2019 forecast to reflect the expected impact from the new lease accounting standard.

This decrease primarily reflects an expected decline in fleet age. We estimate a $0.25 increase to our full year 2018 EPS and a $0.07 increase to Q1 of 2018. This is driven primarily by fleet aging in 2018 as most of our lease fleet growth during the year was back-end loaded.

We plan to file a line item restatement of our 2017 and 2018 results under the new lease accounting standard with or before the filing of our first quarter 10-Q. You can find more detail about the impact of this accounting change in Ryder's white paper that is available on our IR website at investors.ryder.com.

I'll hand the call back over to Robert now to provide an overview of our 2019 forecast starting on Page 20.

Thanks, Art. Based on the assumptions I outlined, we expect operating revenue to grow 9% with revenue up in all business segments. Comparable EPS is forecast in the range of $6 to $6.30 for 2019 as compared to $5.79 last year, an increase of 4% to 9%. This reflects strong growth in our contractual products, cost benefits from ZBB and a new maintenance initiative and solid rental performance. These benefits are partially offset by strategic investments, impact from used vehicle sales, higher interest and insurance costs and elevated maintenance cost on certain older model year vehicles. The forecast is also impacted by lease accounting, which lowers EPS by $0.20. Excluding the impact from lease accounting in both years, earnings per share would've been forecast to grow 7% to 12% from $6.20 to $6.50. Comparable EBITDA is forecast to increase by 17% to almost $2.4 billion, reflecting the benefit from multi-year contractual growth. The spread between adjusted return on capital and cost of capital is forecast to increase to 20 basis points, up 10 basis points from the prior year.

Page 21 outlines our revenue expectations by business segments. Record sales results in 2018 and a strong current pipeline supports our revenue growth outlook for this year. In fleet management, operating revenue is expected to increase by 10 percent, which is above our long-term target range, reflecting growth in all product lines.

ChoiceLease revenue is forecast to grow by 10%, significantly higher than the 6% growth rate last year, driven largely by record fleet growth in 2019 and the revenue impact from vehicles put into service with customers in late 2018. We are forecasting commercial rentals to grow consistent with ChoiceLease at 10% and at a lower rate than in 2018. This reflects rental activity from our growing lease customer base and our strategic expansion of light and medium duty trucks to leverage these growing market categories.

DTS operating revenue is forecast to grow by 11%, a little above the high end of our long-term revenue growth target. Supply-chain operating revenue is expected to grow by 5% with solid growth in the first half of the year tempered by the second half by no lost business and lapping of a large prior year account ramp-up.

Page 22 provides a chart outlining the key changes in our comparable EPS forecast from 2018 to 2019. We continue to make strategic investments to drive future growth in revenue and earnings. In 2019, we're planning a $0.47 increase in strategic spending focused primarily on sales and marketing, information technology and new product development. The net impact from used vehicle sales result in higher depreciation expense and expected to negatively impact earnings by $0.38, below the prior expectation primarily due to the pull-forward of additional depreciation into the fourth quarter of 2018 as mentioned earlier. Increased losses on sale and higher depreciation from our annual residual value policy change will partially offset lower accelerated depreciation versus the prior year. Higher market interest rates and liability insurance premiums are forecast to negatively impact EPS by $0.27. Elevated maintenance expense of $0.16 on certain older model year vehicles will negatively impact earnings but to a lesser extent than in the prior year. Higher compensation expense is expected to reduce earnings by $0.16 this year. This includes standard merit increases as well as the accounting impact of a planned design change for our LTIP, partially offset by lower planned bonus expense.

Turning to the positive earnings drivers. Growth in our dedicated revenue and increased margin -- margins should add $0.20. Commercial rental is expected to increase EPS by $0.23, driven by higher demand for an expanded -- from an expanded customer base. In supply chain, we expect $0.25 of earnings growth due to both higher revenue and better operating performance. Cost savings from our ZBB program and the benefits from the new maintenance cost initiatives are expected to benefit earnings per share by $0.47 this year. We believe further opportunities to lower cost and drive efficiencies exist in the future. The largest contributor to earnings in 2019 is expected to be FMS contractual revenue growth, primarily ChoiceLease and to a lesser extent SelectCare, totaling an additional $1.10 per share. This is driven by strong fleet growth in 2018 and 2019 as well as higher pricing.

The net impact of these operational items would result in an earnings per share of $6.50. As mentioned earlier, the impact from lease accounting is expected to reduce 2019 earnings per share by an estimated $0.20. This brings the high end of our comparable EPS forecast to $6.30 with a range of $6 to $6.30 forecast for the year. I'll turn the call back over to Art to cover capital spending and cash flow.

Thanks, Robert. Turning to Page 23. We are forecasting total gross capital spending of approximately $3.6 billion, about $500 million higher than last year as increased investments to grow and refresh our lease fleet more than offset lower rental spending. Planned lease spending is up due to significantly higher fleet growth in the forecast as well as normalized replacement spending this year. As a reminder, lease capital is only spent after a customer signs the lease contract. For rental, we're planning to spend $630 million in 2019, down by almost 21%. The decrease reflects significantly lower growth spending, partially offset by higher fleet refreshment spending. The replacement spending in 2019 reflects a normalized level for our fleet size. Our investment spending in OP&E is expected to increase by around $110 million in 2019. This reflects FMS operating facility additions and upgrades.

Proceeds from used vehicle sales are forecast to increase 14% to $450 million due primarily to higher expected sales volumes. As a result, net capital expenditures are forecast at around $3.2 billion, an increase of around $400 million from 2018. The majority of this capital will be used to support multi-year contractual lease agreements. Free cash flow is forecast at negative $1.1 billion, down by about $200 million from the prior year, reflecting higher capital spending to grow lease and a normalized replacement spend, partially offset by total cash generated, which is up by almost $500 million.

With lower expected free cash flow and the impact of lease accounting, debt to equity is forecast to increase to 285% at year-end, within our revised target range of 250% to 300%. This forecast includes our estimate of a $400 million after-tax reduction to equity as we establish deferred revenue related to the new lease accounting standard.

Page 24 illustrates how growth capital increases total cash generated and comparable EBITDA over time as capital is priced into lease contracts and recovered over the average 6-year contract term. On the other hand, free cash flow is pressured by growth capital during the period of initial investment, particularly in high-growth years.

In 2019, we expect to spend nearly $1.6 billion in growth capital with almost 90% of that to support contracted lease growth. Total cash generated is projected to be nearly $2.6 billion, up almost $500 million from last year and comparable EBITDA is forecasted to be nearly $2.4 billion, up by $340 million. Both total cash generated and comparable EBITDA have nearly doubled over the past decade, reflecting returns from multiple years of fleet growth investments.

I'll turn the call back over to Robert now to discuss our 2019 forecast and progress on our 3-year targets.

Turning to Page 25, we're forecasting comparable EPS of $6 to $6.30 for 2019 versus $5.79 last year. This represents an increase of 4% to 9%. Excluding the impact of lease -- of the lease accounting change, the year-over-year increase in EPS would be 7% to 12%. We are also providing a first quarter comparable EPS forecast of $0.96 to $1.03 versus the prior year of $0.91, an increase of 5% to 13%. Excluding the impact from lease accounting -- the lease accounting change, the first quarter 2019 forecast would be $0.94 to $1.01, which would be a growth rate of 3% to 11%.

Page 27 provides our expectations for 2019 results as compared to our 3-year financial targets we provided earlier last year. FMS and DTS are expected to beat their operating revenue growth targets, reflecting the secular trends driving outsourcing and the positive results we continue to see from our sales and marketing initiatives. SCS is expected to come in below their growth targets due to lost business in the second half of the year. SCS contracts are individually larger, which can lead to lumpiness in the growth rate depending the timing of new and lost business. Our 3-year CAGR for SCS operating revenue growth in 2019 will be 11%. And given our pipeline, we remain confident in our ability to meet or beat our long-term target of 7% to 8% revenue growth in supply chain. FMS EBT percent is expected to improve year-over-year but remain below target due to the ongoing impact from used vehicles and maintenance.

DTS operating performance is expected to improve but will be just below their target. SCS results are expected to move up into the bottom end of the target range. ROC spread will improve but will remain below the target. And finally, as mentioned earlier, we increased our target leverage range to 250% to 300% to reflect the noncash impact of the lease accounting change, and we expect to remain within that target in 2019.

That concludes our prepared remarks this morning. Please note that we'll file our 10-K next week, which will contain additional details for your review.

Before I turn it over to the operator for the Q&A, I want to take a minute to thank our CFO, Art Garcia, for his many contributions to our company as this will be his final earnings call with Ryder. Art joined the company in 1997 as the senior manager of corporate accounting and has held various roles of increasing responsibility, including Corporate Controller and over the last 9 years as our CFO. Art has not only worked tirelessly to ensure the highest standard for our financial reporting, but has also been an important voice in the developments and execution of our growth strategy. We will all personally and professionally miss Art and wish him all the best in his future endeavors.

I'll now turn it over to the operator to open up the line. (Operator Instructions) Operator?

(Operator Instructions) We will go first to David Ross of Stifel

Yes. Lots of questions, so I got to choose carefully. But I guess, if we can go to the supply chain segment, which also includes Ryder Last Mile now. 2 parts to the question. One, how big is Ryder Last Mile? And is it margin accretive or dilutive right now? And kind of when do you expect to get to that in line with the SCS margins? And then the other part is just about the lost business. Why did you guys lose it? What is it -- was it any specific industry segment?

We'll hand it over to Steve.

Yes, David, let me talk first on Ryder Last Mile. As we release, I think early this year, our e-fulfillment, including e-fulfillment, e-commerce and last mile is in the mid-300s as part of gross revenue. We've continued to see modest growth there on the Ryder Last Mile piece. We did see some softness in volume in Q4 with a couple of large legacy customers there. So the team has been focused on execution and peak season. I think we had a very successful quarter, and they're out on the streets right now working on new opportunities. I think your second question was around the lost business. And these, as Robert said, we've got some very large accounts. In these situations, it was tied really to 2 verticals, primarily the tech and the health industry vertical as well as CPG and retail.

And the reason for losing it, was it just on price, are they changing plants or go with a different provider on a bid?

Yes, I'll give you a couple of reasons here. First and foremost, it was below our target NBT number, in one example. And another, it was a competitive bid, but we had a competitor that came in below market, so we just had to pass on the opportunity.

David, let me add one thing. I think you asked about the margins for Ryder Last Mile, if they were dilutive. The answer to that is no. I think the margins are generally in line with the overall supply chain margins.

We will now go to Ben Hartford of Baird.

Robert, I think you had made the comment about if used vehicle prices were flat, you'd have an impact in '20 and '21 similar to '19. The question is, is that the baseline assumption as you think out through '19, '20 and '21 from a used vehicle price point of view? And if so, can you just talk to that 3-year target for FMS margin EBT as a percent of operating revenue. What does it require to get to the bottom end and the top end of that 10% to 12% range?

Yes, Ben, I think the first answer to your question -- yes, our assumption is really used vehicle pricing being flat to slightly down primarily in the second half of the year. So yes, our assumption is generally in line with that, which would really -- the point we're trying to make is that we're looking at headwinds -- the headwinds that we're looking at for this year which are a lot less than last year. We'll assume you have a couple of more years of that if things remain flat. So as you can see, those are headwinds that we can more than offset by the growth in the earnings that we're seeing in the rest of the business. So if you look at what that means for FMS, it would probably have FMS getting back into their target range probably in 2021. So you'd see improvements in 2020, and then by 2021 getting back maybe into that maybe low end of that 10% to 12% range. So you'll start to see, really, the benefits of the growth that are more than offsetting some of that depreciation headwind, and you should see that creeping back into that range by 2021. I guess one other thing I should mention is as it relates to our ROC spread. As we model this thing out, we believe we can get back to the ROC spread target of 10 to 150 -- 100 to 150 basis points. Depending on how the other divisions go, we could probably get there before we get to the bottom end of the FMS target range. So assuming that we can get the supply chain and dedicated target ranges, which I feel pretty confident we will here in the next year, that could that -- that along with continued improvement in FMS could get us to that 100 to 150 basis point range on ROC spread.

We will now go to Scott Group of Wolfe Research.

So just want to clarify one thing first. The $7-or-so sort of reduction to book value, should we think about that as just a permanent reduction? Or does some of that get recouped as the lease accounting changes flow through?

Right. Generally -- I think, Scott, generally you're going to see that there, at some level, it's going to move up and down as how the fleet ages. But keep in mind that it's deferred revenue with the cash we received if we don't owe really the customer any more services at this point in time. So eventually, as we said, our earnings don't change on an individual lease contract. But over time, you're going to have that amount probably sitting there, directionally.

Okay. And then, Robert, I just want to understand the 2020, 2021 comments. When you say a similar impact, are you talking about a similar year-over-year headwind or on a year-over-year basis, it will be sort of a neutral? And...

Similar year-over-year impact, right? So what you saw on the waterfall that we're showing for 2019, you should expect something similar to that in 2020 -- in 2020 and 2021.

And is that a comment on accelerated depreciation, residual value and vehicle sales? Or just accelerated depreciation and residual value?

That's a comment on the whole thing. So as an example, this year we're showing you a $0.38 headwind. You should expect the $0.38 headwind next year and then the following year. And once we've done that, we'll have parity between our market price and our residual value. Because again, that's a lot less than what we saw in 2018. Because in 2018, we probably had, what, $53 million?

Twice that.

Twice as much. So definitely, we're seeing -- we've seen an improvement in that as prices have improved and also as the impact of all the accelerated and depreciation policy changes we're making starts to bring that number down. So I feel really good about where we're headed with that. Because I think if you look at 2018, I think you see a bit of an inflection point where all the growth that we're seeing from our strategy of multi-years trying to get -- grow in all of the businesses is more than offsetting these headwinds. So going forward, I see the growth continuing and the headwinds really beginning to subside. So I feel that really helps us feel really good about what we're going to be facing in the next couple of years.

Our next question will come from Kevin Sterling of Seaport Global Securities.

Art, congrats on your pending retirement. I wish you nothing but the best in the future. I've enjoyed working with you. So Robert, just kind of a big picture question to help kind of judge what we're seeing in terms of trends, if you don't mind. On the commercial rental fleet, are you seeing rental activity extended, say, in customers keeping rental trucks over the weekend, et cetera? And on the leasing side, are you seeing activity extended and lease customers may be looking to grow their fleet with you? For instance, they might have 10 trucks but looking to grow to 12 trucks? What are you seeing there in terms of rental activity and lease activity, if you don't mind?

Yes, I'll let Dennis handle the comp, but I'll tell you, rental and lease were both very strong in 2018 and we've seen that really continue into January and into February this year. So lease sales have been really hot. We had our strongest January this year. So if you remember last year, we said we had a record month in January for lease sales. Well, this year we beat that record. So goes to show you things haven't really slowed down from that vantage point. And rental, again, seasonally comes down in January but a very strong January in terms of the utilization. So I'd say things have continued to look really strong, I think indicative of the freight environment and what's an overall healthy U.S. economy.

The only thing I would add is that we continue to see new customers come to outsourcing. Still about 40% of our growth is coming from customers who are new to outsourcing. So as Robert said, Kevin, both rental and lease were extremely strong in January, exceeding our expectations, and we see the trend continuing from a secular trend point of view, more and more people are outsourcing.

(Operator Instructions) We will now go to Justin Long of Stephens.

I wanted to ask about the 2019 guidance for commercial rental, I think the 10% revenue growth assumption was a little bit surprising just given the tough year-over-year comp and the recent moderation we've seen in TL spot rates. Can you just talk through your confidence and visibility in that outlook in addition to what you're assuming for the trend in utilization this year?

Yes, Justin. This is Dennis. I'd first start with reminding everyone that 40% of our rental demand comes from supporting the leased product and we are looking at a 7% growth in the number of leased units that we have. So I'd start there. And then I'd say that we're -- as we look out, we're actually anticipating some softening potentially in the second half for tractors, some slight softening. But as we look at January, as we said before, utilization has actually exceeded our expectations by about 100 basis points.

Yes, we're also -- Justin, what I would add to that, is around trucks, as we look at the last couple of years, we have seen -- we haven't had a lot of turndowns in the medium -- mostly medium and light-duty truck market, and we see an opportunity there with the rise in e-commerce to participate more in that segment of the market. So we are -- some of the growth that you're seeing is going to be in those classes as opposed to in the class 8 tractor class. So that's what's makes us more confident in where we're going with this. Again, the other thing I would add is that we've always said that we want to grow our rental fleet consistent with our lease fleet and the 2 are -- we're really planning to grow both 7%. So those are in alignment.

That's helpful. And real quick just to help with modeling on that last point, how should we think about the quarterly cadence of that 11,000 units of growth for ChoiceLease?

Generally flat?

Yes, because if you think about it, some of that is going to come from lease sales that we had in the second half of 2018 as those trucks get delivered. So I would model that out -- I would model that out flat, maybe a little bit heavier in Q1 and then flat for the balance of the year.

We will now take our next question from Amit Mehrotra of Deutsche Bank.

Art, congrats and best of luck. I just had a question on the average -- the change in the average age of the fleet and maybe how we can think about how that translates into the headwind or tailwind you get in any given year from lease accounting change. So I was wondering if you could help us embedded in that $0.20 estimate headwind this year, what the expected change in the average age of the fleet would be. And given the amount of record new leases you're signing, could we -- could that headwind -- could that average age continue to shrink in 2020 and now be an incremental headwind? And then I just have one follow-up as well.

Around fleet age, what we've seen, despite the growth in fleet, in lease fleet, we saw the fleet age we talk about on the call. So I look on a full year basis, the average fleet age was about 43 months for 2018. That's up from about 41 months in 2017. And as we build our expectations for 2019, we're thinking it's going to drop down to 40. So you're going to see it go back down, and that's partly what's driving the change in the -- in that lease accounting impact. As far as talking about 2020, yes, it's possible. I think obviously as we grow, we're going to have 11,000 units going into 2020. It will depend on what we end up doing for actual growth in that year, but it's possible that it will continue to trend down some.

Got it. Okay, that's helpful. And then just 1 maybe detailed question on the supply chain business. Can you -- I don't know if you provided this earlier. But on MXD, could you give us what MXD actually grew in the quarter, on a year-over-year basis? And then I assume that's having some dilutive impact to the margin, to the overall supply chain. I don't know if you could provide a finer point in terms of what the margins are on that business.

Yes, we don't provide a breakout of that. We have within our retail vertical. But it is not creating a whole lot of pressure, I think, in terms of top line at this point. It's growing at a nice clip and also, as I mentioned, margins are generally in line with our supply chain margins.

And is that MXD, is it a safe assumption to say that, that's going to grow kind of 10% to 20% top line organic in 2019 year-over-year. Is that kind of the order of magnitude correct way to think about it?

Yes, we're looking upwards in 10% -- 10% to 15%, again, organic growth in the year.

We will now take our next question from Todd Fowler of KeyBanc Capital Markets.

Robert, I was just hoping that you could give us some directional comments on free cash flow. Obviously, we understand that the investments here supports future growth and it's a byproduct of the strong lease writing activity that you're seeing. But as we kind of think out a little bit if lease growth normalized and maybe the normalized level isn't 3,500 units anymore on an annualized basis. But at what point or how should we think about this business maybe generating some level of free cash flow given the investment that you're making at this point?

Yes, look, I think the business at this level of growth -- you're going to be negative free cash flow because we're making major investments. This year, we're going to look at $3.6 billion of investment in primarily lease vehicles, which are often backed by contracts. So that level of investment will drive negative free cash flow. And if you just look at the history, that growth rate, I don't expect to grow 11,000 vehicles every year into infinity. At some point, that tempers back down. You will start to see positive free cash flow, probably if you look just at our history, probably around that 4,000 range. As we grow more, maybe that 4,000 becomes 5,000. But that would be -- that's a level of growth, I think, which you could see positive free cash flow. Other than that, you're really building up a significant amount of operating cash flow with these investments that really pay off over time and certainly when the market is as good as it's been for us the last few years, in addition to the benefits that we're seeing from all these secular trends, we want to take full advantage of those and bring more people into outsourcing and bring more companies into leasing because we think that in the long term pays a good returns, not just in one turn of the vehicles but over the -- in many cases over decades when those customers stayed with leasing and continue to renew with us year in and year out.

Okay, good. That's actually very helpful. And then just thinking about the gross CapEx guidance this year, the $3.6 billion, how much discretion is there in that number? I mean, is that something where if you got into the second half of the year, you'd have some flexibility with that? And if so, I mean is that mostly on the rental side? Or is that something that you feel is pretty locked in at this point?

Yes, I would say look, it's mostly driven by lease contracts signed, right? So and we have -- I would tell you right now, we have -- the deliveries that we're getting are through May. So we're locked in through May already with leases that we've signed. So I would say a lot of that is already accounted for with lease sales that we've signed -- that we've signed and those that are to come through the balance of the year. The only thing I could do is if what we have started to push it out a little bit, you might see some of that get pushed into 2020. But I would tell you generally, we've got pretty good visibility to that. The rental purchases are mostly coming in early in the year. There are some in the back half of the year that obviously, we would pull back if we saw some slowing down but not a lot. I would say, I think of that $3.6 billion is really a sign of the amount of growth and success that we're having on the sales side.

Next, we'll go to Brian Ossenbeck of JPMorgan.

Art, congrats on retirement and thanks for all the help over the last couple of years. So just wanted to ask one question and a quick follow-up on used vehicle. So could you go into a little bit more detail on this new maintenance program, the Zero Based Budgeting? It sounds like it had a pretty decent effect in 2018. You're expecting more in '19. Is this what we're seeing sort of in the Central Support Service line, was actually down in '18 even though you a decent top line growth going? So just some more context and color around that for what to expect in '19 and what you might have realized in '18?

Yes, Brian. They are 2 separate initiatives. One is the Zero Based Budgeting initiative we really kicked off in 2018. We had significant savings from that, and the good news is they're sustainable savings so we saved somewhere around $50 million in 2018 from our Zero Based Budgeting initiatives. We expect to save an incremental amount this year going into '19, obviously, to a lesser extent but we're still expecting to save some good money there. In addition to that, we have a separate initiative now in Dennis' area and I'll let him address it. But it's a $75 million initiative to really get after some of the maintenance cost around our fleet of trucks. As you know, we spend about $1.3 billion maintaining trucks, and this is an opportunity to really help us -- and this would help us streamline that. So I'll let Dennis...

Yes, Brian. As Robert said, in 2019, we're looking at, at least $20 million of savings and then $75 million over the next 3 years, and we are really looking at parts procurement, aftermarket parts, productivity in our shops, our outservicing of vehicles and our preventive maintenance practices. So we see a lot of opportunity that we're zeroed in on.

So I would tell you as you model this out, this is incremental to any maintenance cost benefit we're getting from just technology improvements and getting some of the 2012s out of our fleet. So this is really a productivity and parts procurement, part strategy type savings initiative.

Okay, got it. So it sounds like both of these are in that cost action bucket in the waterfall, when you lump them together?

Yes.

So the follow-up would be just on the used vehicle. Have you gone through any modeling or sensitivity beyond kind of the baseline outlook here for the bit of softness in the back half of '19 if the fleet were to remain stable in size but used vehicle prices went up or down a couple of percentage points? Can you give us some thoughts around what the sensitivity would be?

Yes, look, just so you know, what we've modeled in there is some softness in this year in terms of pricing, primarily in the back half of the year as more units get to the UTCs and then we got more volume to sell. So we're expecting to see some softening in pricing, maybe low single-digit type price, mid-single-digit type drop. So that's what's already modeled in these numbers. I'd tell you we're looking at that already in what we've put out there. If you just think about -- if you want to model out the 5% drop in pricing, you look at our total sales proceeds of about $400 million, so 5% would be $20 million. Gives you an idea kind of the sensitivities. Obviously, if it goes the other way, then it's a positive.

We now will go to Jeff Kauffman of Loop Capital Markets.

Art, congratulations and best of luck and thank you also for all of the detail in the release today, very, very helpful with all the changes going on. I'm just going to ask one question in 2 parts, the detail and the bigger picture. I thought when you said that 11,000 units, we were talking about all of FMS but now it's sounding like it's 11,000 addition to ChoiceLease and 3,000 addition to rental. Am I thinking about that right?

Yes. The 11,000 is just -- is ChoiceLease so...

Okay, and then bigger picture. When I look around the industry, it doesn't seem like business levels are growing at 7%. So I think you had alluded to it's a lot of outsourcing, 40% from new customers. Where is this occurring in greater magnitude? Is there a particular industry? I'm assuming more private fleet than anything else. But just surprised at the rate of growth given the volume growth that we're seeing or the unit growth we're seeing in the rest of the economy. Could you shed a little light on that?

Jeff, I'll let Dennis give you some more color on that. But I'll tell you, it's kind of -- I think it illustrates the strength of our business model. And once you've sold to customer, you now have locked in that revenue stream for a very long time. And as that customer renews, you can -- or grows their fleet, you continue to get growth from that. So all the work we've done the last 6 years or so to really try to build up that contractual customer base is sort of what -- you're really beginning to see the power of that as you look into both the 2018 performance and 2019. So that's really just a little bit of the color is what you see. But I'll let Dennis give you an idea of kind of where we're seeing some of that growth.

Yes, Jeff. First of all, we're seeing it across the board. I mean, transportation and warehousing is up. Food and beverage is up. Retail is up. And what's happening is more and more customers are looking at the CapEx and the operating expense, and what's required from a technician point of view and diagnostic tools and they're saying, "Hey, this isn't our core competence," and we're seeing more and more of those across the board, various industry segments who are outsourcing to us.

I think that the work that we've done around TCO and helping customers understand their cost, clearly the pain that customers have been through with the technology change has been -- although it's certainly hurt our P&L for a period of time, it has been a godsend in terms of our ability to really convince customers that, "Hey, it's time to give this to the professionals that really know how to deal with this as opposed to you trying to manage your fleet and maintain your fleet yourself." So I think that's really a big part of how you're seeing kind of breakout growth at Ryder versus maybe what you see in other parts of the industry and the economy. So I think getting that top line growing is really a key part of the strategy, and now continuing to focus on getting that the flowing through to the bottom line as we get past the headwinds of UVS and of the maintenance cost, it's really what, I think, has me and our management team very excited about what's to come over the next couple of years.

And now we'll go to Matt Brooklier of Buckingham Research Group.

This is Kyle Robinson for Matt Brooklier. I was just curious about the elimination, the account line, I've seen that has increased over the last couple of years. Should we expect kind of a new running average for that account? And if so, what kind of feeds into that line?

Yes, well the elimination is basically the -- that's the equipment contribution from the fleet management business to both dedicated and supply chain. So clearly, as those fleet and the supply chain and dedicated has grown, they need more trucks, so that elimination line has been growing also. So it's really proportional to the number of units that both supply chain and dedicated are using in their business.

So as long as you see better performance then on the lease side, you'll get some -- you're going to see some of that flow through also.

That's right.

Great. And then actually just one more quick one. Just about the polar vortex in February, talked about a great January so far. Do you think that's going to also positively impact Ryder for the first quarter of '19?

What was the question?

Polar vortex and...

The polar vortex and how --

There's always -- Matt -- Kyle, there's always a little bit of an impact from these unusual changes in temperature. We had one, was it last year, a couple of years ago. So tend to happen in the winter is what we learned, even though we're here in Miami. But no, I don't see it as being a big impact in the year. Obviously, it creates a little bit more work for us as we have to respond to our customers as their trucks are down, but I don't see that as a big impact.

We now will go to Stephanie Benjamin of SunTrust.

I just had a question and was hoping -- can you hear me all right?

Yes, we can.

Excellent. I just was hoping if you could speak a little bit more about the truck sharing program, maybe if you could give us some color on what you did find after the pilot in Atlanta, some of the success or even some metrics you are looking for to drive that expansion into Florida for 2019?

Yes, we're very excited about the results of that initially piloted and then really a full rollout in Atlanta. It's COOP by Ryder is the name for those of you that aren't familiar. But it's basically an Airbnb for trucks, and it's the first and the only one in the market. And it allows customers that have idle trucks to share them with customers who need them and Ryder is really the facilitator of that transaction. So we really had some nice acceptance in Atlanta, and we feel good about that, and we've been able to kind of work through the friction points, if you will, on that -- in those transactions, which was a lot of what we wanted to get done in Atlanta last year. So we feel really good about that. We're rolling it out in South Florida this year. And I think once we have those 2 markets in place, and we've really kind of gotten a better feel for how it works, we would be in a position to then be able to decide if we're going to do something more broadly, nationally or where we go with it next. I'll let Dennis give you some more color also.

Yes, Steph, I just wanted to add, really surprising. We're actually getting customers who are new to Ryder trying out COOP. In fact, one customer started talking to us about COOP. We ended up selling them up to both our SelectCare and ChoiceLease products. So we view this as another on-ramp for us into the leasing product or contractual products ultimately.

We have had -- one other thing, we've had a couple of customers who've gone out and bought trucks in order to put them on COOP and turn it into a business. That really is exciting because if that takes off, you could really see this becoming a tool that allows companies to kind of build little businesses around it. So again, we're early innings still but pretty excited about the early results.

And we will go to our last question, and that will be from Scott Group of Wolfe Research.

Appreciate the follow-ups and best of luck to you, Art. So 2 things, one on maintenance. So the $11 million headwind this year, I guess $40 million-plus combined over 2 years. Does that reverse next year? Or does that not reverse anymore with these new lease accounting changes?

Yes. No, you won't see it -- you will basically see it go away, right? So you've had -- we're at $12 million this year that will hit us. And as we go into next year and the units are out of the fleet, we expect that to go away. Now you will be getting, over time, as you get more of the newer units -- more of the newer units coming in and the older units going out, we're going from a period where each year maintenance costs were really a big -- a headwind. So now we're really -- each year they should become a tailwind because we're getting to periods now where each model unit that comes in is a better performer than the model unit that goes out. So that's the tailwind that we expect over time, over the next several years for us to be able to see in the results. But it isn't like all the spend -- I was not -- those model year 2012 units aren't going to give us money after that.

Scott, this reflects the incremental expense associated with those units, not really their age, if you will. So it's not really associated with lease accounting.

With lease accounting, right.

But just so I understand, when you say... go ahead. Okay, so when you say go away, does that mean it's a year-over-year tailwind next year? Or just it's a no impact next year?

No impact next year, so no impact next year.

Okay. And then the...

Let me just mention one other thing on the lease accounting because I know that there's a lot of angst around it. At the end of day, if you look at what we're putting out there, it's a $0.20 to $0.25 impact plus or minus, depending on what's happening with fleet age. So my goal here is, first of all, I think it's a good thing because this will stabilize earnings going forward as we get years where the fleet gets a little bit older or a little bit younger, you're going to lose that variability that we used to have in earnings. So I think that is a very good thing. And I'll expect this thing to just not be a big topic of conversation after this year because it's just built into the results. So I think we've -- as we get the white paper out, you get a better understanding of that. You get a chance to kind of go through it. That's sort of the way I think everybody should look at it.

Okay. And then the fleet growth, that 11,000, is that an average or year-end? And I guess what I'm trying to understand is you talked in the bridge $1.10 benefit from lease growth, like what do you think is like the -- with the full 11,000 units, what's like the run rate when you exit the year? Is that $1.10 -- it's going to be higher. But is there a way to just think about what like the exit run rate is on that fleet growth?

I guess, the way you could model it, Scott, one way to model it is just look at our gross margins on lease and rental gives you a general idea. And now with lease accounting, you no longer have as big a pop when the new vehicles come in. So you're going to be kind of at that average margin over the life of the vehicle. So 11,000 times that will give you a kind of ballpark as to where it should come in.

The 11,000 is kind of, if you think about it, is ratably over the year, let's say. But you also have the follow-through of the 2018 growth. So you kind of could argue that half of that is kind of your look forward, so that's really what's left if you think about -- of the current year add.

Right.

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

All right. Thanks, everyone. Thank you for getting on the call. Excited to get out there and spend some time with you over the next several months as we get out to some of the conferences. And again, we want to do a final thank you to Art. I know this was his last call so he wanted to make sure you guys had a lot of paper and a lot of documents, so we got a lot out today. But again, wish him all the best and thank him for his many contributions. Thanks, everyone.

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