萊德系統 (R) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Ryder System Second Quarter 2022 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, Senior Vice President, Investor Relations and Corporate Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's Second Quarter 2022 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. For 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 fillings 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 John Diez, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, President of Global Fleet Management Solutions; and Steve Martin, President of Global Supply Chain Solutions and Dedicated Transportation, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to Robert.

Good morning, everyone, and thanks for joining us. I'm very pleased with this quarter's results, which reflect higher earnings in all 3 business segments. I'm also excited to update you on the significant progress we continue to make on our strategy to increase core earnings and create long-term shareholder value, as we outlined in our recent Investor Day. I'll begin the call by providing you with a strategic update. John will then take you through our record second quarter results, which exceeded our expectations again this quarter. We'll then discuss our outlook and review how we've positioned the business to deliver on our long-term targets over the freight cycle.

Our 2 recent supply chain acquisitions, Whiplash and Midwest Warehouse & Distribution System performed above our expectations and continued to be accretive to earnings in the quarter. These acquisitions support our strategy to accelerate growth in our asset-light supply chain business. Whiplash significantly grows our e-fulfillment network with scalable e-commerce and omni-channel fulfillment solutions, and Midwest expands our multiclient warehouse offering.

Following record new contract wins in Supply Chain and Dedicated in 2021, we realized record contractual sales year-to-date for the total company. Challenges impacting labor, supply chains and truck production continue to drive companies to pursue long-term transportation and logistics outsourcing solutions.

FMS also continues to benefit as companies look to source truck capacity in this tight market. We generated record ROE of 28% for the trailing 12-month period, above our high-teens target reflecting continued strong demand and pricing in used vehicle sales and rental as well as benefits from our multiyear lease pricing and maintenance cost savings initiatives.

ROE also improved from a declining depreciation expense impact from prior residual value estimate changes. We revised our full year 2022 ROE forecast to 25% to 26% from our most recent forecast of 24% to 26% and increased our full year comparable EPS forecast. These increases reflect higher-than-expected results for the balance of the year in rental and supply chain.

Supply Chain and Dedicated are on track to achieve their high single-digit target for EBT as a percent of operating revenue in the second half of the year. reflecting pricing adjustments to recover higher labor cost as well as growth. Earnings in both segments increased sequentially, and Dedicated already reached their high single-digit target in the second quarter.

Our strong balance sheet continues to provide us with capacity to pursue targeted acquisitions and investments as well as return capital to shareholders. We expect to complete our $300 million ASR no later than October. Once complete and assuming market conditions remain favorable, we anticipate executing under our other authorized share repurchase programs, a 2 million share discretionary program and a 2.5 million share antidilutive program.

Our Board also recently approved a 7% increase in our quarterly dividend, which we have paid out without interruption for over 46 years. We increased our full year 2022 free cash flow forecast to $750 million to $850 million, primarily to reflect $200 million and lease capital expenditure that is now expected to be deferred due to OEM delivery delays.

Slide 5 provides an overview of the investments we're making to drive accelerated growth in Supply Chain and Dedicated, a key element in our strategy to generate higher returns. Developing new and enhanced capabilities in e-commerce fulfillment, last-mile delivery and freight brokerage, provide opportunities to leverage profitable growth areas in the market and cross-sell services to our large customer base.

Innovative technology enables us to deliver value-added logistics solutions that are in high demand and continue to influence a significant amount of new business awarded to Ryder. In previous quarters, I highlighted our Ryder Last Mile, Ryder Share and e-commerce fulfillment offerings. This quarter, I'll discuss our brokerage offering, which provides us with the opportunity to leverage our logistics expertise, and our ability to secure capacity for our customers.

Sales and marketing are key to our brand awareness and ensuring customers are aware of the full array of supply chain capabilities. Our ever better campaign and increased digital marketing presence have driven a significant increase in qualified sales leads. We're also expanding our sales force and investing in their capabilities to drive additional growth opportunities.

We expect to continue pursuing strategic M&A opportunities with a focus on adding new capabilities, geographies and industry verticals. These opportunities are an important way to accelerate growth especially in Supply Chain and Dedicated, and we have a strong track record of success in this area.

Ryder Ventures, our corporate venture capital fund aims to invest $50 million over 5 years through direct investment in startups. Our investments here advance strategic relationships to support development of new products that benefit our customers and solidify our position as an industry leader. We've made investments in numerous exciting areas such as autonomous vehicle technology, e-commerce fulfillment and digital technologies that support freight optimization and are working with these startups to address important customer needs.

Slide 6 provides a closer look at Ryder's brokerage offering. Ryder has been in the brokerage business for a long time. And in recent years, we began to focus on growing this profitable asset-light business more aggressively. This higher-return asset-light offering expands the services we offer and create additional touch points for customers. Brokerage is an opportunity for Ryder to leverage our logistics expertise, asset-based dedicated transportations solutions, extensive care relationships and significant buying power to create value for our customers. Ryder's brokerage offering provides a concierge-level service for all customers that is supported by a single point of contact and tech-enabled execution.

This model provides shippers and carriers with the confidence that their transaction will be executed as promised. Our technology platform enables digital matching, tracking and settlements, which drives efficiencies and provides customers with more solutions and flexibility.

Our growth initiatives are focused on building scale and density. With existing offices in Novi, Michigan and Fort Worth, Texas, we recently opened a new office in Nashville, with plans to open additional locations in 2023. Our brokerage sales headcount is planned to more than double this year with support -- to support expected growth. Our brokerage offering will also be promoted as part of Ryder's ever better marketing campaign. Any shippers and private fleets in key geographies will continue to build density and investing in digitization, visibility and automation will help us leverage increased scale and density.

More than 1/3 of Ryder's brokerage activity is from customers that use multiple services with Ryder, which provides us with significant opportunity to cross-sell our existing customer base, as well as add new customers.

I'll turn the call over to John now, who will cover second quarter results.

Thanks, Robert. Total company results for the second quarter on Page 7. Operating revenue of $2.3 billion in the second quarter increased 20% from the prior year, reflecting a revenue growth in all segments and the supply acquisition. Comparable earnings per share from continuing operations were $4.43 in the second quarter, up from $2.40 in the prior year. Earnings increased across all 3 business segments with the largest impact from used vehicle sales and rental performance at FMS.

Return on equity, our primary financial metric, reached a record 28% for the trailing 12-month period, reflecting ongoing truck capacity constraints to the market as well as continued benefits from our initiatives to increase returns. Year-to-date free cash flow declined to $551 million from $602 million in the prior year, reflecting higher planned capital expenditures, partially offset by higher used vehicle sales proceeds. Free cash flow in 2022 includes $205 million from the sale vehicles and properties in the U.K. as part of the exit of that business.

Turning to FMS results on Page 8. Fleet Management Solutions operating revenue increased 7%, reflecting 28% higher rental revenue, driven by strong demand and higher pricing. Rental pricing increased 6%, primarily due to higher rates across all vehicle classes. Fleet Management realized pretax earnings of $285 million, up by $127 million from the prior year. $84 million of this improvement is from higher gains on used vehicles sold and a lower depreciation expense impact related to prior residual value estimate changes.

Improved rental performance also significantly contributed to increased FMS earnings. Rental utilization on the power fleet was a record 85% in the quarter and above the prior year of 80%. Results also benefited from our lease pricing initiatives, in line with our expectations. We expect to see incremental benefits going forward as we renew leases at a higher rate or approximately the next 3 years.

Our maintenance cost initiative also contributed to higher earnings. FMS EBT as a percentage of operating revenue was 21.8% in the second quarter and 19% for the trailing 12 months, well above the segment's long-term target of low double digits.

Page 9 highlights used vehicle sales results for the quarter. Market conditions remained strong, reflecting good freight activity and site supply conditions due to continued OEM production constraints. Higher year-over-year sales proceeds in North America reflects significantly increased market pricing. Sequentially from the first quarter, truck proceeds increased 9%. However, tractor prices decreased modestly by 5% from historic highs in line with our expectations.

During the quarter, we sold 10,500 used vehicles, of which 6,500 were related to the exit of our U.K. business. Excluding the U.K. exit-related sales, used vehicle sold 2,000 vehicles versus the prior year, due primarily to lower inventory levels and were down 300 vehicles sequentially from the first quarter.

Used vehicle inventory inclusive of the U.K. was 4,200 vehicles at quarter end below our target range of 7,000 to 9,000 vehicles. Average used vehicle pricing is well above our residual value estimates used for depreciation purposes. We believe our residual value estimates are appropriate based on market conditions and our outlook.

Turning to supply chain on Page 10. Operating revenue versus the prior year increased 49% due to acquisitions and double-digit revenue growth in all industry verticals, reflecting new business volumes and pricing. Operating revenue excluding acquisitions was up 23%.

SCS EBT increased 28%, reflecting revenue growth from new business, pricing and acquisitions partially offset by customer accommodation charges, bad debt and incentive-based compensation. SCS EBT as a percent in operating revenue of 6.6% and increased sequentially and includes a 90 basis point impact from noncash amortization expense related to recent acquisitions. We continue to expect that SCS EBT percent will return to the high single-digit target levels in the second half of the year, reflecting pricing action and profitable growth.

Moving to Dedicated on Page 11. Operating revenue increased 19% due to new business, pricing and volumes. Dedicated EBT increased 76%, primarily due to pricing, new business and gains on used vehicle sales. These benefits were partially offset by strategic investments.

DTS EBT as a percent of operating revenue of 7.6% was at the segment's high single-digit target for the quarter. We expect that DTF EBT percent will continue to generate returns at target levels in the second half, reflecting pricing actions and profitable growth.

Turning to Slide 12. Year-to-date, lease capital spending of $810 million was up year-over-year due to increased lease vehicle replacements for expiring lease contracts. Year-to-date, rental capital spending of $364 million declined slightly year-over-year, reflecting lower planned investments.

Our full year 2022 lease CapEx forecast of $1.8 billion to $1.9 billion, reflects lease replacement and growth capital versus 2021. This forecast has been reduced by $200 million to reflect extended OEM vehicle delivery delays that will defer CapEx previously planned for late 2022.

In North America, we now expect the year on lease fleet to be up approximately 2,000 vehicles. With lease fleet growth expected to occur in late 2022. The associated revenue and earnings will primarily benefit next year. Our full year 2022 rental CapEx forecast is unchanged at $500 million and remains below the prior year, with our ending fleet expected to grow by 2% or 1,000 vehicles. We expect the average rental fleet by 10% or 3,700 vehicles on a full year basis.

Our full year '22 forecast for gross capital expenditures is $2.5 billion to $2.6 billion. We expect proceeds from the sale of used vehicles of approximately $1.1 billion. And this number includes approximately $350 million in proceeds related to the exit of our U.K. FMS business, and higher proceeds from the sale of used vehicles versus prior year. Full year net capital expenditures are expected to be between $1.4 billion to $1.5 billion.

Turning to Slide 13. As mentioned earlier, we've increased our 2022 forecast for free cash flow and return on equity. Our increased 2022 free cash flow forecast of $750 million to $850 million reflects $200 million in deferred lease capital expenditures.

Balance sheet leverage is 233% at the end of the second quarter and is below our 250% to 300% target range. We expect leverage to remain below our target range for the balance of the year which will provide capacity for additional acquisitions and share repurchases. 2022 ROE is expected to be between 25% and 26%, reflecting strength in FMS and a recovery of SCS and DTS returns to target levels in the second half of the year.

I'll now turn the call back over to Robert to provide an update on our plans to drive higher core earnings over the cycle and our increased 2022 EPS forecast.

Thanks, John. I'll start on Page 14. At our recent Investor Day, we reviewed the steps we've taken to generate higher core earnings in recent years and the actions underway to continue to drive core earnings higher over the cycle. As a reminder, core earning assumes normalized gains of $75 million on used vehicle sales as well as rental performance that reflects historical utilization levels in the mid- to high 70s.

First, I'd like to highlight various aspects of our business model that contribute to its strength and resiliency through the freight cycle. Secular trends continue to favor outsourcing decisions, and have contributed to a record contract wins in Supply Chain and Dedicated for the past 1.5 years. Over 85% of our revenue is contractual, recurring revenue streams generated from our supply chain, dedicated and leased businesses.

Although proceeds and gains will fluctuate with changes in market prices for used vehicles, our vehicle residual value estimates are at historically low levels, which we expect to significantly reduce the likelihood of incurring losses on sale or the need for additional depreciation. Structural changes to the business and execution on our balanced growth strategy have resulted in a higher level of core earnings.

Our balance sheet remains strong with leverage below our 250% to 300% target. Used vehicle sales in rental are the noncontractual parts of our business and are more cyclical. As a result of our return initiatives and freight cycle playbook actions, we believe we're positioning the business to achieve long-term -- our long-term target of high teens ROE over the cycle with trough ROE of approximately 15%. Current used vehicle inventory is at historically low levels, reducing the market risk when conditions softened.

In Rental, our focus for growth is on trucks rather than tractors as trucks have been less volatile during prior downturns and are supported by e-commerce growth trends. For both used vehicle sales and rental, we believe the ongoing extended OEM truck lead times are prolonging demand for these products relative to prior cycles. In addition, our asset management playbook provides us with various levers to help mitigate the impact from a downturn.

We can also leverage our expanded retail used vehicle sales capacity, up by 50% since 2019 in order to maximize sales proceeds while also managing inventory levels. Record contractual sales provides us with significant opportunities to reduce rental assets in a down market. We can also extend lease contracts for vehicles with remaining operating life, which defers CapEx and limits the inflow to used truck centers during a downturn. We can also reduce discretionary spending. As such, we believe the business is well positioned to execute successfully throughout the freight cycle and generate higher earnings than in prior cycles.

Turning to Slide 15. We believe we have considerable opportunity to continue to grow core earnings, which we now forecast at $9.50 at the midpoint of comparable EPS, up from $9.25 at our recent Investor Day primarily due to supply chain performance. Key drivers of higher core earnings include Supply Chain and Dedicated EBT percent to their high single-digit targets in the second half of 2022, which will provide us with an earnings tailwind next year.

Next, we have incremental opportunity from our multiyear lease pricing initiative as we renew the remaining leases at higher returns with a full benefit of $125 million expected by 2025.

Next, we plan to continue to grow the business and grow it profitably, focused on our asset-light Supply Chain and Dedicated businesses. Finally, our strong balance sheet provides us with the capacity to pursue strategic acquisitions that provide us with the long-term value creation. We also expect it to allow us to return capital to shareholders through share repurchases and an increasing dividend.

Slide 16 highlights the progress we continue to make on our key drivers of higher core earnings. We expect Supply Chain and Dedicated EBT percent will be at their high single-digit targets in the second half of 2022, reflecting pricing actions to address unusually high labor costs which we have largely completed as well as the impacts from profitable new business.

With lease pricing, approximately 50% of the portfolio through mid-2022 has been priced at higher returns with an additional 20% contracted at the new prices and expected to be in service over the next 12 months or so. Sales activity remains strong across all segments reflecting ongoing secular trends as well as sales and marketing and new product initiatives. Ryder share continues to be a key differentiator in winning new business and is credited for influencing approximately 35% of supply chain and dedicated new business wins in 2021.

We recently launched Ryder View 2.0 to support our fast-growing Ryder Last Mile business, and continue to expand our product offerings such as brokerage, as discussed earlier, in order to create sources for long-term revenue and earnings growth.

Our recent supply chain acquisitions are performing better than expected and continue to be accretive in the quarter. We expect to complete our $300 million ASR no later than October and anticipate executing on our other authorized programs afterwards, assuming market conditions remain favorable. I'm proud of the team's execution on these key drivers of higher core earnings and fully expect these initiatives to generate incremental benefits in the future and position us for higher earnings and stronger free cash flow relative to prior cycles.

Finally, turning to Page 17. We're raising our full year comparable EPS forecast to $14.30 to $14.80, up from our prior forecast of $13.40 to $14.40 and above the prior year of $9.58. We're also providing a third quarter comparable EPS forecast of $3.40 to $3.65 above the prior $2.55.

Rental and supply chain performance are the key drivers to our increased full year forecast. Our forecast continues to assume that the very strong used vehicle and rental environment will moderate in the second half of the year was slower market freight demand, partially offset by ongoing vehicle production constraints. Revenue and earnings growth in Supply Chain and Dedicated are benefiting from record new contract wins in 2021 and strong new contract activity in the first half of 2022 as well as recent accretive supply chain acquisitions.

We're confident Supply Chain and Dedicated will be at their high single-digit target range for EBT as a percent of operating revenue in the second half of the year, reflecting price actions and growth. Overall, we're pleased with the trends that favor outsourcing and the results of our efforts in sales, marketing and new product development. We're confident that the actions we're taking to increase returns and drive core earnings higher will position us to achieve our long-term targets over the cycle.

That concludes our prepared remarks this morning. Please note that we expect to file our 10-Q this afternoon. We had a lot of material to cover today, so please limit yourself to 1 question each. If you have additional questions, you're welcome to get back in the queue and we'll take as many as we can.

At this time, over to the operator.

(Operator Instructions)

And we'll take our first question from Jordan Alliger with Goldman Sachs.

You mentioned just now that contract activity in Dedicated and Supply Chain was strong in the first half. I'm just curious, as we go -- we've been going into maybe what could be a slower environment is the activity or request for proposals, et cetera, does that continue at the same strong rate? Or do you see some ebbing of people making inquiries? And then also following that, supply chain margin, let's say, it gets to that high single digit in the back half. You talk to perhaps the stickiness of that if we do have a slower environment? Is that something that we should expect once you fix the pricing, relative to labor can hang in there even if things slow?

Thanks, Jordan. Let me just answer briefly, and I'll let Steve give you some color. Look, I think the thing to remember is that on the supply chain and dedicated, these are long-term contracts. These are companies making decisions to outsource a function that is really being driven by the secular trends that are making all this activity tougher. So it's less driven by the freight cycle and more driven by just the secular trends. So, I think -- the reason I'm giving you that information is really -- this sales shouldn't be as impacted if you will, by the freight cycle, as you might expect from other more transactional type businesses.

And then as it relates to the supply chain margins, yes, those targets are really on the contractual business. And that contractual business, as I mentioned, is less prone to some of these cycles. But Steve, why don't you give him a little more color?

Yes. Sure will, Jordan. On the pipeline activity, we're not seeing anything at this point slow down. I'd say we're off this year, first half of the year after a really good start. And activity is continuing on pace.

From a margin standpoint, I believe that the work that the teams have done, both on supply chain and dedicated to restructure contracts obviously protect us as we go forward. And a reminder that the majority of our [realizing] business is cost plus, so we've got some insulation there. And then finally, just the continued interest, I think, from a pipeline perspective around our investment in Ryder's share. Right, the collaborative visibility tool, our Ever Better campaign. We're going to relaunch to TV here in a couple of weeks. I think, are really aiding in the supply chain activity.

We'll take our next question from Jeff Kauffman with Vertical Research Partners.

Congratulations. Just tremendous results. I wanted to clarify 2 things. Number one, you said SCS DTS should be high single digit in the second half. Does that mean for the second half? Or does that point in the second half, you should hit that high single-digit margin level? And then associated with that, looks like there was a big jump in Corporate and Other. Is this something that is tied to the growth rate that we're seeing in SCS, DTS where we should assume some higher level of overhead going forward structurally as well?

Well, first, let me answer the first one. Supply chain dedicated, yes, our expectation is for the second half. So it's not that it's just going to reach it. It's average for the second half will be in the high single digits. That's what we're expecting. And then, John, on the overheads, you've got any other additional info on that?

Yes, there were -- I would tell you, you should expect that to grow not at the same level year-over-year for the balance of the year. We did have some added project-related costs tied to growth activity. And then you did have higher incentive-based comp go through that line, but it will moderate as we get deeper into the year.

(Operator Instructions)

We'll take our next question from Brian Ossenbeck with JPMorgan.

So I appreciate all the details on brokerage. I had a couple of follow-ups there. Maybe you can give us bigger picture perspective, what do you define these tech-enabled solutions we get that quantify different ways. So I would love to hear what your view is on the role of technology there and how much is automated and where you think you are in that journey?

And then just, what type of service you're offering here, is it filling it back all the way as you're working to build out density and dedicated with the back of those moves, a lot of transactional. So maybe just some comments on contract versus spot. What type of offerings you have in this business?

Sure. I'll let Steve handle it. I just want to -- just to give you an idea of kind of why we focused on growing is obviously it's a great return business. Given all the customer contacts that we have in all the different businesses we do business with, we thought this was a great additional service that we could provide. And what we're finding is as we've been growing it, we've been having great acceptance from our customers and outside customers. So we're excited about it as an opportunity to continue to help bring more services to our customers and better returns for our shareholders.

So Steve, you want to give me some color on the tech-enabled solutions and the services?

Yes, sure will. So just kind of a couple of stats for you there. About 70% of our brokerage activity is either created or built digitally. I think that's pretty competitive in the marketplace. About 30% right now is matched digitally. So that's a key focus area for us right now. As we continue to build that density of not only shippers, but also carriers. We expect that to increase as we look over the next several years.

Your question around really where we focused, it's all of what you said, right? It's aiding our dedicated operation from a backhaul activity. It's giving headhauls for some of our customers, and it's building -- continuing to build that density in key markets. so that we can provide a more transactional service for our customer.

John, maybe you can just clarify, I think there was a mention of some charge-offs or accommodation charges in bad debt and SCS, some context around that?

Yes. So, in the quarter, we did see in supply chain, we had some customer-related items that came through along with that debt. The bad debt was one that we're still pursuing to recover that charge-off. But I would tell you that was about if we -- absent those items, I would tell you we would have been in line with the high single-digit targets that we set out for ourselves.

So really the encouraging thing in the results is despite that, we had a good year-over-year improvement in -- our sequential improvement in the business.

We will take our next question from Scott Group with Wolfe Research.

Can you talk about the trend in rental utilization and what you're seeing -- what you're expecting for Q3? And any color on what's embedded in the guidance for gains in the second half? And then maybe just -- I don't know, Robert, I don't know if you can comment at all, but anything you wanted to share, if anything on -- if there are any ongoing discussions at all with HG Vora, if you can comment.

Okay. Well, I'll start with that one. I don't -- there's nothing new to report on HG Vora. As far as the trends in rental, I can tell you that we continue to see very, very strong rental utilization as recent as today.

So we're not seeing a big slowdown there. As we said on the call, we did see tractor used truck pricing begin to come down from very, very high levels in this quarter. So we expect used truck prices to moderate in the second half, which obviously will bring down gains with rental, we expect some softening, but not a whole lot based on what we're seeing. But Tom, I don't know if you want to give any additional color on either one of those 2.

Yes. Maybe the only additional color I'll give on rental as you remember last year, we were coming off some record quarters in the third and fourth quarter from a rental utilization perspective. So we do -- we are forecasting that to be not quite at that peak utilization level, but we do have visibility to the reservations during the peak season through the holiday season. We are 60 days away from that now. So based on those reservations and the demand we expect from those. We expect to have good solid utilization through the balance of the year.

Is there something about the mix of what's in rental today that's changed that's allowing you to stay still healthy in a sort of a slower spot trucking environment or maybe we're just connecting things that shouldn't be connected?

Yes. We have been making a concerted effort to be less reliant on transport, particularly those transports playing in the spot market. So we are -- we certainly don't expect to see as large an impact based on the spot market declines in our rental business. And I think we're certainly seeing some of that now.

We'll take our next question from Todd Fowler with KeyBanc Capital Markets.

Great. I think this builds a little bit maybe on the last kind of line of questioning. But when I look at the third quarter guidance relative to the second quarter and then kind of what's implied in the fourth quarter, we're kind of seeing this deceleration in 3Q and then maybe a little bit more moderation into 4Q. So I guess, is that mostly the cadence of gains through the back half of the year? Because it seems like the DTS and SCS the margin profile there is going to improve. So maybe at a high level you can help us think about the sequential change in earnings off of where we're at in the second quarter?

Yes, Todd, you hit it. It's primarily our expect -- what we're assuming in terms of used truck pricing and the reduction in gains. So, it's obviously tough to pinpoint exactly what that number is going to be, but we've taken what we think is a prudent estimate on that. And that's what's driving the sequential, if you will, deceleration. It's primarily that the used truck gains are really driving that. because we're really seeing continued improvement in supply chain and dedicated.

Yes. Okay. And it sounds like that rental utilization is holding in pretty well here as well. So that's helpful. And then just for a quick follow-up. Can you remind us, you've got the core earnings number of $9.50 for this year. What is the metric now that you're using for kind of a normalized level for both gains and for rental utilization in that $9.50?

So gains of $75 million and rental utilization in the mid-70s.

Mid-70s still.

Mid- to high 70s. Mid- to high 70s, yes.

We'll hear next from Justin Long with Stephens.

Maybe to follow up on rental. It sounds like you're expecting some moderation in the back half, but not a lot, just given the strength you're continuing to see today. So if we're mid-80s utilization right now, is your expectation that we're still above 80% utilization in the back half?

And then following up on used pricing. Any way you can kind of give us the order of magnitude in terms of the pullback we've seen so far and what you're assuming is incremental to use pricing through the end of the year?

Well, I'll tell you the answer to your utilization is yes. We're still assuming we'd be above 80% next couple of quarters. And that's based on what we're seeing, but also based on the continued backlog of OEM production in a lot of ways, is a driver of demand. Plus, as Tom said, with our move away from some of these spot type carriers to more what I would call more stable renters. So yes, that's really what our assumption is there.

Around used truck pricing, I don't like to get into predicting that because I don't want a self-fulfilling prophecy of what's going to happen with pricing based on what we say. But we expect used truck pricing to come down from these historically high -- record high levels, and that continue to moderate over the balance of the year.

We don't think it's something that falls off a cliff necessarily, but comes down over a several quarter period. And it's really in line with what we originally forecasted at the beginning of the year. We're seeing it turn when we expected it to turn and we now expect it to continue to come down over the next several quarters.

But it is very much real time, and it's dependent on supply and demand. We certainly don't drop prices unless we see demand really slowed down and need to move the vehicle. So that's kind of where we're at. We're sort of at the same place we were at the beginning of the year in terms of where we expected used truck pricing to end up.

Okay. And as you think about where we were at the peak for used truck pricing versus current levels, would you say we're down 15%, 20%? Is there any kind of rough ballpark?

Yes, John, or Tom, do you have anything on that in terms of where we are? And we're talking about used tractor pricing, I assume not, straight truck was still up.

Yes. I think John mentioned it in the opening comments, but tractor pricing sequentially was down, I think, 5% sequentially. So I would call the peak from the first quarter if you think about it sequentially, right? So we just -- we're just coming off the peak of tractor pricing.

Our next from Bert Subin with Stifel.

Robert, if we look at core EPS projection now at $9.50, that assumes about a 60% improvement from your pre-pandemic peak years. How much of that would you attribute to the residual value changes versus maybe some of the M&A and changes in SCS. The reason I ask is your share count is pretty similar to then, yet I guess you're saying the earnings power has substantially expanded. So I'm just curious how you think about that.

Actually, Bert, if you thinking about it, we lowered our residual values, which means that's not helping us. That's hurting us. as they really -- you have to wait until you sell the vehicle to get those earnings. So the residual value is more of a headwind to getting to the $9.50. The move from our previous peak of around $6 to the $9.50 is all driven by improvements in our maintenance costs, our lease pricing and then significant improvement in growth in our supply chain and dedicated businesses. Those are really the primary drivers of that change in our core earnings.

The other thing I'd add is the core earnings of $9.50 million is for 2022. As you think about 2023, we would expect to have growth in core earnings as supply chain and dedicated gets -- we get -- catch the tail on the improvement in the margins, EBT to high single digits along with the growth that we're expecting, both in supply chain and dedicated as well as the lease business. So we expect that number to move up as we -- as each year goes by.

Yes. Just a clarification. What I meant was sort of the lease pricing that you get from factoring in that addition, I assume that is at least a pretty substantial component of how you think about the number?

Well, we've given the lease pricing numbers. So to date, it's going to be about $50 million. So $50 million is going to give you a -- simple math is going to give you a little bit less than $1 of that. So the balance of it is these other items.

Yes. And I would just add to that, just a reminder, our multiyear maintenance cost savings initiative that that's playing a big part in that progression that you've seen in the core earnings supporting that FMS (inaudible).

Yes, that's over $100 million.

We'll take a follow-up from Scott Group with Wolfe Research.

Thanks for the follow-up, guys. So as supply chains are improving and OEM production is improving, just curious, how are you guys thinking about fleet growth, elevated replacement and maybe just overall sort of CapEx for next year? I know it's early, but any initial thoughts?

Yes. Well, we mentioned that there's probably a couple of hundred million dollars of CapEx that is rolling over from this year to next year based on OEM delays, production delays. So you'd expect that to rollover during the next year. Our growth this year at least is going to be probably more like the 2,000 unit range. So I'd expect next year, we're probably -- we would be on the high end of our targets in that 4,000, maybe even above -- slightly above the 4,000 with some of this rollover.

So it's still early, and we got to -- we also have to make sure we finalize our discussion with the OEMs as to how much production they're going to have. And make sure that we're getting our fair share of that. But yes, I would expect us to see an increase in CapEx as we go into next year with the additional growth that's rolling over at least from this year.

And as you go from the low end of fleet growth to the high end of fleet growth, does that have any implications on the ability to keep pushing that pricing?

No. No. I mean our target is still the same. And as I mentioned, we feel that we -- at the pricing that we have, the target pricing that we have, we can get in that 2,000 to 4,000 range of growth and continue to grow earnings while also making sure we're delivering on free cash flow. So that's a key part of our balanced growth strategy.

And you think -- sorry, just for one last just clarification. Do you think even with that sort of elevated CapEx on being deferred, you think you'll still have positive free cash flow next year?

Yes. It's going to be -- look, I think it will be close next year. We still don't have a final number. So that all depends on exactly how much growth we get. But I would expect with the $200 million that's rolling over, probably breakeven and flattish around free cash flow. But again, it's a really important part of our story is to make sure that through the cycle, we're still getting strong free cash flow. You may have some years where you're going to be around flattish. But generally, we're going to be positive and continue to see growth in that area.

We'll take another follow-up from Bert Subin as well from Stifel.

Just a question on the SCS business. You guys provided some pretty bullish commentary on that segment in your presentation, in your prepared remarks. It looks like -- I mean in general, e-commerce sales have sort of slowed this year, yet your SCS business, obviously moving in the right direction, and you sort of highlighted that all of the segments are doing well. Has the distance change in that, like were you seeing strong -- more strength in warehousing during the year, and that's switched over to dedicated? Or how are you looking at sort of these segments of SCS and where the strength is?

Steve, do you want to take that?

Yes, I'll take it. Bert, look, I think we see a continued even kill sales pipeline, a big healthy mix of both warehousing, stand-alone, dedicated and integrated solutions. Certainly, the acquisition of Whiplash was -- is off and running. We've exceeded our sales target at midyear. They've added 2 new buildings, almost 1 million square feet already online, 1 in California and 1 in Ohio. Those will be filled up here. within the next 12 months. And then we have Atlanta coming online here back half of the year. So I'd say it's really an even kill, I haven't really seen any shift in the pipeline or what we're selling to customers.

We also shouldn't lose sight of the fact that we've got a lot of pent-up auto production demand, too. So as the semiconductor issue starts to get resolved here, hopefully, over the next year, we should have a pretty long runway of ongoing auto production to support in our auto business which again, is also an important component of our supply chain business.

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

Okay. Well, thanks, everyone. Thanks for the questions. Listen, we're excited about what's going on here. Obviously, a great quarter for us. ROE of 28%, strong free cash flow, and we're seeing really strong organic growth in our Supply Chain and Dedicated businesses. FMS is we're benefiting from strong UBS and run up. But the most important thing is that, that core leasing business is really generating some good returns, and we still have some good runway there. So feeling good about where we're going and then the balance sheet flexibility that we have going forward around share buybacks, increasing the dividend and continue to do some acquisitions.

So thank you all for your interest. Look forward to seeing you in the future as we do some more road shows and conferences.

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