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Edited Transcript of R earnings conference call or presentation 30-Apr-19 3:00pm GMT

Q1 2019 Ryder System Inc Earnings Call

MIAMI May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Ryder System Inc earnings conference call or presentation Tuesday, April 30, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis C. Cooke

Ryder System, Inc. - President of Global Fleet Management Solutions

* John J. Diez

Ryder System, Inc. - President of Dedicated Transportation Solutions

* John Steven Sensing

Ryder System, Inc. - President of Global Supply Chain Solutions

* Robert E. Sanchez

Ryder System, Inc. - Chairman, CEO & President

* Robert S. Brunn

Ryder System, Inc. - VP of IR, Corporate Strategy & Product Strategy

* Scott T. Parker

Ryder System, Inc. - Executive VP & CFO

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Conference Call Participants

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* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brian Lee Colley

Stephens Inc., Research Division - Senior Research Associate

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* Jeffrey Asher Kauffman

Loop Capital Markets LLC, Research Division - MD

* Kevin Wallace Sterling

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Ryder System First Quarter 2019 Earnings Release Conference Call. (Operator Instructions) Today's conference 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.

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Robert S. Brunn, Ryder System, Inc. - VP of IR, Corporate Strategy & Product Strategy [2]

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Thanks very much. Good morning, and welcome to Ryder's First Quarter 2019 Earnings Conference Call.

I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission.

This conference call also includes certain non-GAAP financial measures. You'll find reconciliations on each non-GAAP measure to the nearest GAAP measure in the written presentation accompanying this call which is available on our website at investors.ryder.com. Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer; and Scott Parker, 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.

At this time, I'll turn the call over to Robert.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [3]

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Good morning, everyone, and thanks for joining us. Let me start by welcoming our new CFO, Scott Parker, to his first earnings call at Ryder. Scott brings a great depth of experience to the CFO role from both public and private companies and also has extensive background in leasing businesses. I look forward to introducing you to Scott in person at upcoming investor conferences this quarter.

This morning, we'll recap our first quarter 2019 results, discuss the current outlook for our business and highlight progress on some of our strategic initiatives, then we'll open the call for questions. With that, let's turn to an overview of our first quarter results.

Comparable earnings per share from continuing operations were $1.11 for the first quarter 2019, up 16% or $0.15 from the prior year primarily reflecting growth in our contractual businesses, ChoiceLease, Dedicated and Supply Chain and improved operating performance in all business segments. Comparable results were above our forecast range of $0.96 to $1.03 and include the benefit from the lease accounting change that was $0.09 better than forecast. Also contributing to the beat versus forecast was higher-than-expected contractual performance, particularly in ChoiceLease and Dedicated.

Pretax earnings grew by 17% despite depreciation headwinds of $9 million related to lower used vehicle pricing. Sales activity remained strong, and we delivered double-digit revenue growth in all segments driven by secular outsourcing trends as well as our sales and marketing initiatives. Operating revenue, which excludes fuel and subcontracted transportation revenue, increased by 14% to a record $1.8 billion for the first quarter.

Page 5 include some additional financial information for the first quarter. Comparable EBITDA was $565 million, up 18% from the prior year primarily reflecting growth in our contractual businesses and strong rental performance. The average number of diluted shares outstanding for the quarter was 52.6 million, unchanged from the prior year. We began repurchasing shares under a 2-year 1.5 million share anti-dilutive repurchase program in February of 2018. During the quarter, we bought approximately 226,000 shares at an average price of $62.66.

Excluding pension costs and other items, the comparable tax rate was 27.6% for the first quarter of 2019, up from the prior year's rate of 26% but in line with our expectations. This increase reflects the expiration of certain state NOLs in 2019, a onetime beneficial adjustment in 2018 and a change in the mix of jurisdictional earnings. The comparable tax rate is expected to remain somewhat elevated in the second quarter and then decline in the second half of the year. The return on capital spread was 40 basis points, up from 30 basis points in the prior year.

I'll now turn to Page 6 and discuss the key trends that we saw in the business during the quarter. Fleet Management Solutions' operating revenue, which excludes fuel, increased 10% organically from the prior year driven by growth in all product lines. ChoiceLease revenue increased 8% primarily due to fleet growth and to a lesser extent, higher rate on replacement vehicles. The lease fleet increased by a record 4,200 vehicles in the quarter. Growth in the lease fleet benefited from earlier than anticipated vehicle deliveries from the OEMs.

We continue to effectively penetrate the non-outsourced market with 40% of recent fleet growth coming from customers new to outsourcing. We also continue to see growth from customers expanding their fleet sizes. We remain on track to achieve record organic lease fleet growth this year of at least 11,000 vehicles which would be a new record for the company.

SelectCare revenue increased 11%, reflecting higher ancillary maintenance activity. The average SelectCare full-service and preventative fleet grew by nearly 2,000 vehicles from the prior year.

Commercial rental revenue was up 15% driven by higher demand and pricing and was generally in line with our expectations. Global rental demand on power units was up 14% and pricing was up 3%. Rental utilization was 74.9%, consistent with the prior year on an 11% larger average fleet. Used vehicle results for the quarter were down slightly year-over-year. I'll discuss those results separately in a minute.

Overall, FMS earnings increased due to higher performance in ChoiceLease and to a lesser extent, commercial rental. Results also benefited from a significant maintenance cost recovery item. These benefits were partially offset by higher depreciation primarily from depreciation policy changes and accelerated depreciation, higher liability insurance cost related to the development of prior year claims and growth-related investments in sales, marketing and technology.

Earnings before tax in FMS increased 12%. FMS earnings as a percent of operating revenue were 5.3%, up 10 basis points from the prior year. Excluding the impact of lease accounting change in both years, FMS pretax earnings increased by 6%.

Page 7 summarizes key results for used vehicle sales. Used vehicle results for the quarter were down slightly as increased pricing and volume were more than offset by higher valuation adjustments on a larger inventory. Due to growth in the size of the operating fleet over the past few years, we have revised our target range for used vehicle inventory from 6,000 to 8,000 to a new target of 7,000 to 9,000 vehicles. Used vehicle inventory held for sale was 7,600 vehicles at quarter end, within the target range.

Inventory increased by 700 vehicles sequentially, reflecting a greater number of units coming off lease this year as expected. We sold 4,900 used vehicles in the quarter, up 17% versus the prior year and up 9% sequentially. Proceeds per vehicle sold were up 17% for tractors and up 3% for trucks compared to a year ago primarily reflecting pricing improvement in the U.S. market and a higher retail sales mix.

I'll turn now to Dedicated Transportation Solutions on Page 8. Both total revenue and operating revenue increased 17% this quarter due to new business, expanded business with existing customers and higher volumes. Favorable outsourcing trends, including a very challenging driver market, contributed to strong DTS sales results again this quarter. Our sales team also continued to focus on upselling our lease customers to Dedicated which remains a significant growth opportunity for this business. DTS earnings increased due to revenue growth, improved operating performance and a favorable development related to prior year insurance claims.

Segment earnings before tax as a percent of operating revenue were 7.9% this quarter, up 90 basis points from the prior year. As you may recall, during the second half of 2018, DTS results were impacted by costs associated with a challenging start-up account. As we discussed on our last call, the issues associated with this account have been resolved, and we expect this account to positively impact 2019 results going forward.

I'll turn now to Supply Chain Solutions on Page 9. Total revenue grew 28% and operating revenue grew 25% driven by new business, higher volumes and increased pricing. Revenue growth includes Ryder's last mile business from the acquisition of the MXD Group in the second quarter of last year. Excluding the acquisition, Supply Chain Solutions total and operating revenue grew organically by 18% and 19%, respectively.

Supply Chain Solutions earnings before tax were up 27% driven by revenue growth. Segment earnings before tax as a percent of operating revenue were 6.8% for the quarter, up 10 basis points from the prior year.

At this point, I'll turn the call over to our CFO, Scott Parker, to cover several items starting with capital spending.

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Scott T. Parker, Ryder System, Inc. - Executive VP & CFO [4]

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Thanks, Robert. Turning to Page 10. Gross capital expenditures totaled approximately $1.1 billion, up around $390 million from the prior year. This increase reflects higher planned investments to grow and refresh the contractual lease fleet. We realized proceeds primarily from the sale of revenue-earning equipment of $103 million, up from the prior year reflecting higher pricing and increased sales volume. Net capital expenditures increased by $389 million to just over $1 billion.

Turning to the next page. We generated cash from operating activity of around $500 million for the quarter, up approximately $150 million or 44%. The increase was primarily driven by higher cash-based earnings and lower working capital needs. We generated around $600 million of total cash, up approximately $160 million from the prior year, reflecting higher operating cash and sales proceeds. Cash payments for capital expenditures increased by $364 million to just over $1 billion.

The company's free cash flow was negative $438 million for the quarter, down from the prior year of negative $236 million, reflecting increased net capital spending. Our full year forecast for free cash flow remains unchanged at negative $1.1 billion, reflecting significant growth in capital spending. Our debt to equity at the end of the first quarter increased to 278% from 262% in the end of 2018 and primarily reflects investments in the fleet growth. Our balance sheet leverage is near the midpoint of our target range of 250% to 300%.

At this point, I'll hand it back to Robert to cover our outlook.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [5]

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Thanks, Scott. Our overall earnings outlook for the balance of the year remains on track with our prior expectations with a modestly better-than-expected impact from lease accounting. We are on track to meet or beat our 2019 revenue growth targets in all business segments. Commercial rental is expected to perform well for the balance of the year, although we're planning for revenue growth rates to decline from the current levels due to potentially softer demand conditions later in the year. We're pleased with results to date on our initiative to leverage e-commerce growth by increasing the number of medium-duty trucks in our rental fleet.

In used vehicle sales, we continue to expand our retail sales capacity to handle additional volume expected this year. Although used vehicle pricing was up in the first quarter, we continue to expect pricing to be down slightly for the full year, particularly in the second half of 2019 due to additional inventory that's likely to come to the market.

In FMS, we're on track to meet our full year target from our new maintenance cost-reduction initiative. In DTS, we expect revenue growth rate comparisons to remain favorable, although below the first quarter levels. Dedicated EBT percent should be higher year-over-year, reflecting improved operating performance. In Supply Chain, we expect revenue growth rate comparisons to turn negative in the second half due to the impact of previously announced lost business. However, year-over-year earnings are expected to improve.

In light of these factors, we're raising our full year comparable EPS forecast range to $6.05 to $6.35 versus the prior range of $6 to $6.30 primarily to reflect a better-than-expected impact from the new lease accounting standard.

Our second quarter comparable EPS forecast is $1.34 to $1.44 as compared to $1.46 in the prior year. Second quarter comparisons include a $0.10 negative year-over-year impact from lease accounting, reflecting an estimated $0.05 negative impact in the second quarter of 2019 compared to a $0.05 benefit in the prior year. The negative impact from lease accounting in 2019 reflects an expected decline in the lease fleet age.

The full year 2019 impact from lease accounting is expected to reduce earnings per share by approximately $0.15 as compared to the prior accounting method. As a reminder, there is no change to cash flow or total earnings over the life of the lease contract as a result of the new lease accounting standard.

Turning to Slide 14. I'd like to provide you with a brief update on the progress we're making on some of our strategic initiatives. First, we continue to focus on driving long-term profitable growth. We're very pleased that the momentum from record contractual sales in 2017 and 2018 has continued into 2019 with strong sales activity in the first quarter.

DTS sales has been particularly strong with increased proposal activity for larger deals. In addition to benefiting from secular trends that drive more outsourcing, we're realizing success from our initiatives to expand the size of our sales team, increase collaborative selling across the organization and launch new products. We're on track to deliver our eighth consecutive year of organic lease fleet growth with record growth of 11,000 vehicles expected this year.

Ryder Last Mile completed its first year of operations, ahead of our earnings expectations and is well positioned as a leading provider of last-mile services for big and bulky goods. We're pleased with the successful integration completed by our team since last April's acquisition. We're also encouraged by recent sales activity with an increased pipeline that is 50% larger and a larger average deal size.

We expanded COOP by Ryder, the first commercial vehicle sharing platform of its kind into the South Florida market. We're leveraging the experience gained from the platform's initial launch in Atlanta last year, and we see strong opportunities for COOP in the Florida market and beyond. Finally, we're on track to achieve our full year cost savings expected from our multiyear maintenance cost-reduction initiative and from our zero-based budgeting process. We expect significant opportunities to lower cost and drive efficiencies in the future.

Slide 15 provides our expectations for 2019 results as compared to our 3-year financial targets we laid out in early 2018. FMS and DTS are expected to beat their operating revenue growth targets, reflecting secular trends and our initiatives.

Supply Chain is expected to come in below their targets this year due to the previously announced lost business in the second half of the year. Supply Chain contracts are individually larger, which can lead to lumpiness in the segment's growth rates depending on the timing of new and lost business. Our 3-year CAGR for operating revenue growth is expected to be 11% this year.

Given our pipeline for new business, we remain confident in our ability to meet or beat our long-term target of 7% to 8% revenue growth in Supply Chain over time. FMS EBT percent is expected to improve year-over-year, but remain below the target due to the ongoing impact of used vehicle sales and higher maintenance cost in certain older model year vehicles. As we discussed before, the maintenance cost headwind should be largely eliminated in 2020.

Dedicated earnings performance is expected to improve and approach target levels this year. Supply Chain results are expected to move up into the bottom end of their range this year. Our return on capital spread is forecast to improve but will be below target due to FMS earnings. Finally, we expect leverage to remain within our target range of 250% to 300%.

That concludes our prepared remarks this morning. I do want to mention that due to the additional requirements with our first quarterly filing under the new lease accounting standard, we expect to file our 10-Q by the middle of next week. Starting in the second quarter, we expect to return to our regular cadence of filing the Q on the same day of the earnings call.

At this time, I'll turn it over to the operator to open up the line for questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Stephanie Benjamin with SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]

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I just wanted to talk a little bit on the used vehicle environment. A lot of good color on your prepared remarks, but I think just the negative impact from used vehicle sales is a bit higher -- or the loss on used vehicle sales is a bit higher than expected in the first quarter. So I was hoping you could kind of flesh out what you're seeing and if expectations have changed for the full year and just kind of overall the environment as we kind of move through in the second quarter.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [3]

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Okay. I'll let Dennis give a little bit more color. But just as a highlight, I would tell you, used vehicle came in generally where we expected. The pricing, especially on tractors, which is really where the focus is primarily because of what's happened the last few years, pricing on tractors, I mentioned, was up 17%. So definitely, pricing continues to move in the right direction. Part of that is because we're growing our retail capacity so we're able to retail more trucks as opposed to wholesaling which is a 30% price differential typically between a retail and a wholesale. So our strategy is to continue to expand our capacity. Capacity was up 17% year-over-year this quarter. We expect that to grow in the second half of the year and really be able to continue to retail more trucks in the second half, but I'll let Dennis give you a little more color on what we're seeing.

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Dennis C. Cooke, Ryder System, Inc. - President of Global Fleet Management Solutions [4]

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Yes, Stephanie. I would just add to Robert's comments that pricing was up, as Robert shared, but the book values of what was coming through was a little higher than we expected. So we really need to get even a little more price. And we've got several initiatives to target that. So for example, from the retail point of view, we're using inside sales more. Inside sales is now 20% of our retail volume where we have leads being generated online and going to telemarketers who are selling vehicles and getting nice proceeds per unit.

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Operator [5]

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(Operator Instructions) We'll take our next question from Todd Fowler with KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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Scott, welcome. Robert, can you maybe just help us flesh out a little bit the changes to the full year guidance? 1Q came in above the range of what you were looking for and you've got the lease accounting headwind coming in about $0.05 lighter for the full year. Was all of that in 1Q? And is that just what the adjustment is to the guidance? And then if you can also talk about the cadence with 2Q, where you've set it at, and then kind of the back-end weighting for the rest of the year, I think that would be helpful.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [7]

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Sure. Well, first, let me answer the question on the change in guidance. Yes, the change in guidance is primarily driven by the lease accounting adjustment. It was a beat in the first quarter. A portion of that beat, the $0.05, we think, is really a permanent one for the year so we really brought the guidance up as a result of that. In terms of -- so the rest of the business, I would tell you, is operating in line with our expectations.

In terms of the second quarter, I think the year-over-year deltas, if you look at the growth rate that we saw in the first quarter and compare that to what is really going to be flat to down in the second, lease accounting is a big part of it. Lease accounting in the first quarter was a $0.06 good guy year-over-year. And in the second quarter is going to be a $0.10 bad guy year-over-year. So that really takes a big chunk of it. So you're going -- if you exclude lease accounting, first quarter was up 10%. Second quarter at the high end of our guidance would be 6%. So the bulk of that is primarily Supply Chain earnings growing at a lower rate than they grew in the first quarter. The Supply Chain earnings in the first quarter grew at 28%, I think, it was. That comes down a bit in the second quarter. So that's primarily the difference.

The other thing if you go back second quarter of last year was a bang-up quarter for Supply Chain. Earnings in Supply Chain were up 45%. So a little bit tougher comps in the second quarter. But I'll tell you, we feel very good about the second quarter and certainly in the second half as we continue to see contractual business really growing across all segments. So this is business that we're locking in that we know is profitable. And we feel really good about how that's going to play out for the balance of the year. So I would tell you, even though we didn't adjust the guidance excluding lease accounting, we didn't adjust the guidance for the balance of the year, probably be a lot more confident now than we just did just 3 months ago in terms of our ability to hit it.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [8]

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Yes. Good to know. That's helpful. And to be clear, you mean operationally you didn't adjust guidance down even though 1Q was above your guidance range, that was the lease accounting benefit in 1Q. And operationally, things are really the same for the rest of the year at this point?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [9]

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Correct. Correct.

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Operator [10]

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We'll take our next question from Ben Hartford with Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Robert, maybe a perspective on commercial rental trends. Utilization came in pretty good in the first quarter. Can you kind of splice out Class 8 versus medium duty, what the trends look like? And I know you talked about your underlying outlook for the balance of the year being unchanged, but anything on the rental side? Obviously, coming in a little bit better in a weak spot environment is impressive. So could you splice out heavy duty versus medium duty and maybe what an updated outlook is for the balance of the year?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [12]

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I guess I'll let Dennis give a little more coverage. Just at a high level, I'll tell you, demand is coming in, in line with what we had expected. If you spliced it out by class, probably the medium duty initiative that we have coming maybe a little bit better and maybe Class 8 a little bit worse. But generally, demand has been where we expected it. So we do expect -- our forecast does expect some softening in the second half of the year in terms of demand and utilization and primarily around the Class 8 as we expect more of the new Class 8 to hit the market. But all in all, I think it's in line with what we have forecast. I'll let Dennis give you a little more color around the class.

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Dennis C. Cooke, Ryder System, Inc. - President of Global Fleet Management Solutions [13]

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Yes, Ben. I'll just add to what Robert said. Even April, demand is looking strong year-over-year. And when it comes to the split between tractors and trucks, trucks are strong. And tractors, I would say, we saw a little softening with sleepers, in particular, on the West Coast, but still strong demand coming from tractors. But we are planning for the second half to be softer with tractors, in particular. We still expect strong demand from trucks, and so we're preparing for that.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Okay. Great. And if I could get a related follow-up. You highlighted COOP and the expansion there. Robert, as you think about the development and the rollout of that product, when can it become meaningful to results, I mean, in terms of perhaps providing a cyclical buffer to the existing rental fleet and its utilization? Is that something that can be expected over the next couple of years or is that still a longer-term type initiative before it becomes material?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [15]

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Yes. I guess I would tell you at a high level it's longer-term initiative. Our plan is really to -- so we rolled it out into Atlanta last year. We're doing South Florida, maybe broader Florida this year. And at the end of this year, really be in a position to then finalize our strategy if we're going to go -- continue to go market by market or do a broader national type of a rollout. Obviously, if we decide to go with a broader national rollout, that would start to impact and help us in the nearer term. But I would look at this certainly at least 3 years out before you'd have a meaningful impact. But we're encouraged by it. I'll let -- I know John Diez has been helping to head that up. I'll let him just give you a little color on what we're seeing here in Florida.

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John J. Diez, Ryder System, Inc. - President of Dedicated Transportation Solutions [16]

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Yes, Ben. Just to give you an update here, the Florida market has actually been very encouraging for the COOP platform in that we've been able to demonstrate that we can scale in a seg market fairly quickly. The acceptance in this market has been actually a lot more favorable than our original market with Atlanta and Georgia. So as we scale up and we take this platform to other markets, I think the encouraging signs for us is how quickly we can do that and what's the acceptance going to be from the broader market.

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Operator [17]

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

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [18]

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Welcome, Scott. Wanted to just first clarify just a couple of things. Robert, in prepared comments, you talked about a maintenance recovery. Was what a one -- can you quantify and if that's onetime or part of the new initiatives? And then when you were talking about rental, you talked about a decline in the second half of the year. You're talking about year-over-year decline in revenue or just less revenue growth than the 15% in the first quarter? Just wanted to clarify those 2 things.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [19]

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Okay. Let me just -- I'll hit the first one and I'll let Dennis take the second half. The maintenance cost recovery item was a negotiated warranty-related recovery for prior period maintenance cost. So it was a onetime item. Now in addition to that, Dennis and his team also made progress on the $75 million maintenance cost initiative, which, as I mentioned, $20 million was for this year. So we're well on our way to achieving that also. So yes, that was a onetime item that we called out, and it was for prior period maintenance cost. And Dennis, you want to talk about...

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Dennis C. Cooke, Ryder System, Inc. - President of Global Fleet Management Solutions [20]

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Yes. Scott, on the rental side, it's just a decline in the growth rates. So we grew revenue 15% in Q1. We don't expect that 15% to continue, but we'll still be growing, to be clear, in the second half. It's just not growing as fast.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [21]

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And how much was that maintenance recovery?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [22]

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We didn't -- we're not disclosing that. There's a lot of puts and takes, but it was meaningful enough that we wanted to call it out.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [23]

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Okay. And then just lastly, so I think last quarter you had talked about, give or take, a $0.40 headwind from losses on sales and lower residuals this year and then a similar headwind next year. Given your sort of views on used truck market and what you're seeing, do either of those numbers change for this year or next year?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [24]

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No. I would say, again, we're going to know a lot more in the second half of this year, but right now I would say we're probably on track for those numbers.

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Operator [25]

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Our next question will come from Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [26]

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Robert, I just wanted to ask about the, I guess, the leasing business. There's obviously a bit of a lag between when you negotiate the new leases and when the earnings stream hits the P&L. Can you just talk about the impact that will have as you look beyond this year and into 2020? Meaning how much of the earnings growth is underwritten in 2020 from the leases you're adding this year?

And also maybe for Scott, is the age -- is the fleet age a push next year in terms of the puts and takes or does it continue to get a bit younger? So we can understand if there's any incremental headwind beyond this year from some of the leases you're adding this year?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [27]

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Well, as we're getting into 2020, might be a little early. But just I guess to answer the first part of your question, the leases that we signed at the end of last year, a lot of that are vehicles that we're now taking in to service. So I mentioned on the call that in January we were signing leases for May time frame. As we sit here today, we're signing leases for August, September time frame. So you can look at all of the equipment that's going to come in to lease between now and August. September is already signed and locked in. So we're getting now to a lot of the revenue for this year is already accounted for and will be locked in. So we feel good about that, it's why I said we feel more confident about hitting our numbers now than I did 3 months ago because the earnings growth is really primarily being driven by our ChoiceLease, Dedicated and Supply Chain businesses. So we feel good about that. The second part of your question was around?

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [28]

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The fleet age.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [29]

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Oh, fleet age. Yes. Fleet age right now, year-over-year, is at 41 months for the lease fleet age. It's down sequentially 1 month. As we go into this year, we expect it to come down maybe another month. And as we get into next year, I guess it depends on what happens with our sales. If you just look at what's happening with Class 8 production and the forecast for next year is already that Class 8 production will be down some. I would expect that our sales for 2020 will be down some from 2019. But again, that still remains to be seen. So if that happens, you would expect then fleet age to really start aging out a little bit again. Again which -- the accounting kind of neutralizes that a bit.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [30]

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All right. Just one follow-up, if I could. I think embedded in the guidance this year, the EPS guidance, is a pretty decent-sized headwind from various strategic investments. I was just hoping if you can maybe expand on that, the size of those investments and when those investments, I guess, are going to kind of pay off? Are they quick payback type stuff? And are you guys willing or are you willing to maybe dial back some of those strategic investments to drive maybe some higher earnings growth in the near- to mid-term?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [31]

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Yes. Look, as we mentioned on the call in January, about $0.47 of strategic investments, which as we showed was really covered entirely with some of the cost actions we're taking. Those investments are really around sales and marketing to help drive some of the continued growth. So you look at where we're adding salespeople. We're spending money on marketing. We've got technology investments, we talked about COOP, technology investments in e-fulfillment. We're rolling out a new e-fulfillment product to be able to provide that service to a new set of customers. So those are investments in new service offerings, new products and in sales which we are confident really are going to pay dividends here in the next year, the next 2 years and 3 years. So we think they're important.

To your question of, would we pull them back? Obviously, if we got into some type of a crunch scenario where really things slowed down, we would look at some of those areas and possibly pull some of them back. But in the environment we're in now with the growth that we're seeing, we think it's a good time to make these investments in the future.

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Operator [32]

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Moving next to David Ross with Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [33]

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Just wanted to talk about the Last Mile division, the old MXD now Ryder Last Mile. I think it's about a $350 million run rate at the moment. Can you give us some more color around the growth and margins of that segment? Are they better or worse than SCS average? Is there a lot of improvement going on there?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [34]

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I guess I'll hand it over to Steve in a minute, but I just want to -- I think it's important to point out that we now hit the 1-year mark since we did the acquisition. And I can tell you that, I'm happy to report that we exceeded our earnings estimates of what we had initially expected when we made the investment. So we're very excited about the business. The integration has gone very well. And what we're seeing is really the traditional supply chain sales team beginning to sell into this last mile piece of the business, which was really a key part of the synergies we expected to see. So we're in the early innings of that, but are excited about what we're seeing.

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John Steven Sensing, Ryder System, Inc. - President of Global Supply Chain Solutions [35]

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Yes, Dave, it's Steve. Just a reminder, on the $350 million, that's a combination really of Ryder Last Mile and our e-commerce, e-fulfillment business that is part of an overall solution for many of our customers in Supply Chain. As Robert said, we started really cross-selling across SCS and DTS customers. So if you think about the sales pipeline, we got a good mix between new names and expansion business. About 1/3 of our pipeline is coming from DTS and SCS customers and salespeople. So I think we're off to a really strong start. We hit our target in Q1, feel really good about Q2. I think in the back half, you're obviously focused about execution for our customers in peak period. So at the end of the day, it's going to be about volume coming through their retail sales channels. So feeling really good about it.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [36]

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And what did you have to do, I guess, with MXD to get it to where it is today? And is there anything left to do still with the integration or to get Ryder Last Mile to where you want it to be?

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John Steven Sensing, Ryder System, Inc. - President of Global Supply Chain Solutions [37]

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So the integration went great, on track, actually, ahead of schedule last year. The business is executing. They've got cost-cutting initiatives in there. I think you asked earlier about the EBT target. It's just slightly below the normal SCS business, but now it's really growing the business and continuing to expand the footprint to serve the many customers out there.

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Operator [38]

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Our next question will come from Jeff Kauffman with Loop Capital Markets.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [39]

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Is my math on par here that the yield on the FMS leasing business was flat to slightly down? If so, could you tell me what's going on there because the trend has been kind of slower yield on -- yield gains year-on-year over the last few quarters?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [40]

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You're talking about the FMS margins?

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [41]

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No, I'm looking at revenue per vehicle.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [42]

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Oh, revenue per vehicle. Let us take a look at that. There is a possibility that you might see it coming down some and that's because as you get a churn of a lot of vehicles coming into the fleet, you've got vehicles that are on their way out and some vehicles that are on their way in. So during that process, you could see some slight blips down, but I wouldn't read that as a long-term change. Yes, there's a lot of vehicles that have come into the fleet in Q1. Both growth, as you saw, we grew the lease fleet 4,200 vehicles. In addition to that, we had a lot of replacement vehicles. So when that happens, a lot of vehicles have to come out. So if you just take our total lease fleet number that you see out there, you're going to -- and you divide the revenue by, you might see a little of an anomaly during that time.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [43]

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Okay. Is there a mix effect where maybe you're taking more smaller light duty vehicles that might be complicating this? No? Okay.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [44]

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No. No. And I can tell you, I mean, obviously, the revenue that we're getting for the new units coming in is meaningfully higher than the units going out so.

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Operator [45]

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Our next question will come from Matt Brooklier with Buckingham Research.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [46]

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Scott, congratulations. Welcome. So wanted to hit on the DTS top line outperformance. Maybe if you could provide a little more color in terms of what drove that. Was there a big account or accounts win in the quarter or just was it more related to volume with existing customers? I think it would be helpful to get a little bit more color there.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [47]

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Well, I think the easy answer was all the above. But I'll let John give you a little more color.

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John J. Diez, Ryder System, Inc. - President of Dedicated Transportation Solutions [48]

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Yes, Matt. If you look at the growth in the quarter, about half of that came from new names that were added to the portfolio. About 1/4 of that is expansion of existing accounts as well. And if you look at how we perform relative to our historical levels, last year in the quarter, we had a record year of sales and that was certainly impacted by significant win in last year in Q1. We didn't have that level of activity, meaning we had a significant number of account wins, but we didn't have one account that drove the number. So overall, if you look at our performance, was the second highest sales here for the quarter that we've had which is terrific. I think we're still seeing the secular trends which is around driver challenges. You look at people looking for visibility and technology solutions and then they're looking to mitigate cost headwinds. We're seeing all 3 play out, and we continue to win in the marketplace with the solutions we have in place.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [49]

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And I guess, let me just add, going back to the question on the strategic investments. Here's an example of where we made strategic investments in prior years of adding salespeople to Dedicated, adding salespeople to the other segments and adding marketing dollars and technology to drive the growth. You're seeing top line and bottom line growth now as a result of that, where FMS is growing 10%, Dedicated 17% and Supply Chain 25%, again, along with acquisition there. But these investments do pay off. And in order to get the growth on the top line and the bottom line, that's where some of the money goes. But I think Dedicated is great example of that.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [50]

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Okay. And just quickly, the second part of my original question. I know there are some insurance cost benefit in the quarter, can you talk to how much that lifted EBT?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [51]

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Yes. I would look at insurance. The out of period insurance stuff as a net for the company was -- year-over-year was flat, right? It was generally in line and flat with prior year. It was a negative on the FMS side and a positive on the Dedicated and Supply Chain.

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Operator [52]

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Moving next to Kevin Sterling with Seaport Global Securities.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [53]

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Welcome, Scott. Robert, with your bump up in used vehicle inventory, do you think you can still sell those in the retail channel or do you think you might have to ship some of that inventory to the wholesale market? How should we think about that?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [54]

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Yes. No. We have an aggressive initiative to really ramp up our retail sales channel. And it's primarily through an inside sales organization that Dennis and John Gleason, our Head of Sales, are building out. So the plan and the initiative is really to go out and really retail those additional units through this new structure. So our sales volume was up 17% in Q1. The majority of that was through retail. So the goal is to keep ramping that up and in the second half of the year really have a meaningful increase in the number of vehicles that we can retail.

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Dennis C. Cooke, Ryder System, Inc. - President of Global Fleet Management Solutions [55]

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Kevin, let me just add to that. We sold 4,900 units in Q1, and that goes up to 5,300 or 8% increase in Q2. And as Robert said, this is why we've added the marketing for getting new prospects and then we're feeding them into inside sales. And that, as I said earlier, is now north of 20% of our retail volume. So what we're doing is we're expanding our retail reach and having a lot of success with that. And again, we've got to sell about 8% more units here in Q2.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [56]

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If I'm not mistaken, you guys have always had pretty good traction in the used market because of your maintenance records and then things like that. I assume that's still the case?

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Dennis C. Cooke, Ryder System, Inc. - President of Global Fleet Management Solutions [57]

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That is. And I would just add, we've -- again, with the investment in the marketing as Robert talked about earlier, we're reaching a larger retail audience for our used vehicles. And the value prop is still there about maintaining the vehicles over a 6- to 7-year period and having the maintenance records available for the customer.

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Operator [58]

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Our next question will come from Brian Colley with Stephens.

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Brian Lee Colley, Stephens Inc., Research Division - Senior Research Associate [59]

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So I just wanted to ask about the sensitivity within the 2019 earnings guidance around rental demand and what you're assuming there? So if we were to assume rental demand is 5% lower than what you guys are projecting, what's the ballpark headwind to the bottom line if we factor in your ability to flex and reallocate the equipment?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [60]

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Well, 5% lower, I think the key would be -- let's say it happens in the second half of the year, so 5% lower on the second half of the year.

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Brian Lee Colley, Stephens Inc., Research Division - Senior Research Associate [61]

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Right. Sorry, 5% lower than what you're projecting, I guess, for the year, for the full year?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [62]

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Than what we're projecting? Okay. If you think about it, yes, it's a math equation at that point. If you assume that rental is about a $900 million product line, so half the year is $450 million. 10% of $450 million would be $45 million and half of that is $24 million, $25 million is what we're thinking. So it's probably $24 million, $25 million if you just say 100% pull-through of that. Obviously, we would adjust the fleet. The last time that we headed down, certainly, we were able to adjust the fleet in a matter of one quarter. So we would really be able to mitigate a good chunk of that. So that's a quick way to look at it. Obviously, we have -- what we've built in just to be clear, we have already built in a slowdown in the second half. So you're talking about another 5% beyond that.

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Brian Lee Colley, Stephens Inc., Research Division - Senior Research Associate [63]

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Got it. All right. That's helpful. And then I just wanted to ask about how the sales pipeline trended in the quarter? What you're seeing maybe in some more detail across the different segments?

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [64]

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Well, look, I think sales across the company were very strong in the first quarter. Not as strong as the record from last year's first quarter. If you remember last year's first quarter was really a record across the company. But to put it in perspective, in FMS and Dedicated, it wasn't the strongest first quarter in history, but it was the second strongest first quarter in the history of the company. So I would tell you, still very robust sales. The 3.2% GDP environment here in the U.S. is very helpful. We see commercial customers willing to sign up a long-term contract. The confidence is good. So we still feel very good about the sales prospects. We still see companies looking to outsource their transportation and logistics needs. So I would tell you, not only was it a good start to the year in terms of the results, double-digit top line with double-digit bottom line growth, but also the sales that we saw in the quarter were very healthy, which bode well for the second half of the year and as we start into 2020.

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Operator [65]

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And at this time, this does conclude today's question-and-answer session. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.

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Robert E. Sanchez, Ryder System, Inc. - Chairman, CEO & President [66]

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All right. Well, thanks, everyone. Thanks for getting on the call. I'm sure we will be seeing a lot of you over the next few quarters and get a chance to meet Scott in the conference and the roadshows. So look forward to doing that. You guys have a safe day.

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Operator [67]

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