Good morning, and welcome to the Ryder System Second Quarter 2020 Earnings Release Conference Call. [Operator Instructions]. I would now like to introduce Mr. Bob Brunn, Vice President, Investor Relations, Corporate Strategy and Product Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's Second Quarter 2020 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 are contained -- and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website. Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer; and Scott Parker, Executive Vice President and Chief Financial Officer. Additionally, John Diez, President of Global Fleet Management Solutions; and Steve Sensing, 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. Let me start by saying that I hope you, your family and friends are safe and healthy during this difficult period. Ryder continues to work closely with our customers to keep the flow of goods and services moving throughout the economy, and I'm extremely proud of how our workforce has performed during this pandemic. On our call this morning, we'll provide an overview of our second quarter results and the impacts we've seen as a result of the COVID-19 pandemic. We'll provide an update on our outlook, our capital allocation priorities and the actions that we're taking to improve returns over…

Thanks, Robert, and good morning. The chart on Page 7 illustrates the level of residual value estimates on trucks for policy depreciation purposes relative to historical sales prices as a percent of their original purchase cost. The anticipated impact of COVID on our outlook for used vehicle market conditions triggered a review of residual value estimates. Based on this review, we lowered estimated residuals for trucks and, to a lesser extent, tractors to reflect our updated outlook. The change in estimated residuals will be recognized through higher depreciation over the remaining life of the vehicles. Based on our revised residuals for policy depreciation purposes, over the next 2 years, we estimate that we need U.S. used vehicle pricing to improve from current levels and achieve an increase of at least approximately 30% for tractors and 10% for trucks in order to maintain current policy depreciation residual estimates. These improved pricing levels are similar to those that we've seen in 2018 and '19 for tractors and similar to levels seen at the beginning of 2020 for trucks. Moving to the column on the right regarding accelerated depreciation. In the first quarter of 2020, we lowered residual estimates for vehicles, we expect to sell by mid-2021 to reflect weaker expected used vehicle conditions as a result of COVID. Residuals for accelerated depreciation purposes were reduced at the time to trough levels and resulted in additional accelerated depreciation. In the second quarter of 2020, we increased accelerated depreciation, primarily by expanding the pool of vehicles requiring accelerated depreciation by 1 year to include vehicles we expect to sell by mid-2022. Management views residual values periodically based on current and expected market conditions. And if management's view of market conditions change, we may adjust, positively or negatively, residual value estimates. Page 8 details the impact from residual value estimate changes made in the current quarter as well as the combined impact for changes made in the first quarter of 2020 and in 2019 for both policy and accelerated depreciation. As you can see, the estimated earnings headwind is most significant in 2020 and is expected to decline each year thereafter. As shown in the gray box below the chart, the impact from depreciation changes is expected to result in a year-over-year earnings benefit of $250 million in 2021. Please note that if vehicle sales prices come in higher than our new residual values, we would show gains on sale of vehicles on the P&L. I'll hand it back to Robert now to discuss new vehicle sales performance during the quarter.

Thanks, Scott. Page 9 highlights global used vehicle sales results for the quarter. We sold 6,300 used vehicles during the quarter, up 24% versus the prior year and up 15% sequentially. Used vehicle inventory held for sale was 14,000 vehicles at quarter end, up from 8,300 in the prior year and above our target range of 7,000 to 9,000 vehicles. We expect year-end inventory of around 10,000 vehicles. Inventory increased by 2,400 vehicles sequentially, reflecting a greater number of units coming off-lease and downsizing of the rental fleet. Proceeds per vehicle sold were down 33% for tractors and down 9% for trucks compared to a year ago, reflecting continued market weakness. Sequentially, tractor pricing was down 12%, and truck pricing was unchanged. When normalized for age and mileage of unit, truck pricing in the U.S. was actually up by approximately 9%, which is reflected on the chart in Slide 7, as we sold a higher volume of older trucks in the quarter, which are adjusted for in the calculation on Slide 7. Tractor proceeds in the current quarter were not materially impacted when normalized for age and mileage. Turning to supply chain on Page 10. Operating revenue versus the prior year decreased 16%, primarily reflecting COVID-related volume reductions in the automotive sector. SCS pretax earnings were down 19% due to estimated COVID impacts of $25 million, primarily related to automotive industry production shutdowns, partially offset by COVID-related cost actions and lower medical expense totaling $13 million. Earnings were also negatively impacted by lower residual value estimates on vehicles used in supply chain. These impacts were partially offset by higher pricing and improved operating performance. SCS EBT as a percent of operating revenue was 9.1% for the quarter, consistent with the segment's long-term target of high single digits. Moving to dedicated on Page 11. Operating revenue versus the prior year was down 8%, reflecting lower sales activity. DTS earnings before tax decreased by $6 million, primarily due to a $7 million impact from residual value estimates for vehicles used and dedicated. DTS EBT as a percent of operating revenue was 9.3% for the quarter, consistent with the segment's long-term target of high single digits. I'll turn the call back over to Scott to discuss capital and leverage.

Thanks, Robert. Turning to Page 12. Year-to-date gross capital expenditures were just under $600 million, down nearly $1.7 billion from the prior year. This decrease reflects lower investment in lease and rental vehicles. Weaker economic conditions due to COVID are expected to result in lower lease sales activity and reduced capital spending in 2020. Use of redeployed equipment to fulfill new lease contracts will also result in lower capital expenditures. Our expected range of 2020 gross capital expenditures is now $1 billion to $1.3 billion, below our pre-COVID forecast of $2.1 billion and below prior year of $3.6 billion. We're now expecting free cash flow in 2020 of $1 billion to $1.2 billion, reflecting the countercyclical cash nature of our business model. Proceeds from sales of $218 million were below prior year, primarily due to sale of property in 2019 for approximately $40 million. Net capital expenditures decreased by over $1.6 billion to $378 million. Turning to the next page. We generated just over $1.3 billion of total cash for the year, up 1% from the prior year. As higher depreciation and lower working capital needs more than offset lower earnings. Free cash flow was a positive $612 million, up by approximately $1.5 billion from the prior year, reflecting lower capital spending. Debt-to-equity at the end of the second quarter increased to 377% due to lower earnings, reflecting residual value estimate changes and COVID-related impacts. We increased liquidity in response to COVID and are carrying this higher cash balance increased the debt-to-equity ratio by approximately 35 percentage points. At this point, I'll turn the call back over to Robert to discuss our outlook as well as provide an update on our actions to increase returns.

Thanks, Scott. Given the uncertainty from COVID-19 and the resulting economic impact, Ryder is not providing financial guidance at this time. We expect to resume issuing guidance when business conditions stabilize. We expect to reduce used vehicle inventory to around 10,000 units at year-end as a result of our initiatives to expand our retail sales capacity and due to fewer rental vehicles expected to be out serviced in the second half of 2020. We will also continue to use the wholesale channel to address used vehicle inventory levels. We were encouraged to see rental utilization improve each month during the quarter from trough levels in April. We expect utilization to continue to improve but remain below typical seasonal levels for the balance of 2020. For every percentage point change in utilization, we estimate a monthly pretax earnings impact of approximately $1 million until the fleet is rightsized to meet market demands. Supply chain activity with automotive customers is expected to be at approximately pre-COVID levels in the third quarter, assuming no additional disruption. The ChoiceLease fleet is expected to be down by approximately 10,000 vehicles in 2020, reflecting customer defleeting and lower sales activity. We've lowered our capital expenditure forecast to $1 billion to $1.3 billion. No material impacts from COVID-19 are expected for ChoiceLease, dedicated or non-automotive supply chain business for the balance of 2020. We continue to expect a comparable tax rate of approximately 20% for full year 2020, reflecting lower earnings due to depreciation and COVID impacts. Slide 16 illustrates our capital allocation strategy. As we discussed, our primary financial focus is on improving returns and reaching our adjusted return on equity target of 15% over the cycle. A disciplined approach to capital allocation plays a critical role in our ability to reach this target. Going forward,…

[Operator Instructions]. We'll take our first question from Stephanie Benjamin with SunTrust.

I wanted to, I guess, I'm back on to Slide 7 here. And I wanted to clarify just on the depreciation changes. Clearly, there's a lot of positive tailwinds going and strategies in place right now for you guys to improve your ROE and whether it's cost savings or a greater focus on your supply chain solutions, but a big part of that step-up does assume that improvement in depreciation. I guess maybe just help us with, I guess, it's the footnote talking about expectations would be for a 30% improvement in tractor and 10% improvement in truck pricing. So what kind of gives you confidence? Why did you choose these levels in 2Q? This is kind of it from a depreciation reduction. Why we should be comfortable, like, going forward we're not going to see another step down? So maybe just through kind of your thought process when making these decisions for 2Q, that would be helpful.

Yes, Stephanie, thank you. I'll let Scott give you more color. But just remember, the policy of residual estimate is our best estimate of what we think the long-term sales proceeds will be for these vehicles. So where we think they'll be sold for. So you can see on the chart that we gave on Page 7, that gives you kind of the 22-year look back at historical proceeds as a percent of operating -- as a percent of original investments indexed to 1999. So you can see that where we've now set the long-term policy is really near the trough levels that we saw back in 2009. So it gives you an idea that, look, if I just look historically, we're setting them at historically lower -- pretty low levels. But I'll let Scott give you a little bit more color.

Yes, Stephanie. Thanks, Robert. I think the -- what Robert just mentioned was clearly that we -- when we're projecting our long-term policy levels, we need to take into consideration both historical as well as prospective. And so what we built into the current policy in the second quarter was this extended kind of recovery into 2022 for our sales. That kind of gives you a little bit of a sense that we're expecting things to stay at these below trough levels. So for trucks, trough levels were in 2009, our accelerated policy is at or below that level. And tractors, which we showed in the third quarter, the trough was in 2002, and we're at or below that for tractors. So when we factored those in and looking at the sensitivities, we wanted to give you context around what those improvement levels are. But to Robert's point, if you look at tractors, we're looking at kind of levels at the 2008 -- or 2018, 2019 levels, which we saw. And then for trucks, kind of levels that we saw as we kind of started the year. So that gives you a little context of expectations for policy over the next couple of years.

Right. So in order for us to not have any more policy, pricing would be to get back to just where it was over the last couple of years, I think, for trucks and tractors. So it's not a huge move, but it's -- again, there's been such a big drop here because of COVID and a couple of other things, that's what would have to happen.

[Operator Instructions]. Moving on, we'll go to Todd Fowler with KeyBanc Capital Markets.

Great. So I want to ask a very similar question on Slide 7, but I'm going to ask on the accelerated depreciation side. Understanding that you're accelerating depreciation on vehicles coming off of lease by an extra year into mid-2022, what is your assumption for where those vehicles are being depreciated, too? Is that at today's used truck value? Or is there any assumption that used truck pricing is going to improve from where we're at today over the next 1.5 years? And Robert, to your last comment to Stephanie, it's kind of a similar question. What would we need to see to make sure there isn't additional accelerated depreciation going forward?

Okay. Well, Todd, just to be clear, the accelerated is for those vehicles you mentioned that are going to be sold between now and middle of 2022. So we really extended it out. It's basically a 2-year window. Those residuals are set to, I would say, at or below historical trough levels. So we haven't given exactly where that is, but it's lower than where the policy is. So we're assuming that we're going to stay at kind of the levels that we're at now, we're going to stay at those for the next 2 years. If there's any type of recovery, you'll start to see gains, but that's what we've set those at. Scott, is there anything else that you'd add?

No, I think that's clear.

Next, we'll go to Ben Hartford with Baird.

Robert, just interested in your perspective on rental utilization, the improvement through the quarter makes sense. But if we look at some broader spot trucking data points, I mean, the market's firmed up quite a bit. Utilization is still below historical levels, as you said, and you expect it to remain as such in the back half of the year. So with regard to rental utilization, do you think it's more of a demand or a supply issue? And to what extent can you defleet to get back to targeted levels here over the next several quarters, if the demand environment does remain as firm as it has been from a spot perspective?

Yes. That's a good question. Look, I think if you remember, rental is sort of our leading indicator of what's going on in the transportation market, right? It's the first trucks that come back when things slow down. And typically, the first trucks that get picked up when things speed up. Now there's been so many idle assets, I guess, in general, during this COVID-19 shutdown that just getting the base units of most of our customers up and running has sort of been the first step. And then once they have it, then you'll start to see rental pickup. So there's a little bit of a lag here. I think that's why you're seeing that utilization is not at target levels. I'll let John give you some more color as what we saw during the month -- during the quarter, but we did see an increase and kind of seeing it level off a little bit now at a certain level. So I'll let John give you that color.

Okay. Ben, just to give you a little bit of color of what happened during the quarter. I think your question on demand, specifically what we're seeing in the tractor class, we did see the tractor class similar to the trucks, kind of behaved about the same in April and May. And that with the lockdown, there was not much moving from a rental point of view. So we saw March utilization in the low-60s. April, as we mentioned, was 51%, so low-50s. In May, ticked up a little bit to 54%. And then when we finished June, we were just above 60%. A good portion of that, you are seeing the tractors come on up. So similar to what you're seeing in the spot market. But I would tell you, we're -- in July, we're in the mid- to high 60s, and we expect that to level off because that's seasonally what we expect in the third quarter. So we have seen a pickup. We have seen a pickup on the tractor side, driving some of that improvement that I just called out on the utilization front, but we expect that to kind of level off here over the next couple of months.

Yes. I think, Ben, if you see things really pick up in the economy, we don't have any more of these shutdowns as we had, you could get some benefit there more than we expect. It's just difficult to say right now based on what's going on in some parts of the country where you're seeing things begin to slow down a little bit.

That's helpful. And if I could get a quick just follow-up related to that, Robert. There's a lot of ifs around the demand side. What can you do from a supply perspective within that rental fleet to work the denominator down to help improve utilization above and beyond? Any hope on demand remaining stable or even improving from here?

Yes. Big one there is really redeploying vehicles from our rental fleet into lease applications. And you saw that we got the -- John and his team did a really good job in the quarter, got it down -- got the fleet down 7%. And what's been a difficult quarter, just in general, as there wasn't a lot of activity, but they're able to get it down. I think the fleet's down 19% year-over-year. So we would have continued to do that activity, really, leasing out of our rental fleet to get the fleet down is probably the biggest driver. But John, is there anything else there that we need to add?

No, I think that's right. I think we're going to continue with our redeployment efforts. We've seen a good amount of acceptance on the part of our lease customers that are looking for a shorter-term flexible equipment. So we've been able to redeploy on-ground equipment for shorter terms at good rates, and we expect that to continue.

I think the important thing also, Ben, is that we do believe just whether it's rental or automotive or some of the other areas, the worst is behind us, we believe, in terms of just activity. April was definitely the most challenging month and then we saw things really improve. We would expect that improvement to continue, barring any type of other disruption if we -- as long as we don't have to go backwards. So we think it's just hard to tell the pace at which that improvement is going to happen. And that's really the unknown here. And really, one of the reasons why we're having a tough time being able to provide guidance.

And next, we'll go to Scott Group with Wolfe Research.

So can we go back to Slide 7, just because I'm still pretty confused here, I apologize. But -- so the black line, which I thought was current used prices is -- looks like it's moving up and is above the policy assumptions. But I'm confused, is that right? Well, I'm going to just start there, is that right? Is this the way to think about this black growing?

Yes, Scott, you're right on that one. That's the second quarter, where Robert mentioned the second quarter, we had seen a decline. And in the second quarter, I think John mentioned in the last call that the wholesale market in kind of April and May was very low. So we had a higher than normal level of retail sales in the quarter, which led to the pickup there. And our expectation for the remainder of the year as we kind of go back to normalized levels of retail wholesale mix, given the inventories that we have. That's the assumption.

I guess -- yes. So the black line, is it -- go ahead, Robert, sorry.

No. Yes, the black line did go up in the quarter, as Scott mentioned, but it's primarily due to the fact that we -- the retail wholesale mix for trucks was higher than what we normally expect. So we got -- the wholesale market kind of shut down in April. So we did a lot more retail over time. So the good news, I would tell you, the good news overall in UBS is the volumes have been strong. So the volumes being strong is definitely a good indication. And over time, could lead to price increases. We are not assuming that, that continues in the analysis we've done here. So if pricing were to continue that trajectory. Obviously, we would have gains in these numbers and residuals would be below that. But this is -- what we've done here is we actually have it lower, and we're assuming over the next several quarters that pricing will continue that trajectory, it will come back down some.

So just want to understand, where is -- then where would you call sort of underlying used prices relative to the blue x? Is that what you're saying is current used prices are 30%, give or take, below that blue x?

No, not 30%. No, we're saying current used prices are going to be somewhat below that blue x, not 30%.

Okay. Okay. And sorry just...

And when I say current used prices, normalized for normal rental and for normal retail wholesale mix.

Right. Okay. And then just last thing. So let's say, hypothetically, used truck pricing gets 10% better. So it doesn't get 30% better, but it gets 10% better. Will you start reporting gains on sales?

Yes.

I guess how much does used need to improve to start reporting gains on sales?

In order to report gain on sales, Scott, if you're currently looking at, that would be the accelerated pool, like the assets that we're expecting to sell in the next couple of quarters. That level is below the blue x that's on this page. So our residuals that we're setting for accelerated at trough levels. So if pricing came up in the short term, you would see gains on those assets that we're selling currently, if they're up from current levels.

So if we see any improvement in used truck pricing from here, we'll start reporting gains on sales?

Yes, the answer is yes. It's a little bit on timing based on some of the depreciation. So it would just be a change -- it's a timing issue. But generally, the answer would be yes.

Next, we'll hear from Brian Ossenbeck with JPMorgan.

Just one follow-up on the -- just on the residual index, again, just to be clear because it does sound like there's a mixed effect, not only from the class and the type attractive, but also how you're selling it. So recognizing you had a bit of a shift in wholesale retail for truck. Last quarter, that's been normalized. You are pushing, as you mentioned earlier, into more retail channels. So just wanted to be clear if the increases you're looking at, the 10% and 30% mentioned on Slide 7, does that include a bigger shift towards retail, which would be a little bit of a little bit of a tailwind? Or are you not kind of counting on that when you look over the next couple of years making these assumptions?

Yes. We're really not making assumptions either way. What we're saying is the overall proceeds, the combination, obviously, if I retail more, that's going to help me get to the number quicker. So it would assume -- so if we were able to increase the percentage of vehicles that we're selling through the retail channel, then the overall pricing, if you will, of retail wouldn't have to go up as much, right, because you're -- the blended would be higher. But just to be clear, those -- the sensitivity we gave of 30% to 10% is for the long term. That's for the next -- within the next 2 years, it has to go up that much. In the short term, I think that was Scott's earlier question. In the short term, we're -- our residual values are very close to what we're pricing, what we're seeing in the marketplace now. So if it goes up, you're going to start to see -- you should start to see gains. We just -- we don't know that yet because we know we have a lot of inventory. As we show, we've got 14,000 units in inventory. So we have to move a lot of vehicles in the balance of the year. And we know that overall, in the market, there's a lot of vehicles to move. So we're going to have to wholesale some more units, and we know that, that could create some pressure on pricing. So that's really why we've made these assumptions. If things come in bigger, and we continue to see a lot of strength in volume. That could go the other way, and we could see gains.

Okay. The other clarification I'd like to make on the chart. The other clarification is, this is normalized for age and for mileage. So when you're looking at the impact on P&L on a quarterly basis, there's the mix between retail and wholesale, but also the age and miles of the units we're selling. So this is trying to give a directional kind of index around how the market is doing. But on a quarter-to-quarter basis, it will be impacted by kind of the age and miles of the units we're selling. And that's part of -- incorporated into our accelerated depreciation.

Okay. Got it. Then just a quick follow-up for you, Scott, on -- you mentioned the similar chart for tractors. I think it's a couple of quarters old now. But if you can just give us a little bit of context as to where that where that stands, your understanding accelerated is below residual. Probably didn't make too much change for that. So I thought maybe there's something you're seeing there even though the last quarter was a little bit soft with the impact on realized value per tractor. What are you seeing when you look at that trend that gives you a little more confidence not to need to make as big of an adjustment on the tractor side?

Yes. I think it's a little bit about what John mentioned. So the second quarter action was predominantly on the on the truck side. And so on the tractor side, when we picked the action in the third quarter, we mentioned that we were kind of tracking kind of close to the assumptions we made there. So the change really was on the accelerated side. We did do a slight modification on the policy side for tractors. But they have been kind of stable the last couple of quarters.

Our next question comes from Jeff Kauffman with Loop Capital Markets.

I just wanted to ask a detailed question and more of a kind of longer-term outlook question. You mentioned that at the end of the year, you would look to get the ChoiceLease fleet down by 10,000 vehicles. Where are you on the progress of that so far? And can you give us kind of a view of where you think the commercial rental fleet needs to be as we approach year-end? Just trying to get an idea for vehicle accounts through 3Q and 4Q.

Yes. I'll let John give you some color on that. We do expect the ChoiceLease fleet to be down 10,000 units. That's primarily a reflection of our customers defleeting during the softer economic period, and there's definitely been slower sales activity as companies have been kind of holding off to make those types of investments. So that's really the natural flow down of vehicles. And I'll let John give you some color. As I mentioned, our rental fleet is already down 19% year-over-year. But I'll let him give you a little more color on the balance of the year. John?

Yes. So looking at the rental fleet, we're down 19%, as we highlighted in the remarks, I would expect that to continue to decline 1 to 2 percentage points sequentially each of the next couple of quarters. So you're probably looking at another 1,000 to 2,000 units in that range as the potential adjustment that we need to make. Obviously, we're going to continue to monitor demand side. And if the demand comes back as we approach the fourth quarter, we may pull back on that. But that's kind of the range that we're looking at right now that's needed.

All right. I want to switch gears. There was an announcement that you had reached an agreement to bring some Workhorse electric step vans into the fleet. I know there's a company, Nikola, that's made a big splash coming public, and you were going to provide maintenance exclusively for those vehicles and then not exclusively. Hey, can we take a step back and kind of give us your view on this emerging alternative power technology and kind of where Ryder's strategy is and what your expectations are for customer demand in those areas?

Sure. I think, Jeff, we're pretty uniquely positioned to really be able to evaluate and understand where that technology is going. We think going forward, we can certainly continue to play an important role in fleeting our customers with those types of vehicles based on the breadth of contacts and presence that we have here in North America. So we've been early adopters in getting into some of these vehicles and relationships with different start-ups, along with the more traditional OEMs. So we see -- we do see progress. I mean there's a lot of money being put in globally for research and investment in that type of technology. We have been working with numerous customers. You mentioned recently, Workhorse is one of them. They are bringing to market more of a smaller, lighter duty type step van and vehicle which we think is probably where you see the technology first really taking off. So we're excited about the progress we've seen there, specifically with Workhorse and that we have vehicles with a lease customer already. And now that we're bringing some additional vehicles of their newer generation into our rental fleet. But again, we see that progressing. I don't think it's going to be a light switch that's going to turn on one day, and everybody is going to convert, but I think it's going to be a slow migration over time, starting with probably the lighter duty vehicles where the technology is more advanced.

And next, we'll go to David Ross with Stifel.

I wanted to follow-up on the rental fleet. And with the fleet coming down significantly, utilization is still only being in the 60s. What percentage of your rental business is typically what I would call trade show conference event business because there are no conferences, there are no concerts, there are no stadium events probably happening the rest of this year. So if 10% to 15% of your normal business just doesn't exist until 2021, is that really what we have to prepare for?

Yes. I'll let John give you some color. That hasn't been the biggest driver, it is one of the drivers. But I'll let John give you some color on the decline in -- by industry type, by customer -- end customer. John?

Yes. So David, just to address your question. With regards to the event rentals, you're absolutely right. That group or that segment of our customer base has felt the impact and continues to feel the impact. That specific category represents mid-single digits for us in the rental portfolio. I would tell you, I think we have seen the impact across both food and service -- foodservice customers as well as van rental customers, and they're coming back online. The foodservice folks have figured out a way to kind of reinvent themselves and they're coming back online now. And certainly, we expect that to continue to progress. It's going to be a gradual improvement. Whereas the events folks, I think it's going to be longer term, as you suggested in your remarks.

And then just quickly on the Ryder Last Mile business. You mentioned that, I guess, maybe due to increased demand, the outlook was raised to a high single-digit margin business. Why the, I guess, more optimistic outlook on profitability, better pricing, change in operations, other?

Yes. David, I'll tell you a couple of things. One is definitely the growth and the prospects we're seeing for continued growth there. But I think the more important item has just been the overall performance of the business. We've got a great team there that's really performing extremely well. We're seeing profitability certainly better than what we had originally expected. I'll let Steve give a little bit more color of what we're seeing there. But clearly, the activity that we're seeing with the impacts of COVID and even in a post-COVID world, I think the prospects look very positive for that business. So Steve, you got to give him some color there.

Yes, David. So we went through some cost control measures back earlier in the year. So I think we're certainly benefiting from that at this point. As Robert said, pipeline is very, very strong. Sales team is really hitting it on all cylinders. So we've got a lot of new business coming into the pipeline and then volume here over the last 3 or 4 months. So this business is all about density. And as we continue to build that density and optimize each one of these trucks, we continue to see that profitability grow. So operations team is executing as well. So just really in a good spot now.

What I would add there, David, is if you look beyond even just beyond Ryder Last Mile, but you look at all of the supply chain business dedicated and even in our ChoiceLease business, the level of performance, even during this extremely extraordinarily difficult quarter, has been very high. I mean it kind of showed the resiliency of our contractual business because the headwinds that we got were really around rental, the automotive business, which had a full shutdown, which I don't think anybody expects an entire industry to shut down like the way it did. So those were extraordinary circumstances there. And then ultimately, it's just continued used vehicle challenge and depreciation, which I really -- if you look at the charts that we've laid out, I think we've taken a prudent position on these residual values, even now additionally with this COVID-19. But the -- if you look at the charts, this stuff, a big chunk of this gets behind us this year, another chunk gets behind next year. And then you look at much more normalized earnings coming from that part of the business. So it's -- overall, I think you got to step back and just look at how well the business performed when you take out those COVID-related items.

And next, we'll go to Justin Long with Stephens.

Robert, I wanted to take a step back and ask you a bigger picture question. If I think about Ryder, historically, it's been a countercyclical cash flow model. We can see big swings based on where we are in the cycle. Is there a focus on managing the business differently going forward? And instead of having this focus historically that's been on growth, shifting to a strategy that's more focused on maintaining positive cash flow through the cycle? And if the answer to that is yes, would love to know some of the changes you're implementing to incentivize that.

Yes. I think that's a good question. We had a page in the presentation, we talk about kind of our adjustment to our capital allocation strategy, and it's precisely that. First of all, the #1 goal for the company is to achieve our 15% ROE. So that's where we're really hyper-focused on getting there. Some of that is going to require growth. You can't -- you're not going to get to just like ripping out costs. But we feel that the growth -- we want more of the growth coming from our supply chain and dedicated businesses where you have a higher return. On the lease side of the business, which is more capital-intensive, we're really looking at improving returns to price increases, maintenance cost reductions, other ways of driving efficiencies in that business and maybe limiting some of the growth. We had a couple of years there with very large CapEx shares, very negative free cash flow, which ultimately, I think, really, from a public company standpoint, creates some challenges for investors. So we want to moderate that growth some. So we're going to have some growth, but not -- clearly, not at the 10,000, 11,000 unit level that we've seen in the last few years. And by doing that, you're going to be able to -- we're going to be able to get to the 15% ROE. And have positive free cash flow over the cycle. Certainly, more positive free cash flow in each of the years. I'm not saying every single year is going to have to be positive, but most years are going to be positive and certainly not seeing the big negative free cash flow years that we've seen. So we've got a clear path to get there as you see with that waterfall. We're making good progress on those initiatives. As we said at the beginning of this quarter, even pre-COVID, we said we think we can get to our cost of capital by 2022. Even post-COVID, I would tell you, I think we can get to our cost of capital of 11% in 2022. And if some things go our way, we could get above that by 2022. But again, a lot of -- there's still a lot of uncertainty, but I think just getting a lot of this depreciation behind us, which is really what we've been trying to do here over the last several quarters, is going to create that path to get to our return on equity of 15%.

Great. And just a quick follow-up on that. That 15% target, is that a 3-year target, 5-year target? Is there any kind of time frame you can put around it?

No, it's our long-term target over the cycle, right? So depending on how the economy goes, you could get there sooner or later. But again, what I do think is by 2022. So in 2 years, we think we can get to our cost of capital. And then from that point on, be able to move up into that 15% range. So again, there's just a lot of -- there's still a lot of unknowns between now and then. But if I just look at the amount of depreciation that we're going to get behind us over this year and next year, we should be in a position to really be able to make really strong progress starting in 2022.

We'll go to David Mack with J. Goldman.

I just want to clarify a few things because the whole discussion about the risk of additional charges has to factor into pricing and then into your 15% returns. What I think I've heard so far is on trucks that you're selling for the next few years, if use values go up from where they are, you're going to recognize gains. The confusion seems to be, though, for trucks that you'd be selling beyond that time frame, you need a significant improvement from here in use values in order to not take any charges. One, is that correct? And then if that is correct, how does that factor into your 15% targets? Because if you have to take further charges, I would assume that's going to impact your returns. And additionally, how are you pricing long-term leases with this great uncertainty that you need a 30% move up in use values? I would think that, that has to create a greater residual risk when you're going out into the market pricing leases.

Yes. Well, first, I'll tell you, David, use values are historically trough levels today, right? So that's the starting point. If you look, whether it's trucks or tractors, we're at trough levels for trucks or close to trough levels for trucks, which were '09 levels, and we're at trough levels for tractors, which were 2002. So we're assuming that it stays at those trough levels for the next 2 years. Then we're assuming that trucks will improve by 10% from those trough levels, which is basically the pricing that we had at the beginning of this year. So it isn't a big improvement. It's a relatively small improvement when you look at the volatility that used vehicle prices have. For tractors, we're assuming it stays at these trough levels for the next two years. And then over that period of time, it gets back to the pricing that we had in '18 and '19, which, again, was not peak pricing. It was just more moderate type pricing level. So that's what we're assuming. In terms of the pricing that we have out there, we're at or below those levels on what we're assuming on pricing of the leases. So that gives you -- I will give you some understanding of where that's at. So we're not assuming -- just to be clear, we're not assuming pricing stays at trough levels forever. I think that would be kind of difficult to even explain. So we believe this will continue to be a cyclical market, and we're coming off of low lows here, and we expect it to move up over the next couple of years.

So just so I understand the volatility news because, really, we've been talking about decline in use values for a number of years now. I'm guessing like 5 years or so. First, it was the ones with the new engines, I guess, the 2012s, and it's it hasn't gotten any better. So is there any risk in your mind that we are in a just a deflationary environment for trucks due to how many trucks were built and potentially greater fuel economy and technological advances that are shortening the period of obsolescence on older equipment?

Yes. I think if you look at the buyer for a vehicle that we sell, we're selling a tractor, for example, we're selling -- and I assume you're probably talking more specifically around tractors. On tractors, we're selling a vehicle that is 7 to 8 years old. And the person -- the buyer buying one of our vehicles is going to pay $20,000 to $25,000 in this environment for that vehicle. So that is not the same buyer that can go out and buy a vehicle for a new one for $120,000 or can go out and buy a 3-year old for $60,000. So there is a segment of the market, which is typically an owner-operator who is going to go out and buy our vintage of vehicle. And fuel efficiency and all that is nice, but at the end of the day, it's what vehicle can I afford to buy. So I don't believe -- and if you look at the cycle over the last few years, it hasn't just been the older vintage vehicles where pricing has gone down. Pricing has gone down across the board on used equipment and has really been sustained. So it really -- we do believe it's like every market. It's a supply and demand market. And when demand has gone up because a lot of vehicles were built 7 years earlier, you do get some pressure. And when the economy slows down, you also get pressure. When the economy picks up, you're going to see things improve. And if supply goes down, you'll see things improve also. So this is more of a -- we do believe this is more of a supply-demand issue, not so much a secular technology issue.

And just to put a finer point on it. So if we get to a point in 2 years where values haven't gone up and really, if you're saying 30% from $25,000, it's really not a lot of dollars we're talking about here. But if that doesn't happen, is there then risk to that 15%? Or are there offsetting variables that would still allow you to reach that 15%?

Yes. There's -- look, there's always offsetting variables, right? That's what we've been talking about with all these initiatives, right? The $100 million of maintenance initiatives that we've got out there that we've been making really good progress on cost-cutting we can do. There's always other things in the business that can offset it, and that's what we focused on. So yes, if we got to the point we had to take more, we would continue -- we're going to continue to look for improvement opportunities and efficiencies that we can bring into the business. So that's what all this is about. And that's why we have these initiatives. If you think about that vintage chart that we showed on the third quarter call, you'd say, "Well, now with trucks, with pricing with used vehicle values going down, there should be pressure on that chart." There is some pressure on that chart. However, that pressure is offset by the fact that maintenance is coming in better. And all these initiatives that we have around maintenance are really helping out that number. So that chart is still pretty valid to exactly what it looked like in the third quarter. So that's the way -- it's not just one variable in the equation. It's multiple variables. One of the variables is this used vehicle price. But again, it's not the only ones.

Okay. And this is my last one. And just to hammer this, for the next two years, if use values, and I know there's a mix issue, but for the next two years, if use values do not decline further, you should start recognizing gains. So this discussion that we're going to have and we're going to have again and again over what's going to happen in two years, that's about two years. Anything that you're selling now, if we see any kind of noticeable uptick in use values you should start reporting gains on those units?

Yes, yes. Again, the only other variable is the retail wholesale mix, but as long as there's not a big move there, you're exactly right. Actually, the retail mix moves more towards retail, you can actually get there even without a lot of improvement. But yes, that's a fair assessment.

And our final question will be a follow-up from Stephanie Benjamin with SunTrust.

I just wanted to see -- you talked about this a little bit on the last call, but are you seeing any additional demand for some of your supply chain or dedicated services because of COVID? Maybe customers that have seen a pretty big disruption in their supply chain. Just trying to see if there's any positives that have been able to come from for those particular segments.

Yes. I'll let Steve give you some color on that. But I'll tell you, what is very encouraging for us is that with COVID, there's a new focus on supply chains in general with all the disruption that happened in April. I think the move between the tariff awards last year and this issue with COVID, I think the on-shoring and near-shoring activity is going to increase, and Ryder is really focused primarily in North America. So all of our expertise is here, which I think bodes very well for the onshoring and near-shoring, especially when you think about the capabilities we have in Mexico, along with the stuff we have here in the U.S. and in Canada. E-commerce, you're seeing -- we're going to see more of that. And I think the initiatives we have around e-fulfillment and Ryder Last Mile are going to benefit from that also. So I'll let Steve give you some color on what he's hearing and seeing with customers real time.

Yes, Stephanie, it's Steve. Yes, I think just to kind of dig a little bit deeper on the areas that Robert highlighted. Certainly, e-comm is up significantly over the last 2 or 3 months, sequentially quarter-over-quarter and over last year. So seeing a lot of good mix of opportunities there, and volumes continue to increase. So a lot of interest from new and existing customers on that front. We talked a little bit earlier about Last Mile. We expect that to continue to grow and saw quarter-over-quarter versus last year, we were up mid-double digits. So I think that's a good sign. And then with the marketing campaign that Robert talked about that will launch here in the next week or so, we expect that to help build the pipeline. And our pipeline on supply chain is at historical record levels. So that's only going to be more on top and new opportunities that we can grow in. So our team is very excited and focused.

That's why we're launching this national ad campaign as we think it's really a great opportunity for us to get the word out on the capabilities that we have in supply chain and how we can help companies.

I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.

All right. Thank you. We're a little bit past the top of the hour. So thank you all for joining. And hopefully, you all continue to stay safe, and we look forward to seeing you, if not in person, we'll see you virtually at some of the conferences. Thank you.

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