Ryder System, Inc. (R) Q2 2021 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Ryder System Second Quarter 2021 Earnings Release Conference Call. [Operator Instructions]. I would now like to introduce Mr. Bob Brunn, Senior Vice President, Investor Relations, Corporate Strategy and New Product Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's Second Quarter 2021 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 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 John Diez, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, 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. Before we begin, I'd like to recognize John Diez, who is joining this morning's call in his new role as CFO. John was most recently President of Fleet Management Solutions and brings a wealth of experience to the CFO role, having held various senior operational and financial roles during his 20-year tenure at Ryder. I'd also like to welcome Tom Havens, who was recently appointed as President of Fleet Management Solutions for his first earnings call. Tom brings a great depth of experience to the leadership role in FMS from his 28-year career at Ryder, having most recently served as Senior Vice President and Global Chief of Operations for the FMS business. On today's call, I'll begin with a strategic update, followed by a discussion around the investments we're making to accelerate growth in our supply chain and dedicated businesses. John will take you through our second quarter results, which exceeded our expectations. I'll then review our updated outlook for 2021, discuss the significant progress we're making on actions to achieve our ROE target and review our initiatives to mitigate the impact of future cyclical downturns on our business. Following our prepared remarks, we'll open the call for questions. With that, let's turn to our strategic update. Secular trends continue to support our strategy to accelerate growth in our supply chain and dedicated businesses while targeting moderate growth and increased returns in our fleet management business. We're seeing strong sales and pipeline growth across all our businesses, driven by secular trends that favor outsourcing as well as increased focus by customers on supply chain resiliency and the use of innovative technology solutions. Trends that we saw accelerate during the pandemic, such as e-commerce, and the demand for last-mile delivery of big and bulky items remain strong and support the strategic investments we're making in these fast-growing areas. We remain focused on increasing returns and are pleased with the significant progress we're making to achieve our ROE target. Multiple years of lease pricing increases that began with a focus on derisking our portfolio through lower residual assumptions and cost updates are benefiting returns. Most recently, we began implementing additional pricing actions to improve future lease returns using data analytics around customer segmentation, application, equipment type and other key drivers of lease returns. Strong freight conditions combined with our initiatives, resulted in better-than-expected results in used vehicle sales and rental. We're seeing the benefits of dynamic pricing in used vehicle sales and rental as well as our prior investments to increase retail used vehicle sales capacity. We now expect to achieve ROE in the range of 16% to 17% this year, above our long-term target of 15%. Later in the call, we'll review additional enhancements we're making to our playbook to improve returns over the cycle. Moving on to cash flow. Our year-to-date free cash flow is $602 million, down $10 million from the prior year as higher vehicle capital spending was largely offset by higher proceeds from the sale of used vehicles and property. We're increasing our full year free cash flow forecast to $650 million to $750 million, up from $400 million to $700 million, primarily to reflect the anticipated impact from delays for new vehicle deliveries from the OEMs. We're encouraged by our performance and by the market trends we're seeing in the areas that we're investing for future growth. We continue to invest in technology and other areas to address industry disruption in order to enhance our business model and position the company for long-term success. Slide 5 provides an overview of the investments we're making to drive accelerated growth in our supply chain and dedicated business, a key element in our strategy to generate higher returns and long-term profitable growth, developing new and enhanced products, such as Ryder Last Mile, e-commerce fulfillment and freight brokerage is critical for us to leverage growth trends in supply chain and dedicated. Innovative technology enables us to deliver value-added logistics solutions that are in high demand. RyderShare, our visibility and collaboration tool, is a strategic differentiator for us, and its capabilities have moved to the forefront of our sales discussions. RyderView is our proprietary customer interface that supports self-scheduling and delivery execution for Ryder Last Mile. Enhanced order management and fulfillment software supports our growing presence in e-commerce fulfillment. Sales and marketing effectiveness is key to our brand awareness, and communicating the broad array of logistics and transportation solutions we offer. Our Ever better campaign and increased digital marketing presence have driven an increase in qualified sales leads. We're also expanding our sales force and investing in the capabilities and their capabilities to drive additional growth opportunities. RyderVentures, our corporate venture capital fund, aims to invest $50 million over the next 5 years through direct investment in start-ups, primarily where we can partner to develop new products and services for our customers. We've invested in areas including e-commerce micro fulfillment, a tech-enabled hub and spoke transportation network, and an AI-enabled dispatch product for small- to medium-sized fleets. In addition, we continue to evaluate strategic M&A opportunities focused on adding new capabilities, geographies and our industry verticals, which we view as another important way to accelerate growth, especially in our supply chain and dedicated business. Slide 6 takes a closer look at Ryder Last Mile, which provides final mile delivery of big and bulky goods through a nationwide network of hub and agent locations that service every ZIP code in the Continental U.S. The Ryder Last Mile offering was launched in 2018 as a result of a strategic acquisition. Since then, online purchases of big and bulky goods, such as furniture, exercise equipment and home appliances have accelerated, driving demand for a seamless home delivery experience. We've been pleased with the strong revenue growth in Ryder Last Mile. RyderView is our proprietary customer-facing technology that allows consumers to self-schedule their deliveries and provide them with real-time delivery updates. Our centralized customer support team is key to the execution of a qualified delivery experience. We carefully monitor customer delivery feedback to ensure that service levels are maintained. We're making strategic investments in this area in order to continue to enhance the capabilities and customer experience for this important product offering. We're enhancing RyderView's capabilities and plan to launch Version 2.0 later this year. Enhancements include easier and more convenient self-scheduling and rescheduling of deliveries as well as the option to schedule those deliveries at the point of sale. We're enhancing the software used for the delivery route optimization. We're also rolling out a customer experience that is branded for our customers, the retailer, so that RyderView 2.0 serves as an extension of their brand. We continue to expand our geographic footprint in order to place us closer to the end customer and improve delivery speed. We recently announced the addition of 2 new fulfillment centers in Milwaukee and Philadelphia. In addition to future geographic expansion, we'll also look at opportunities to add new services and capabilities or industry verticals through strategic M&A or RyderVentures. We're confident that RyderView 2.0 will be a market differentiator that will enhance the customer experience and propel further profitable growth for Ryder Last Mile. Now I'll turn the call over to John to discuss second quarter results.

Thank you, Robert. Total company results for the second quarter on Page 7. Comparisons reflect COVID effects in the prior year, which most significantly impacted second quarter 2020 results in used vehicle sales, rental and SCS automotive, all which have recovered quite well since then. Operating revenue of $1.9 billion in the second quarter increased 18% from the prior year, reflecting double-digit revenue growth across all 3 of our business segments. Comparable earnings per share from continuing operations was $2.40 in the second quarter as compared to a loss of $0.95 in the prior year. Higher earnings reflect improved performance in FMS from higher gain on the sale of used vehicles, a decline in depreciation expense impact related to prior residual value estimate changes and improved rental and lease results, return on equity increase, reflecting the declining depreciation impact, higher gains and improved lease and rental results. We expect continued improvement in ROE, our primary financial metric, as we move past the earnings impacts from prior residual value estimate changes and COVID, and continue to benefit from our actions to increase returns. Year-to-date free cash flow was $602 million below prior year as planned. Turning to FMS results on Page 8. Fleet Management Solutions operating revenue increased 14%, primarily reflecting higher rental and lease revenue. Rental revenue increased 58%, driven by higher demand and pricing. Rental pricing increased by 13%, which is significantly higher than we've seen historically, reflecting pricing actions taken over the past year, prior year COVID effects and a larger mix of higher-return pure rental business in the current quarter. ChoiceLease revenue increased 5%, reflecting higher pricing and miles driven, partially offset by smaller fleet. FMS realized pretax earnings of $158 million are up by $262 million from the prior year. $131 million of this improvement resulted from lower depreciation expense related to the prior residual value estimate changes and higher used vehicle sales results. Improved rental and lease results also significantly contributed to increased FMS earnings. Higher lease pricing and miles driven were partially offset by a smaller fleet. In rental, higher demand and pricing drove higher results. Rental utilization on the power fleet was 80% in the quarter, significantly above the prior year 56%, which included COVID impact, and was close to historical second quarter high. FMS EBT as a percentage of operating revenue was 12.9% in the second quarter and surpassed the company's long-term target of high single digits. For the trailing 12-month period, it was 6.3%, primarily reflecting higher depreciation expense from prior residual value estimate changes. Page 9 highlights global used vehicle sales results for the quarter. Used vehicle market conditions continue to be robust with strong demand meeting tight supply. Globally, year-over-year proceeds were up 73% for tractors and 72% for trucks. Sequentially, tractor proceeds were up 22% and truck proceeds were up 27% versus the first quarter. Higher sales proceeds primarily reflect significantly improved market pricing. As you may recall, in the second quarter of last year, we provided a sensitivity noting that a 10% price increase for trucks and a 30% price increase for tractors in the U.S. would be needed by 2022 in order to maintain current policy depreciation residual estimates. Since the second quarter 2020, U.S. truck proceeds were up 59% and tractor proceeds were up 67%. Although these increases are not age or mix adjusted, they are generally indicative of pricing improvements that have occurred since the second quarter of 2020. As such, with these improvements, average pricing in the U.S. for trucks and tractors is above residual values applied for depreciation purposes. During the quarter, we sold 6,000 used vehicles, down 5% versus the prior year, reflecting lower trailer sales. Sequentially, sales volumes declined due to lower inventory levels. Used vehicle inventory held for sale was 4,300 vehicles at quarter end and is below our target range of 7,000 to 9,000 vehicles. Inventory is down by 9,700 vehicles from the prior year and down by 1,900 vehicles sequentially. Turning to supply chain on Page 10. Operating revenue versus the prior year increased 32% due to new business and increased volumes and COVID effects in the prior year. Growth was driven by double-digit percentage increases in the automotive, retail, consumer packaged goods and industrial sectors. SCS automotive business experienced intermittent customer plant shutdowns in the quarter due to a global shortage of parts. We have included an estimated impact from potential shutdowns in our balance of year forecast as the situation remains fluid. SCS pretax earnings increased 11%, benefiting from revenue growth, partially offset by strategic investments in marketing and technology as well as increased incentive compensation and medical costs. SCS EBT as a percent of operating revenue was 7.7% for the quarter and below the company's long-term target of high-single digits. However, it was 8.2% for the trailing 12-month period, in line with our long-term target of high single digits. Moving to dedicated on Page 11. Operating revenue increased 12% due to new business and higher volumes. Revenue growth from new DTS business can be largely attributed to wins from competitors and private fleet conversions. DTS earnings before tax decreased 38%, reflecting increased labor costs, higher insurance expense and strategic investments. Labor costs are being impacted by an exceptionally tight driver market. Driver turnover is up significantly, and open positions are taking longer to fill. We're working with customers to adjust rates where needed to recoup the incremental wage and other costs, and this will take some time to address. We're also continuing to implement automatic contract triggers that allow for more real-time wage cost adjustments. We've increased our recruiting headcount and remain focused on maintaining a quality work environment, where most drivers get home every day while providing competitive wages and benefits. Our strategic investments are positively impacting sales performance, and we expect this to provide accretive earnings in the future. DTS EBT as a percentage of operating revenue was 5.1% for the quarter. It was 6.9% for the trailing 12-month period, below our high single-digit target. Turning to Slide 12. Lease capital spending of $501 million was above prior year as planned due to increased lease sales activity. Lease returns are benefiting from pricing initiatives and support a more normalized lease capital investment. Rental capital spending of $397 million increased significantly year-over-year, reflecting higher planned investment in the rental fleet. We plan to grow the rental fleet by approximately 13% in 2021, mostly in light- and medium-duty vehicles in order to capture increased demand expected from strong e-commerce and free market activity. Our full year 2021 forecast for gross capital expenditures of $2.2 billion to $2.3 billion is at the high end of our initial forecast range and is shown in the chart at the bottom of the page. This is up from 2020 when spending was well below normalized replacement levels primarily due to COVID. Turning to Slide 13. Our 2021 free cash flow forecast has increased to a range of $650 million to $750 million from our previous forecast of $400 million to $700 million. This reflects the expected impact from OEM vehicle delivery delay due to the chip shortage. 2021 forecasted free cash flow is below prior year's record level under COVID conditions, but is well above our historic levels. It also reflects our strategy to balance growth in the capital-intensive FMS business, with generating positive free cash flow over the cycle. Balance sheet leverage this year is expected to finish below 250%, which is the bottom end of our target range. Importantly, as Robert mentioned, we now expect to achieve ROE of 16% to 17% this year, with a declining depreciation impact and a stronger-than-expected recovery in the used vehicle sales market. Rental demand recovery and lease pricing initiatives are also expected to contribute to our increased ROE forecast. Higher year-to-date comparable EBITDA, which excludes the impact of gains and losses on used vehicle sales, reflects revenue growth and improved operating performance. I'll turn the call back over to Robert now to discuss our outlook.

Thanks, John. Turning now to our EPS outlook on Page 14. We're raising our full year comparable EPS forecast to $720 million to $750 million from a prior forecast of $550 to $590 and well above a loss of $0.27 in the prior year, which included COVID effects. We're also providing a third quarter comparable EPS forecast of $1.95 to $2.05, significantly above our prior year of $1.21. Third quarter earnings are expected to be down sequentially, reflecting lower expected gains from fewer used vehicles sold due to lower inventory levels as well as the estimated impact on SCS automotive due to the chip shortage and plant retooling. Our forecast assumes that strong freight and economic conditions continue into 2022 and a continuation of the current tax policy. Lease, rental and used vehicle sales performance are the key drivers of higher expected results. We expect lease to benefit from our pricing actions, increased sales activity and improved operating performance. We also expect pricing in rental and used vehicle sales to remain strong. We're forecasting quarterly gains around $35 million for the balance of the year, reflecting higher pricing, partially offset by fewer vehicles sold due to low inventory levels. In FMS, the depreciation impact from prior residual value estimate changes is expected to continue to decline, resulting in a year-over-year benefit of approximately $40 million in the third quarter of 2021. This benefit does not include any potential impact from gains or losses on sale or valuation adjustments, accelerating outsourcing trend in supply chain, including growth in e-commerce and last-mile delivery, support strategic investments in new products and technology aimed at driving future growth opportunities. We expect labor markets to remain under pressure, particularly with drivers. Private fleets are also experiencing this pain point, which we expect will continue to drive additional sales opportunities for our dedicated offering. We are focused on initiatives to attract and retain drivers and be the employer of choice. In supply chain and dedicated, we're on track to meet or exceed our high single-digit revenue growth targets. Supply chain and dedicated returns are also anticipated to be impacted by higher labor costs as well as strategic investments in new technology and our brand awareness campaign. We expect supply chain margins to decline in the back half of the year from the second quarter levels due to the impacts of chip shortages and plant retooling by certain automotive OEMs. Finally, the semiconductor shortage is expected to delay the delivery of some vehicles in FMS. We expect the impact of delivery delays to be offset by higher lease sales activity in the first half of the year as well as higher rental utilization and pricing. Turning to Slide 15. I'd like to provide a brief reminder regarding our planned actions to increase returns and achieve our ROE target. As shown on the chart, the biggest driver is moving past higher levels of depreciation impact related to prior residual value estimate changes. Slide 16 highlights the progress we're making on the 5 key areas from the prior page. Strong used vehicle market conditions are expected to continue in 2021, and we're capitalizing on those trends through pricing actions and our expanded retail sales channel. We expect the earnings benefit from the declining depreciation impact to continue. In rental, strong year-to-date performance and our planned rental fleet growth are supported by strong pricing and demand trends. In FMS, results continue to benefit from our lease pricing initiatives. Revenue on leased vehicles increased year-over-year by mid-single digits, reflecting these pricing actions with additional opportunity going forward as we replace expiring leases at higher pricing levels. Our multiyear maintenance cost initiative delivered more than $50 million in annual savings through the end of last year, and we are on track to achieve an additional $30 million in savings in 2021. Cost actions also include exiting underperforming assets in locations that we expect will improve our long-term returns. We're investing in strategic initiatives to accelerate growth in our higher return supply chain and dedicated businesses. Slide 17 provides an updated view of the expected performance of our lease portfolio as a result of the pricing actions taken. Substantially, all leases, with the exception of those signed in 2013, are expected to perform above our target return. The leases signed in 2013 represent only 8% of our lease fleet. The majority of the power fleet in this cohort will be replaced in the balance of 2021 at higher pricing. As a result of our pricing and cost actions since 2014 as well as the analytics-driven pricing changes we are incorporating now, we expect the returns on our lease portfolio to continue to increase as the portfolio turns over to more recent and higher returning vintage years. Although we are encouraged that we expect to exceed our target ROE of 15% in 2021, we remain focused on taking action - additional actions to position our business to generate long-term returns of 15% ROE over the cycle. As such, we're implementing actions to mitigate the impact on returns from future cyclical downturns. These actions include maintaining balance sheet flexibility through a disciplined capital allocation strategy that will enable us to pursue higher return investments and strategic M&A opportunities as well as share repurchases. In ChoiceLease, we're replacing certain leased vehicles prior to contract expiration during an up cycle in order to reduce the number of used vehicles that we need to sell during a downturn. In rental, we're planning to shift our asset mix for better returns by growing our light- to medium-duty truck fleet, as we view this asset class as less susceptible and heavy-duty tractors to the impacts of the freight downturn. This quarter, we completed an analysis of our residual values and life expectancies of our entire fleet, which included, among other factors, reviewing vehicles by class, condition, expected sales, availability of equipment and technology changes. As part of this review, we also factored in a potential future cyclical downturn on used vehicle prices. As a reminder, in recent years, we significantly lowered the residual value estimates for our entire fleet to a level where used tractor prices have only been below these estimates in 4 of the last 21 years. However, based on our most recent analysis, we made an additional modest reduction in residual values, primarily for certain tractors. This change is intended to further reduce the probability of losses or need for accelerated depreciation during a potential cyclical downturn, even if tractor pricing returns to historical trough levels like they did in the early 2000s and in 2020. We expect these changes will increase depreciation expense in 2021 by $18 million, representing approximately 1% of total depreciation expense for the year. That concludes our prepared remarks this morning. Before we go to questions, please note that we expect to file our 10-Q later today. [Operator Instructions]. At this time, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions]. And we'll first hear from Scott Group of Wolfe Research.

Can you help us - I think in the beginning of the year, you talked about a $4 tailwind turning this year from depreciation and gains? Where are we now? I'm just trying to understand how much of the guidance is reflective of used pricing improvement and how much is beyond that. And then maybe to that last point you were trying to make, Robert, if we assume that used prices fall next year, not to trough levels, but just something a little bit more normal, can you just talk about the puts and takes of gains on sales probably down next year, but would depreciation go up? Or would that still be going down next year as an offset? I think we're just trying to understand the ability to grow earnings again next year if used prices start to normalize.

Yes. Let me answer the back half of that question, and I'll let John answer the first part of the question. In terms of where we are in used truck pricing and what happens next year, obviously, used truck pricing has gone up this year and continues to go up. So we would expect the pricing in the market to continue to go up through this year and into next year. What's driving that is certainly an improving economy with a limited number of new trucks being able to hit the market with, among other things, the semiconductor shortage hampering that. So I don't see that getting resolved here in the next 6 months. I think that's going to continue. And it usually takes a while for that to bleed through. So as we go into next year, I would expect to still have relatively strong used truck market. But assuming that used truck pricing were to slow down at some point, which it will at some point, what - the way you should look at it is that gains will come down, right? So whatever the gains we get into next year will come down. But we are - the changes that we've made around our residual values, the likelihood of having to take any type of accelerated depreciation or any type of loss, has been greatly reduced. If you think about it, we've lowered our residual value significantly in '19 and again in '20, and now we've taken some additional actions that will reduce tractor residuals for certain tractors down to trough levels. So even at a trough level for those vehicles, we would not be taking losses or additional accelerated depreciation. So if you think about this year, $150 million in gains, you've got $150 million in gains this year. As we go into next year, you're going to have a benefit of less depreciation expense from the residual value changes that we made. It was $100 million, now we're at $85 million. So it's going to be $85 million of benefit next year on depreciation. So you can do the math on what happens to gains. If gains were to come down $85 million, you got an offset of $85 million from the benefit that you're going to get on the roll-off of depreciation. So your earnings then would be flat. So that would be cutting your gains about in half, and you'd still be flat in terms of year-over-year impact of depreciation and gains. Let me hand it over to John now to answer the first part of your question.

Yes, Scott, let me walk you back. The guidance we have provided at the beginning of the year was a roll-off of the depreciation residual value estimate changes that we have made of about a benefit of $220 million year-over-year in 2021. That number, if you look at the tables we're presenting, we're projecting that benefit now to be year-over-year about $180 million, so slightly below the beginning of year forecast, and that's really attributed to changes in the fleet over the last 6 months. So that gives you some perspective. Keep in mind, our gains, as you heard from Robert, are significantly higher than what we had forecasted or baked into our beginning of year forecast through the year, and we're projecting that to finish about $150 million for the full year.

Okay. Super helpful. Can I just clarify one thing that I think could help? How much of a decline in used prices next year would equate to an $85 million drop in gains? Is there a good rule of thumb?

Well, Scott, what you can look at is if you look at our proceeds levels, they're typically in that $500 million level. We're up to $600 million. So a 20% drop there in proceeds will give you kind of the equation there. But for $85 million, you're looking at a more severe drop, right? You're going to be looking at close to a 15% drop in proceeds.

And that would be - and just to be clear, Scott, that would be across all classes, trucks and tractors, where you have more of the volatility historically is around the tractor class, so you assume that the tractors would have to drop double that in order to make up $85 million.

Okay. So it sounds like using the net of it is it's still likely that we'll have a used - a net used tailwind in '22.

Net used sale price. It's a little early to tell, but from where we sit today, yes.

[Operator Instructions]. Next, we'll hear from Todd Fowler of KeyBanc Capital Markets.

Robert, at the end of your prepared remarks, if I understand correctly, it sounds like that you're saying that there's an additional $18 million of depreciation coming in this year. It sounds like that, that's policy depreciation. I guess number one, did I get that right? And then number two, kind of building on what Scott was asking about if we follow that through into 2022, is there additional policy depreciation that's coming in next year that offset some of the $85 million benefit on the accelerated side?

Yes, that's a good way to think about it. The $18 million, you can think about it as a policy. It's more of our longer-term view. And again, it's really - we've talked about what are the things that we could do to mitigate future accelerated in losses, and this was an additional step that we've taken based on our ability to have more visibility around cycles. So - but to answer your question, is it additional headwind, it is included in the $85 million estimate I just gave you. So if you think about it, we had originally said $100 million, now it's $85 million.

Okay. Perfect. Yes. So that's the bridge there. So that helps. Okay, good. And then just on the strength here in rental in the quarter, the 80% utilization, is there a way to kind of tease out how much of that you think is cyclical demand versus how much of that is either customers waiting for lease vehicles due to some of the constraints on the OEM side? And what are your expectations for utilization and lease pricing and guidance as you move into the third and fourth quarter?

Yes. I'll let Tom give you a little bit more color on that in a second, but I'll tell you that the rental demand is very hot right now. If you think about it, the economy has picked up. There's a shortage of capacity in the freight market plus e-commerce really continuing to ramp up. So there's just not enough trucks to handle all the demand that's out there. So it's kind of a great environment for rental. To your question on how much of it is coming from customers waiting for lease trucks, it is actually - more of it is coming from, as you heard in John's statements, coming from just pure rental customers that are coming in and renting our vehicles to meet their demand. So a very good environment. You saw the pricing power that we have and how much pricing has gone up, 13%. So we had a quarter of - I guess it was 80% utilization this quarter, which for second quarter, I think, is our second highest ever. So we expect that utilization to continue to stay very high for the balance of the year. I'm not going to call it red light, but certainly at a very good clip. And we are going to be bringing some additional vehicles in the second half of the year that are being delivered. So Tom, do you want to add anything to that?

Yes. Just to be clear, it is not tied to customers waiting for a lease. It's really demand, primarily in two key places in the external freight environment that I think everyone understands what's going on there along with e-commerce. When we think about the coming quarters, we expect the rental fleet to continue to increase. We haven't received our full rental order, so our fleet is expected to increase in the third quarter. We're also expecting those pricing trends to continue as well. So as Robert mentioned, we're up 13% year-over-year. We also expect pricing to be up double digits year-over-year in both the third quarter and the fourth quarter, so the demand out there is strong. I'll just mention two other things. We - there's still opportunity, we believe, in the event-type companies that are out there that typically rent from us this time of the year. They haven't completely come back to the demand levels that we've typically seen in the past. So we're expecting, hopefully, in the third quarter that the event companies will largely come back as well. So there's still maybe some opportunity in demand that's out there that we haven't fully gotten past the impacts of COVID.

Yes, that's great.

Todd, I will also add that we're very pleased with the demand we're seeing around our light- and medium-duty trucks, which is the area we've been making more investments in as e-commerce and those types of companies have really ramped up. And the good news is that historically, that is less tied to the freight cycle. That demand tends to be less cyclical than the Class 8 tractor demand, so we're very pleased with what we're seeing on that side of it also.

Good. That sounds good. And I might be helping you guys with some of that event demand here in the third quarter.

All right. Good you can deal with that.

I'm - just some stuff I'm attending, not actually renting for.

And next, we'll hear from Justin Long of Stephens.

Maybe I'll follow up to that last topic on rental. Thinking about the percentage of that fleet, it's light and medium duty today. Would you mind sharing what that number is and where that could potentially go? And I definitely understand the point that it's less cyclical, but maybe you could comment on the impact this could have to margins from a mix perspective, if at all?

Yes. I'll let the team get you the number on the percentage. But this is something, as we've looked at making investments in rental and part of our - as we talked about our disciplined capital allocation strategy, if you look underneath the covers on our rental product line, we found that the truck rental side versus the tractor rental side, we've been seeing more consistent demand as e-commerce and there's a - it's a pretty broad industry that really rents those trucks, industry groups that rent those trucks versus our Class 8 tractors are typically rented to transports and trucking companies that are more cyclical. So just from a return on capital and return on equity standpoint, the investments on the truck side certainly have been historically better and higher, and that's why we've looked to increase our investments there. So John, do you have that number in terms of the percentage?

Yes. So just to give you an idea of rental fleet mix, about 50% is trucks versus the rest of the fleet. But as you heard from Tom a little bit earlier, we haven't received the full capital that we put in order for, for this year. So we expect the truck count to continue to move up, and we're looking to move that 50% up to 52%, 53% over the next 12 to 18 months since we continue to make those investments. So that will give you an idea of kind of the fleet mix. And then as we move forward into future periods, that's the level of activity we're going to continue to grow it by going forward.

Okay. That's helpful. And maybe just a quick follow-up, any initial thoughts on CapEx for 2022?

Yes. We haven't given guidance for 2022. The one thing I will tell you is in our forecast for this year, we did talk about delays in OEM delivery. So you probably got $200 million from this year that are being pushed into next year as the capital will be spent really next year and that's when we're going to get the vehicles. That's just delays in OEMs getting the vehicles out because of the semiconductor challenges. So yes, you would expect CapEx will go up next year, not only from the $200 million that are going across, but also as we grow our lease fleet next year, we expect to have some growth next year in our lease fleet and make some rental investments. So yes, CapEx will be up next year versus this year.

Stephanie Moore of Truist.

I was hoping you could talk a little bit more about EBIT margins across segments. FMS actually coming at above long-term target, but the supply chain and dedicated businesses slightly below. Maybe if you could walk through what you view were more temporary factors during the quarter really across the segments? And then taking a longer-term view why you remain confident in some of these long-term targets, including why you think FMS shouldn't actually be higher just based on the 2Q performance and really the pricing actions that have been put into place since - I think you called out 2014. So any color there would be helpful.

Yes. Let me start off with FMS because I think it's a great question. Look, we set a target for FMS of high single-digit margins, partially driven by the fact that we know we've got a lot of depreciation impact from these recent residual value changes that we made. That rolls off, but it takes multiple years for that to happen. So obviously, with the number that we posted this quarter of over 12%, we are very encouraged by that. $50 million or plus of gains are included in that number, so we can't lose sight of that. But as we perform well in the next few quarters and we go into next year, obviously, we'll continue to reevaluate those targets and see if there's opportunities to move those up. Certainly, as the depreciation rolls off, the likelihood of being at the high end of that or above that increase as long as the rest of the business continues to perform the way it is. We're also very encouraged by the benefits of the lease pricing changes that we've made. So there is - certainly, there is - we continue to evaluate that, and there's a possibility of increasing that at some point. In terms of supply chain and dedicated, as you mentioned, supply chain is above for the quarter, but if you look at - is above year - for the 12 months, but it's below in the quarter. It's primarily driven by the automotive shutdowns that are impacting that part of the business due to the semiconductor challenges and also some retooling that's going on and also some of the driver wage issues. We expect those - both of those to be transitory. They're not going to be here forever. So we expect supply chain to be able to get back into that high single-digit range along with dedicated. Dedicated is primarily a driver wage issue along with some insurance headwinds that we had and some investments that we're making in growth. So again, all three of those, I think, are transitory. And they're transitory because as driver wages have to go up, we have to go back to our customers and recapture that in the rate, which we feel confident in our ability to do it, sometimes just - especially on something that's happened as quickly as what we've seen in the last 6 months. It takes us a few quarters to get that done, and that's what we're in the middle of. So we still feel really good about the targets that we've got out there for both supply chain and dedicated.

Next, we hear from Brian Ossenbeck of JPMorgan.

Robert, maybe just a quick follow-up on the dedicated side. Things are really tight, it should get a little bit looser over time. Just wanted to see if you could give us some additional color on your confidence in getting those driver wages pass through? And then also if you're seeing anything on, I guess, more on the warehousing side, to the extent that's affecting SCS? And then secondly, can you just give us your updated thoughts on the lease size or what you think about...

I'm sorry, I missed that last part of your question, Brian? We might have lost Brian.

And it looks like Brian may have disconnected his line.

Okay. Let me answer the question around what we're seeing around driver wages. Actually, let me hand it over to Steve. Steve can give you color on the driver wages and also, we're seeing around warehousing.

Yes. Brian, from a driver wage standpoint, I think some of the key things that we've done in the quarter working with the customers have begun to stabilize the turnover. We did see an increase of about 20% to 25% across key areas in the country, but I think the team has done a really nice job in working with the customers. As Robert said, it will take us a couple of quarters to claw all of it back, but I think most of our customers understand the challenge that we're up against. A key piece for us is about 85% of our jobs are home every night or home every other night, so very attractive. We are seeing applications on the increase here in the last couple of weeks, so that's a positive sign as well. And then on the warehousing side, we started seeing it around the end of Q1 into Q2. We are in those discussions as well. About 50% of our business on the warehousing side is cost plus, so we have that structured in the contract with our customers. And the other transactional business, we're working account by account to get those covered as well. But I would expect it to continue certainly through the end of the year.

Brian, are you back? All right. Let's move on and maybe when he gets back, we can get him back on. I want to make sure we don't miss the second part of that question. All right. Operator, go to the next question.

Jordan Alliger of Goldman Sachs.

Just following up on an earlier question, in terms - I know you haven't given guidance for 2022. Obviously, this year's results are quite excellent. Is the key to getting profit growth on top of this year for 2022 going to be driven or need to be driven by dedicated and supply chain getting to those target levels?

Well, not necessarily. I think certainly, as we go into next year, there's a lot - if you think about each of the areas, supply chain should see improvement, again, barring continued or more severe, if you'd say, semiconductor shortages, which don't think anybody is forecasting. I think most people are forecasting we get beyond that certainly as we get into next year. So we could see improvement in supply chain, along with growth that we're getting in - we're seeing really strong sales in both supply chain and dedicated, that will start to produce earnings next year. On the dedicated side, same thing is we are able to negotiate these wage increases into our rates, you're going to see margins improve, and we're going to have a bang-up year in terms of sales on the dedicated side. So I'm expecting really strong sales from both supply chain - a very strong revenue growth, if you will, next year from both supply chain and dedicated. Along with - on the FMS side, I think you still - we still expect to see some good rental demand next year as it will take a while for capacity to catch up with demand on the e-commerce and freight side lease. Think about it, we've had lease decline in the last 2 years - this year and last year. We'll start to see lease come back, which should help us from a return standpoint. And then the net-net that we just talked about of used vehicle gains with the depreciation benefit probably being a push or a plus along with - I can't forget the maintenance cost initiatives that we've got in place. So a lot of positives going into next year, I would say. Although I'll tell you, it's still early, right? We're in July and we still got a few more months to wrap up this year. We'll be in a better position to give you guidance for next year here later into this year and into 2022.

Just as a quick follow-up on dedicated with the driver issues, presumably, while the pipeline is strong, there has been delays in getting things going. Would that suggest that as the drivers loosen up and we go into next year, there could be an additional surge from projects that had to be held off this year?

Yes. We haven't really - I don't think we've had an issue with holding off projects because of driver shortages. We've been able to get them started. Look, Ryder employs over 10,000 professional drivers, so we're a very large employer. We've got a great recruiting network, so we're typically able to find drivers where others can't. Obviously, in some cases, we have to pay more than what we had expected or as the market moves, but that's when we go back to the customers and make sure we have those discussions and get the adjustments made. So no, I wouldn't say necessarily we've been held back by that. I think it's just been the timing of when deals are happening. But we're certainly looking at for the balance of this year - for the full year, really seeing a dedicated revenue growth in that high single-digit to double-digit level.

And we'll hear from Brian Ossenbeck of JPMorgan.

Sorry about that. I was reading the transcript for the first part. But the second one was really just going back to your point there on lease. Robert, do you have a sense of your ballpark how big you think you want to grow the lease fleet next year, especially as you're working more on the pricing, getting some strong pricing right now and maybe some of the initial initiatives you're working on for some of the differentiation to the extent that it affects the lease fleet. What's the rough ballpark you have in mind for next year for lease fleet growth?

Yes. We've said moderate growth. We're looking for an FMS over the cycle, so you think moderate growth for us, I would define it as 4,000 to 6,000 units maybe. So after a couple of years of not having growth, we'll probably be on the high end of that because we got a lot of deals that we're making this year that are being pushed off into next year because of the OEM delays. But the important thing to note there is those are deals that are being signed at good returns with low - historically low residual assumptions, so not a lot - much less risk than in the past and a good solid returns. So we feel good about them, and we're focused on making sure that we bring that - bring those to the table and again, continue to provide good long-term earnings growth and returns for the company for years to come.

Okay. So it seems like the pricing initiatives or at least the higher residual values - I'm sorry, lower residual values higher pricing that's being put into the market that's still being born given the level of demand and what's happening on the competitive front?

Yes. Yes. We are experiencing very good sales in lease this year - through the balance of the year. We expect that to continue for the balance of the year. So year-to-date, we've had good sales, and we expect it to continue for the balance of the year. So yes, the driver - the pricing changes that we've made, we're seeing them being accepted in the marketplace. And we are signing up to those deals as the customers are willing to pay them.

Next, we'll hear from Jeff Kauffman of Vertical Research Partners.

John, congratulations on your new role. I got to tell you, I just - I'm fuzzy with all these unpacking of changes here, so I just want to make sure I understand what's going on for modeling here. So did you lower or, I guess, raise your depreciation number on a policy basis by the $18 million, and that's why you only have the $85 million incremental benefit next year? Or are you talking about we made a small adjustment now, but maybe there's an adjustment next year because our price realizations are well above what's being implied by our depreciation schedules? Can you help clarify kind of what's changed to the permanent depreciation, what might be kind of a short-term adjustment? I'm trying to sort all this out.

Yes. I'll hand it over to John in a second. But just to step back for a minute, we made an adjustment, but we've lowered the residuals on a certain group of tractors that really further derisk those tractors from being - leading accelerated depreciation or losses in the case of a severe downturn. So if used truck pricing were to go back to trough levels that we've seen in 22 years, those vehicles, we would still have - we would still be at breakeven, wouldn't have any losses, and we wouldn't need accelerated depreciation. So you can view those as just further derisking, if you will, of those. What that amounted to was $18 million of depreciation expense - additional depreciation expenses here, which is built into our forecast. And then as you go into next year, some of that continues to roll forward. So what was $100 million of benefit next year is now only going to be $85 million. That's really the way those numbers are. Let me hand it over to John Diez.

Yes. And then conversely, I guess what that implies is, let's say, used vehicle prices miraculously don't change from where they are now, we've got another year of larger gains on sale because we're depreciating these vehicles more aggressively. Is that another way to think about it?

You will have in the future because it's the timing of when these vehicles are expected to come out. But in the future, you will have more. Yes. Yes. That's another way to think about that.

Okay. And John?

And Jeff, just for clarity, I think generally, you have it correct with your look at the $180 million that we discussed from the $220 million. That shortfall relative to the $220 million is in part the $18 million from the residual estimate changes that we've disclosed. And then you had changes in the fleet that also drove some of the movement there. But generally speaking, the majority of it was what you highlighted in your remarks in your question. So I think that gives you the color you were looking for.

Yes. Just a philosophical question on how we think about this, though. So a lot of investors, right or wrong, treat gains as onetime things, right? So they don't want to give you credit for that. And the earnings, whereas in your business, gains are really just an adjustment of what we didn't depreciate correctly over the life of the vehicle. I shouldn't use the word correctly because the market jumps all over. But I guess why do that and not lower your depreciation structurally to raise the residual value so that you're not reporting such large gains and it's showing up as pretax earnings?

Yes. Jeff, that's a great question. Look, I understand that some investors may look at gains as not being core to our business, but the way that - especially after we went through the last couple of years, we know we don't ever want to be in a situation where we're selling our used trucks for less than our residual values for an extended period of time. That was not a good experience. I certainly don't want to relive it. So our philosophy is really to have our residuals in a way where you're going to be getting gains, if not all the time, the vast majority of the time. And so a portion - as you model out the business, you have to assume that there will be gains. There will be some level of gains always in the P&L. That's what we're targeting. That's what we're trying to get to. So that's the activity we're taking - that we've just taken. I don't want to talk about depreciation on these calls. I wanted to not no longer be a point of discussion. I want to just talk about the operations of the business and all the great things we're doing in the FMS business and our supply chain and dedicated businesses. And I think the only way to do that is to have those residuals at a level where the likelihood of having losses or accelerated depreciation is very, very low. And that's really what we're doing here.

And then the point is this all rolls up into pretax earnings anyway regardless of whether it goes up as depreciation or gains, correct?

Correct.

Correct.

Bert Subin of Stifel.

Congrats on the quarter. I was wondering if you could - can you walk us through what you see as the bull and bear cases for supply chain? It seems like you're on a track to steady revenue growth, excluding some of these temporary auto headwinds. Just curious to know what factors do you expect to drive margin expansion and what do you see as the top line runway for that segment maybe on a longer-term basis?

Yes. The top line growth, we've really - obviously, it's a core part of our strategy is really accelerating growth in supply chain and dedicated. These are good return - higher return businesses, less capital intensive. So we've been making significant investments in sales and marketing and technology. You heard us talk about RyderShare, you're going to hear us continue to talk about that because that tool and that product has become a key part of our sales in supply chain and dedicated as our customers and prospects have seen what that tool can do. Relative to some of the competitors, we are winning a lot of business as a result of that. So I expect the top line organically in supply chain and dedicated to really be pushing at that high single-digit level, maybe floating with double digit a few years and over time. But in addition to that, I would tell you, we're also looking to make investments from an acquisition standpoint that are going to bring new capabilities and expand our capabilities in those areas - e-commerce, as an example. Some of the big and bulky stuff that we're doing, even adding new industries to supply chain, areas where our dedicated business can become more competitive as we look at different ways of providing dedicated. We think there's some opportunities to bring in some strategic acquisitions there. So Steve, let me hand it over to you if you want to add any additional points.

I think, Robert, just hitting again on the continued investments is critical for us, and I think it's shown how we can grow the top line, the Ever better campaign. As most of you may have seen it, earlier in the year, we're going to be relaunching that here mid-August into September, and that's adding a great deal to our top line pipeline growth, so we expect that to continue to help dedicated and supply chain as well. As Robert said, I think when we hit on all cylinders, you're looking at that floating with the double-digit numbers. But as we try to remind you, our business is very cyclical, and we're spread across a number of different verticals. So team's continuing to focus on it and always trying to improve the bottom line.

Just one clarification on that. You guys put a slide in the deck about last mile has certainly been sort of a core focus. Where does that fit into the whole paradigm here? Is that going to be sort of a margin accelerant going forward? Or is that just sort of taking advantage of where trends in e-commerce are right now?

Yes. I think what we're doing there is - if you look at what we're doing there, we've made an investment in area that's clearly a secular trend. It's taking advantage of the secular trend as more and more people are comfortable with buying things online and having things like furniture and appliances and fitness equipment delivered to their home. The capabilities that we have in dedicated, the capabilities that we have in transportation and equipment really allows us to play an important role in that market. So we do see that as an opportunity to get into that space, obviously because of the secular as a growth accelerator. So we'll grow at a higher clip than the average. And over time, we see margins there certainly being within the range of what we have for supply chain and dedicated, maybe over time, even getting to the high end of that range. So really, overall, a good business. I think the business that we purchased a few years ago through the acquisition of MXD, which became Ryder Last Mile, really is a very well-run business. We've continued to enhance the capabilities there with some of the technology investments that we just discussed around RyderView. And we have a great operating team there that runs that business very well.

And our final question for today will come from Scott Group of Wolfe Research.

So I noticed the number of lease extensions picked up quite a bit in the quarter. Is this just delayed new trucks coming in? And what's the financial impact of longer leases, I guess?

Yes. I think that's primarily as there's a delay in trucks coming in. So trucks that have life remaining, we've always had the philosophy of the truck has the life remaining, then we're going to extend that. You get a nice return on those vehicles. But I'll let Tom give you a little bit more color. Tom?

Yes. We actually saw two things. I think you've all heard about the - what's going on in the trailer market and how tight trailers are. But we saw an unusually high number of trailer extensions in our fleet this quarter more than we've ever seen. It was almost triple what we saw in Q2 of last year. And then secondarily would be OEM delays. We do have a number of short-term leases that are on our books and they typically expire in the second quarter, and we saw a large number of those vehicles get extended even more than what we've seen in prior quarters. So it was really those two things that drove the numbers.

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

Okay. No. Thank you, everyone. We're past the top of the hour, so I appreciate everybody getting on the call and staying on a little longer. Thank you for the questions, I think, but it was - there were some great questions and hopefully get a good picture of what's going on here. So look forward to seeing all of you in the coming weeks as we get out to some conferences and roadshows. Thank you.