Ryder System Inc (R) Q1 2020 Earnings Call Transcript

Good morning and welcome to the Ryder System First Quarter 2020 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Mr. Bob Brunn, Vice President Investor Relations Corporate Strategy and Product Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning and welcome to Ryder's first 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 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 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. Safety has long been a key component of Ryder's culture, and I'm so very proud of our 40,000 employees and the work they're doing to keep critical supplies flowing while putting safety first. I want to personally thank them for their extraordinary contributions to serving our customers and our communities during this crisis. On our call this morning, we'll provide an overview of our first quarter results and the impacts we've seen so far as a result of the COVID-19 pandemic. We'll also provide an update on our outlook and the actions that we're taking to improve returns in our business over time. Following our prepared remarks, we'll open the call for questions. With that, let's turn to an overview of our first quarter results. Operating revenue increased by 1% to a record $1.8 billion for the first quarter, driven by contractual revenue growth in Fleet Management Solutions, partially offset by lower revenue in Supply Chain. Comparable earnings per share from continuing operations was a loss of $1.38 for the first quarter as compared to a profit of $1.11 in the prior year. Results include $1.13 of higher depreciation expense related to previously announced residual value estimate changes and were negatively impacted by lower commercial rental performance. An estimated pretax impact from COVID-19 of $70 million also negatively impacted results. Page five includes some additional financial information for the first quarter. Comparable EBITDA for the quarter was $519 million, down 3% from the prior year, primarily driven by lower commercial rental results, partially offset by earnings from contractual growth. The average number of diluted shares outstanding was 52.3 million, down from 52.6 million in the prior year. We began repurchasing shares under a new two-year 1.5 million share anti-dilutive share repurchase program in February of 2020. During the period, we bought just over 300,000 shares at an average price of $39.34. Due to uncertain economic conditions resulting from COVID-19, we have currently paused the anti-dilutive share repurchases. Excluding pension costs and other items, the comparable tax rate was a benefit of 20.6% in Q1 2020 as compared to an expense of 27.6% in the prior year. The current rate was impacted by higher depreciation related to the residual value estimate change and lower expected earnings due to COVID-19. Adjusted return on equity was a negative 4.8%, down from a positive 12.2% in the prior year, reflecting lower earnings from higher depreciation related to the previously announced residual value changes, COVID-19 impacts, and lower rental performance. I'll turn now to page six to discuss key trends that we saw in each business segment. Fleet Management Solutions operating revenue increased by 2%, driven by growth in our contractual ChoiceLease product, partially offset by lower rental revenue. ChoiceLease revenue increased by 7%, driven by fleet growth and, to a lesser extent, higher rates on replacement vehicles. The active lease fleet increased by 5,600 vehicles versus the prior year, reflecting outsourcing trends. Rental revenue was down 13% for the first quarter, reflecting weaker demand conditions that were driven incrementally lower than expected late in the second quarter. Lower demand was partially offset by higher rental pricing of 3%. Rental utilization on power units was 64.4%, down from 74.9% in the prior year. Our ending commercial rental fleet declined by 5% sequentially from the prior quarter as planned, reflecting actions we began in the second half of 2019 to align our rental fleet size with lower expected market demand. FMS realized a pretax loss of $115 million primarily reflecting higher non-cash depreciation of $80 million due to the impacts from the previously announced residual value changes, an estimated $60 million impact due to COVID-19 effects, and lower rental results. The largest impact from COVID-19 came from $48 million of higher depreciation, consisting of $27 million in additional accelerated depreciation for vehicles we expect to sell by mid-2021 and valuation adjustments of $21 million to reduce the value of the used vehicles and inventory at quarter end. Used vehicle prices and sales volumes in the first quarter were generally in line with our prior expectations. However, sales activity fell significantly late in the quarter as the impacts of COVID-19 began to emerge. As a result, used vehicle inventory levels at Ryder and in the overall market are increasing. Higher depreciation reflects our changed outlook for used vehicle pricing in the second half of 2020, which we now expect to be lower through year-end versus our prior expectation of a moderate increase. We experienced incrementally lower rental demand trends late in the quarter due to the slowdown in business activity related to COVID-19, which resulted in a negative impact estimated at $8 million. We also increased our bad debt reserves due to slower payment activity from some of our customers. Our ChoiceLease business has not been significantly impacted to date, although we are expecting lower lease sales activity due to weaker economic conditions. Lower lease sales, as well as the redeployment of rental vehicles to fulfill these contracts, are expected to result in lower capital expenditures as well as full-year free cash flow above our prior record of $600 million. Page seven highlights used vehicle sales results. We sold 5,500 used vehicles during the quarter, up 12% versus the prior year and down 8% sequentially. Used vehicle inventory held for sale was 11,600 vehicles at quarter end, up from 7,600 in the prior year and above our target range of 7,000 to 9,000 vehicles. Inventory increased by 2,200 vehicles sequentially reflecting a greater number of units coming off lease as expected and downsizing of the rental fleet. Proceeds per vehicle sold were down 26% for tractors and down 6% for trucks compared to a year ago, reflecting continued market weakness. Sequentially, tractor pricing was up 1% and truck pricing was down 2%. I'll turn now to Supply Chain on page eight. Operating revenue decreased 2%, reflecting previously announced lost business and COVID-related volume reductions in the automotive sector, partially offset by higher pricing and increased volumes in non-automotive customers. SCS pretax earnings were down 4% due to COVID-19 impacts, prior year insurance rebates, and increased medical expenses. These impacts were mostly offset by higher pricing and increased volumes with nonautomotive customers. The estimated $10 million impact on Supply Chain from COVID-19 was primarily due to a $6 million impact from automotive industry production shutdowns. Turning to Dedicated on page 9. Operating results -- operating revenue was up slightly reflecting higher volumes and pricing, mostly offset by lost business. DTS earnings before tax decreased due to a $4 million impact from the previously announced change in residual value estimates for vehicles used in DTS, prior year insurance rebates, increased medical expenses, and bad debt reserves. These impacts were partially offset by higher pricing and volumes. DTS did not experience any material impact from COVID-19 during the quarter. At this point, I'll turn the call over to our CFO, Scott Parker, to cover several items starting with capital spending.

Thanks, Robert. Turning to page 10. First quarter gross capital expenditures were just under $400 million, down by about $700 million from the prior year. This decrease reflects lower investments in lease and rental vehicles. Weaker economic conditions due to COVID are expected to result in lower lease sales activity and capital spending for the balance of the year. Our expected range of 2020 gross capital expenditures is now $1 billion to $1.4 billion, below our $2.1 billion forecast prior to COVID and lower than the prior year of $3.6 billion. We're now expecting record free cash flow in 2020, reflecting the countercyclical cash flow nature of our business model. Proceeds from sales of $103 million were in line with the prior year as higher used vehicle volumes were offset by lower pricing. Net capital expenditures decreased by over $700 million to $289 million. Turning to the next page, we generated $542 million of total cash for the quarter, down 8% from the prior year primarily due to higher working capital needs. Free cash flow was a positive $111 million, up by approximately $550 million from the prior year, reflecting lower capital expenditures. Debt to equity at the end of 2019 increased to 364% due to the lower earnings reflecting residual value estimate changes, COVID-19, and the impacts of foreign exchange. A higher cash balance as we increased liquidity in response to COVID increased our debt to equity ratio by approximately 15 percentage points. At this point, I'll turn the call back over to Robert to discuss our outlook and potential impacts from COVID as well as to provide an update on our actions to increase returns.

Thanks, Scott. Given the uncertainty from COVID-19 and the resulting economic impacts, Ryder recently suspended providing financial guidance until visibility improves into the magnitude and duration of the crisis. Our liquidity position remains solid and was enhanced in April due to our execution of a $400 million syndicated term loan, completion of a $400 million public bond offering, and renewal of our $300 million receivables-backed financing facility. As a result, we currently have $1.7 billion of available liquidity, including approximately $1 billion in cash as of April 28, 2020. This liquidity positions us well to support operations and fund $600 million of remaining 2020 debt maturities. We also expect to continue to pay our dividend, which we have long viewed as an important way to provide returns to shareholders. In addition, given the economic slowdown due to the pandemic and the countercyclical cash flow inherent in our business model, we anticipate generating record levels of free cash flow in 2020. As a result of lower expected used vehicle demand and pricing, we anticipate increased, accelerated depreciation in 2020 for vehicles to be sold by mid-2021. We've lowered the residual values that we are using on these vehicles to below historical trough levels. Based on these lower residuals, we expect accelerated depreciation in the second quarter of approximately $30 million above our original expectation. This amount would decline throughout the remainder of the year so that the full-year impact will be approximately $80 million of additional accelerated appreciation. As always, the residual values used to determine accelerated depreciation could be modified up or down as market conditions develop. Additionally, if market prices do not fall as much as anticipated, we could realize gains on these vehicles to be sold in the near term. We are also taking actions to redeploy rental vehicles into contractual lease, Supply Chain, and Dedicated applications as we have seen rental demand decrease significantly due to the substantial reduction in business activity following COVID-19. Our rental utilization percentage for power vehicles for April is estimated to be in the low 50s compared to historical levels in the low 70s. We estimate that every percentage point change in utilization impacts monthly pre-tax earnings by approximately $1 million until the rental fleet size can be aligned with market demand. Due to production shutdowns, SCS volumes with automotive customers declined significantly. Our automotive customers generally expect production to resume throughout May; however, the timing and pace of the ramp-up are subject to change. Continued full production shutdowns in North America would impact Supply Chain earnings by approximately $15 million to $20 million per month, including fixed costs required to maintain production readiness. ChoiceLease operations are not expected to be significantly impacted by the effects of COVID-19. We've seen slower payment activity with some customers, and as a result, increased our bad debt reserves. We now expect a comparable tax rate of approximately 20% for the full year 2020, below our prior forecast, reflecting lower expected results from COVID-19 effects. We took action in early April to reduce discretionary spending and overhead costs by a total of $20 million in the second quarter, including employee furloughs. Turning to page 14. We remain focused on achieving our long-term return on equity of 15% over the cycle. The segment operating revenue and pre-tax earnings goals we outlined on our last call are key components to achieving this target. I'd like to emphasize that reaching our adjusted return on equity of 11% is only an interim target, and we expect to make significant progress towards that as we move past higher levels of depreciation related to the residual value estimate changes. Turning to Page 15. While the unprecedented challenges that we are currently facing present a setback to our earnings in the near term, we continue to make progress on our strategic initiatives to increase returns over time. We're continuing to implement meaningful ChoiceLease price increases in order to raise returns and de-risk the business in light of the volatility of the used truck market. Revenue per unit for new leased vehicles is up by mid-single digits compared to new leased vehicles in the prior year as a result of price increases in 2019. In addition, we implemented a mid-single-digit price increase on our new ChoiceLease capital in the first quarter of this year. We're on track to achieve expected annual savings of $30 million in 2020 from our multi-year maintenance initiative, bringing the program savings to date to over $60 million. We expect that our previously announced decision to discontinue the liability extension program on customer leased vehicles will benefit 2020 comparable results by approximately $37 million. This action will also reduce our exposure going forward. Please note that revenue for this product is no longer included in operating revenue for all the time periods as shown on Page 25 in the appendix. As we discontinued the product line, the expenses related to this program are no longer reflected in comparable earnings effective January 1, 2020, when we announced the discontinuation of the product line. In used vehicle sales, we're focused on directing as much volume as possible through retail channels where we generate higher proceeds than other channels. So far this year, we increased headcount in our inside sales team and opened new retail sales locations, with three additional locations planned in the second quarter. In addition, we're launching a remote delivery program for used vehicles that will expand our geographic reach beyond our existing retail locations and get us closer to our customers by leveraging our shop network. The COVID-19 pandemic has heightened awareness of the importance of a reliable and efficient supply chain. New trends and opportunities will emerge as a result, including an increase in near-shoring and growth in e-commerce and last-mile services. I expect increased demand for the sophisticated North American logistics operations provided by our supply chain and dedicated businesses, as well as an elevated level of visibility, transparency, and collaboration across the supply chain provided by our RyderShare visibility and collaboration tool. I also believe Ryder will find many new opportunities to provide even greater levels of products and services in a post-COVID-19 environment. Make no mistake, the months ahead will remain challenging. I'm confident in the ability of the men and women of Ryder to come together in support of our customers, our shareholders, and our communities and each other. That concludes our prepared remarks this morning. Before we go to questions, please note that we expect to file our 10-K later this week. I'd also like to note that based on our investor feedback, we've added a new disclosure item; EBITDA by business segment. This disclosure will provide you with additional insights on our business and can be found in the appendix of the earnings call slide presentation. We got a lot of material to cover today, so please limit yourself to one question. If you have additional questions, you're welcome to get back in the queue and we'll take as many as we can. At this time, I'll turn it over to the operator to open up the line for questions.

Thank you. [Operator Instructions] And we will take the first question from David Ross from Stifel.

Yes, good morning, gentlemen.

Good morning, David.

So in the first quarter, there's a $70 million estimated pre-tax impact from COVID-19. Given what you've seen in April so far, do you expect that to be a greater impact for the second quarter?

Yes, I would. I would expect -- certainly it's dependent on what happens obviously in May and June. But those things that we saw in April -- I'm sorry in March, we expect -- for example in rental, we expect that to be a bigger impact in Q2 because we only had a couple of weeks of that. The accelerated depreciation impact that we had in Q1, I would expect about the same in Q2 as we really started accelerating that depreciation in Q1 for the lower residual. So I would expect that you're going to have -- we had $27 million in Q1 for accelerated depreciation. You'll have another $27 million to $30 million in Q2, and then really drops off in the second half of the year as those units really start to sell off. And then the last thing is really on the supply chain auto piece. I do expect that we're going to have -- obviously we had the impact of April pretty much having a full shutdown. But as we get into May, I would expect to see it start to come back and then start to see some of that recover.

And do you think early terminations are going to play any part in that, because they didn't tick up much in the first quarter. I don't know if you're seeing an uptick finally in April that's going to lead to some more cost issues?

Yeah. I'll let John Diez answer that in more detail, but we did not see a whole lot happen in Q1. As you know we've got a pretty diversified portfolio of lease customers. So with that, you're not going to have an overwhelming headwind from that, but you could have some. Let me hand it over to John for more color.

Yes, David. With regards to our lease portfolio and what you're seeing in early terminations, if you look at the appendix, we didn't see a significant tick-up in March and in Q1. But if you look at what is going to be the lasting impact of COVID on the business, I would say, look primarily our small customers may see an impact. Our big accounts, which represent a good portion of the business, we're not seeing that much of an impact on any of those. But we are monitoring that. We have seen requests for payment deferrals. But on the early termination side, we haven't seen much thus far. So right now, we're pretty confident that the lease portfolio is holding up pretty well.

Good. Thank you.

Okay. Thank you, David. Operator, we’ll take the next question.

Yes. [Operator Instructions] And we'll now go to Justin Long with Stephens.

Thanks, and good morning. Just because things are changing so rapidly, I was wondering, if you could comment on the used truck pricing environment in the last 1.5 months or so. Curious what you're seeing. And as we think about that accelerated depreciation assumption, could you provide some more color on what that assumes for used truck pricing? Is that assuming that the decline we've seen in the last month and a half holds? Does it assume things are getting worse? And then finally, I would love to get your thoughts on policy depreciation and any changes we could see on that front? Thanks.

Okay. Thank you, Justin. A good question. First of all, we did not see any pricing decline in the first quarter in used trucks. So the adjustment that we did to our residual values is really based on our expectation that since volumes were down -- came down in the back half of the quarter that we would then see some pricing pressure in the second half. So that -- I'll let John maybe give you a little more color on anything we're seeing in April. The second thing is how far we lowered those residual values. I think it's important to note that we've lowered now those below our historical trough levels. So for tractors, we're below the trough, which was back in 2002 in terms of pricing. And for trucks, we're below the trough that we hit in 2009, I think it was during the Great Recession. So we have brought those levels down pretty significantly. If we come in better as I mentioned you'll start to see some gains. And obviously, we would adjust it if we saw it come in any different. So I think those are -- those hopefully gives you a little bit of an idea of what we're doing. Obviously, my number one goal over time is to try to get this used truck issue behind us. And I think by -- certainly by taking on the depreciation starting in Q1 is helping us do that. In terms of policy, I'll let Scott give you a little bit more color on that too in a second after John talks. But obviously, we go through our normal process. We would now pick up policy adjustments as we go into next year. It all depends on what happens with pricing really over the next year. And what our view is because remember we changed our policy process to now take on not just a rolling look back at five years. We're actually incorporating our view of the next year. So that's going to be an important component to this process. So let me hand it over to John first to give you some color on what we're seeing in April.

Hey, Justin. Yes, just to reiterate what Robert said, during Q1, we didn't see sequentially a meaningful difference in pricing both for trucks and tractors sequentially. But as you get into April, and it's a little bit soon to tell with April even yet, what we are seeing is the significant decline in volumes. What I would tell you is the wholesale market for the most part has dried up. We are seeing good retail activity and pricing remains fairly stable, but it is declining relative to what we saw in Q1, and we expect that decline to continue throughout the year now. Previously, we were expecting that decline to reverse course in Q3 and Q4. But now we're expecting with rising inventory levels that will continue through the balance of the year.

Scott?

Yeah. Justin, on your question about policy depreciation, as you remember, policy depreciation is a longer-term outlook on where we think used pricing and residuals will be for the book that matures greater than kind of right now 2022 and beyond. So we will -- given the uncertainty of the COVID, we will be looking at our policy depreciation in the second quarter. And we'll have to run different scenarios to kind of see what kind of the future as John and Robert just mentioned what the expectations and some of the analysis around 2021 and 2022 kind of expectations for the market. So we'll take that into consideration in the second quarter and we'll update you as we get through that process.

Okay. Great. I appreciate everyone. Thanks for your time.

Okay. Thank you, Justin. Operator, next question.

And at this time, there are no additional questions. So I'd like to turn it back over to Mr. Robert Sanchez -- I'm sorry, we did have a couple of people just pop into the queue. So let me go to David Ross again. Please go ahead.

Yes, I was trying to restrain my questioning activity earlier, but I get another shot. So I want to talk about just the competitive dynamics in the industry given this unusual situation we're in. And Ryder is fortunate to have a broader portfolio. Are you expecting any industry consolidation to come out of this? There's a lot of the smaller regional leasing companies that have a less diversified portfolio. What are you seeing on the competitive landscape? And will there be any acquisition opportunities in the next few quarters?

Yes. David, I guess the floor is yours. You're the guy with the question. So yes, the answer is, as you know, there was a lot of industry consolidation maybe about 10 years ago. So a lot of the kind of the more regional players were consolidated; most of them came into Ryder. I think as we go forward, you might see some of the smaller ones looking to move out depending on how much pressure they get, particularly around the used truck market. But as you know a lot of those transitions are family businesses and they're looking for generational transition. So it really depends on that, but we're always open and looking for opportunities in that area that makes sense for us that could bring value. So we'll continue to look for those opportunities.

And then given such a sharp downturn in rental activity, are you seeing any competitive issues there with rental rates being screwy?

That's a good question, David. We haven't seen a whole lot yet. If you recall during the last -- in the Great Recession we were fortunate that rental rates really did not take much of a steep decline. So it really just depends on how the market behaves here over the next several quarters and what happens with demand too. So we have not seen a big decline at this point. As you saw in the first quarter, we had -- we were up 3% on pricing and rental. So, John, I don't know if there's anything you want to add to that?

No. I think that's right. So far, we haven't seen anything that is out of the norm from the marketplace. As demand starts popping back up then that's when we expect that we'll see a more competitive landscape. But in the short term, we haven't seen anything meaningful in pricing activity. Robert?

Scott, with such strong free cash flow expected this year once we get through this uncertain period, which will happen at some point, how are you thinking about share buybacks especially if the stock remains down at these depressed levels versus debt pay down and then further reducing leverage?

Will you take that? Scott are you there?

Yes, David what I'd say is, clearly we are a little bit above as you know our target leverage ratio. Some of that is because of some of the excess cash we had. We also had a little bit of an impact from currency kind of movements with the U.S. dollar strengthening, which impacted some of the currency adjustments in our equity. But I think as we look forward, our primary focus is going to be to kind of get our leverage back in line with kind of where we were planning on for it when we started the year to get it back down into the -- close to the 300% level. And then, if there's more certainty that comes through the rest of the remainder of the year, it is an item, David, that we would kind of look at more as a broader kind of conversation around kind of the activities going forward versus kind of just because of given all the different things that we're kind of working through right now.

And then lastly, maybe a question for Steve on the Last Mile business. Any update on how that's fared through this coronavirus period?

Yes. Steve, do you want to -- you've got any update on that?

Yeah. I can take it. Yeah, I think if you look at Q1, we had a really good Q1 volume. And new sales were up right at the low end of our range around 10%. We do have a good diverse set of customers. And I'd say here in the month of April, volumes have been kind of up and down really tied to some of the shelter and place restrictions, where some of our customers were deemed nonessential. But then in other locations, we've seen volume increases like in bedding and exercise equipment. So all-in-all, I think they held pretty steady in the month of April, and we expect the pipeline to continue to be healthy as we look at Q2 and Q3 and more customers looking for the capabilities. Back to you Robert.

Excellent. Yeah. Thank you very much.

Hey, David, the one thing I’d add to that, I think Supply Chain is -- as we make a very strong-performing segment along with Dedicated in spite of these challenges that we're seeing a little bit temporarily here in automotive. But we did -- I did mention it on the call. I wanted to just reiterate that, we have provided some additional transparency around the segment, particularly around EBITDA, to really help all of you with the valuation of the segment, and therefore the valuation of the company, which I think when you apply some of the market multiples you'll see the value that we have in that Supply Chain Dedicated business and really the value of the whole company. So I just wanted to make sure that you guys take a look at that.

And we will now go to Ben Hartford with Baird.

Hey. Can you guys hear me okay?

Yeah. I hear you Ben.

Okay. Thanks. Forgive me. And maybe Robert could we just kind of start with your -- well that final comment about the value of the entire company. As you think about FMS in this environment given what's changed some of these additional price increases in ChoiceLease and some of the interim and longer-term return targets you've discussed, how do you think about intrinsic value with regard to FMS given what has changed? And maybe you can talk a little bit about the pathway to get to that interim target of 11% ROE and the longer-term 15% ROE target given what has changed? Because it seems like that's – the focal point here is just about what FMS is worth.

Yeah. I think Ben I'm actually very bullish on FMS and what's going on. If you think about the vintage chart that we showed in the third quarter, what we're really suffering through right now is those vintages of 2012 and 2013 where we've had significant challenges with the maintenance costs and now have significant challenges with the residual values. As we get out of those, and you start – even in this environment that we're in today as we get out of those and you start to see the drop-off of depreciation from those vehicles and the accelerated depreciation and we get into the next couple of years, you're going to realize a significant benefit on returns in FMS and also returns at Ryder. So some of this stuff just happens naturally as those vintages kind of roll off. And the other part that really gets me very excited about what's going on in FMS is the fact that the new business coming in is coming in at a much better rate and a much better return level even with some more conservative assumptions. So there's still a lot of work to do. Obviously, we've got work to do around the maintenance initiatives that they're working on in that sector, to make sure that we have the enough retail sales capacity to get out of the used trucks that we have coming at us. So John and the team are putting a lot of work into that piece of it. We are looking at certain geographies, certain accounts where we're not getting the appropriate return. And we are pulling back on spending capital in those areas which I think over time also will help get us to the target returns over time. So the key thing here is that we have a line of sight to get us to a 15% return on equity over the cycle on an ongoing basis. So that is the number one focus. Everything we're doing at Ryder right now is really consistent with us -- with that 15% ROE. So we're making decisions on a daily basis to understand -- to figure out is this decision going to help me get to the 15% or is it going to hurt me and really using that in any type of either operational decision we make or capital decision we make.

Great. The comment about April utilization in rental was helpful. Can you talk about what the plan looks like right now to get utilization rates back into the 70s? Is it more normalized levels? Obviously the demand environment is uncertain. I think I heard a comment about the wholesale channel having dried up. So interested in how you guys are evaluating redeployment of assets into perhaps leases versus just idling equipment to help improve utilization into that context as well. Can you provide a little bit of kind of perspective on that walk back to normalized levels?

Yes. We've got a lot – obviously with that level of a gap in utilization that's a lot of vehicles that we have to move. So over time we do need some help from the demand side, which I feel pretty confident we're going to get. If you think about it April was the month of complete shutdown across most of our markets. As they start opening up now, we expect to see pickup in demand, which is going to be a big help. We're actually seeing even the rate of decline over the last week or so really start to come down. So still coming down but certainly not at the same clip, so which kind of indicates that we're getting to a bottom here on demand. So we should see some pickup in demand. In the meantime, we are really looking to fulfill just about every lease customer demand that we get with redeployed rental equipment. So the sales force is completely focused on that effort. We've got a great sales force with a lot of great relationships with customers. So really looking to leverage that investment we've made in the rental fleet and bring it over into lease customers. We're also – where we have to replace dedicated or supply chain or growth in those areas, we're using redeployed rental equipment wherever we can there. So that's where you're going to see a big drop-off in CapEx per lease, because we're – in this time period, we expect to be able to fulfill most of that lease demand with rental. So that should help us get that lease fleet down. We're probably looking at – based on historical we typically could move 500 to 600 vehicles a month through that process. We may do a little bit more here in this time period. But to give you an idea that's how much we move that way. Then the rest of it we moved through the used truck channel.

Okay. Are you managing the lease termination process any differently given how different this environment is versus other downturns? I know we're getting towards month end and so there's cash collection concerns or focus. And we haven't seen that sharp uptick in terminations. Or would you – to...

Let me – I'll hand – yes, let me hand that over to John, because he's doing a great job with his team on doing that. I think the key thing to remember is that in most cases number one, we have a pretty good credit process that we take our customers through. Even during the Great Recession we did not have a lot of vehicles really come back prematurely or bad debt. And that's because of that credit process. You're right. This is a little bit of an extraordinary situation. But what we find is that most of our customers do pay for their truck leases because they know that without that they can't get their companies restarted. There are some -- obviously some more requests over the last several weeks of people wanting to make adjustments to their payment and maybe some deferral. So I'll let John give you a little bit more color around that process.

Yes, Ben. As Robert mentioned, if you look at our underwriting practices even historically from a lease perspective, our default rate is very, very low. Even in this environment, we think defaults will be manageable. With regards to what we're seeing from our customer base the majority of the discussions we're having with customers today is kind of short-term liquidity pressures that they're seeing in their business. So they're looking for either some, sort of, cash flow or payment deferral short term. But as far as commitment to their existing leases what we continue to see from our customer base is they're committed to those leases. They do expect their business to come back. And right now we don't expect this lease portfolio to see a great number of terminations in the next couple of quarters. So a lot of what we're seeing is just short-term payment cash flow deferral issues that we expect that to come back by the end of the year.

Okay. That's great. And then one last one if I could. Just Scott, your commitment to the dividend is understood and the nature of the free cash flow this year as well. But under what circumstance would you think that you'd be forced to reconsider the level of the quarterly dividend? Obviously we're in an extreme environment at the moment and the commitments there. Under what circumstances do you think that would need to change?

Scott?

Yes. Ben, I would say that I think it's probably too early to kind of do that forward look. I think what we think about clearly is as Robert mentions, we see the dividend as the very important piece of our overall shareholder return strategy. We look primarily at our kind of cash flow liquidity, which is paramount right now for us to support our customers and to run the operations. Clearly, another important aspect that we do look at is kind of our credit rating in regards to staying in that strong BBB rating. And so I think when you think about what could change that would be the kind of the depth and longevity of the impacts of the COVID situation that we would have to take into consideration kind of relative to how long that is. And if it gets more severe, we'll constantly have to reevaluate our lens through kind of cash liquidity business performance and our credit rating.

Yes. That’s helpful. Appreciate the time. Stay safe, guys.

Thank you, Ben. You too. Operator, next question.

Yes. We'll go to Stephanie Benjamin with SunTrust.

Hi. Good afternoon. I just had a question on the Supply Chain business. I think looking at it this quarter it's a little messy it's a loss business that was known. And I think as we all expected given your exposure to the automotive space that impact and how that'll continue in 2Q. But I was hoping you could talk about some of your other customer vertical concentrations and what you're seeing from them either a pickup or slowdown but more importantly maybe some conversations you're having now with prospective customers that are looking at this impact of the virus that might actually drive incremental demand for your services as we kind of get through this. Just would love to get any color that you have on just probably future opportunities within supply chains. Thank you.

Well, Stephanie, I've always said that the tougher of what we do becomes the better it is for Ryder. And I got to tell you supply chain because of the COVID-19 has become a lot tougher for everybody. You probably heard on the news and in the media a lot of discussion about supply chain and logistics whether it's for hospitals or for ventilators, grocery stores there's just a real focus on it. And I think most companies have really gotten a heightened awareness of this importance if they didn't have it already. And really they're looking for a more sophisticated and nimble supply chain which is exactly what we do at Ryder as one of the leading 3PLs in North America. The other thing, I think, which is important is that clearly with what's happening now with COVID-19, what happened with the trade dispute if you will with China has certainly got a lot of companies thinking more towards near-shoring versus being in Asia. And I think that's also very good for Ryder because we made the decision years ago to be primarily a North American logistics provider. It's where our core competency is where our expertise is which is U.S., Canada, and Mexico. And we see more companies as a result of this COVID-19 looking to make that move which I think will bode well for the services we provide there. So that just gives you a little bit of an overview of kind of what we're seeing in Supply Chain longer term. But I'll let Steve give you some more color as to what he's seeing in the more immediate term.

Yes, Stephanie, I'll give you a little bit of color here across some of the other verticals. Certainly, in CPG, we've seen an uptick over the last three or four weeks in volume shipped. I think one of the nuances there is that typically we were shipping multi-SKU pallets into the retail store network. And with COVID, we flipped more to a full-pallet direct ship to store. So while it is incremental volume it kind of takes less headcount to operate that. So I think maybe a little mix give and take there. Retail certainly we've seen some of the nonessentials slow down a little bit. But in addition to the near-shoring and on-shoring, I think one of the things that we're seeing right now is visibility. And with our RyderShare platform that we launched a couple of years ago, we got plans right now to roll that out to all of our dedicated customers here in the first half of the year. We began our first transportation management customer a couple of weeks ago. We've seen really a request from our current customers to get that rolled out quicker and we've seen a new demand from new customers that are very interested in the platform. So our sales team has been going through extensive training and they're proactively going out to their targets to push that. I would also say that e-commerce, while we opened up our third node up in Pennsylvania here over the last couple of weeks, we have seen a spike in volume there as you would imagine. Remember we're in the early stages, we had a handful of customers there in the three locations, but the volume has been up about 100%. So still a very small part of the revenue stream but we would believe that customers would look for e-commerce just like they will last mile. Back to you Robert.

All right. Thank you, Steve.

We'll go to Scott Group with Wolfe Research.

All right. Good morning guys. So a couple of things I just want to clarify on the used side if I can. So your comment accelerated $80 million above prior plan. Was that a full-year comment or just rest of year? And then can you give the '21 impact on accelerated relative to the prior plan?

$80 million is for the full year. So that includes the amount that we took in the first quarter of $27 million. So that leaves it with just what, $53 million for the balance of the year. In terms of what it means for 2021, we really haven't had any additional changes. As you know, we were depreciating all the vehicles that we think we're going to sell through the middle of 2021. We're depreciating all those vehicles through the end of this year. So we have not made a pick yet on the vehicles beyond that. Those vehicles that are going to sell after the middle of 2021 are currently depreciating to our policy -- our new updated policy level. So that will be part of the process we go through in the next quarter. Scott, is there anything else that I need to have Scott Parker anything else you need to add to that?

No, I think Robert, you covered it. So what we provided was exactly what Robert mentioned in regards to the 2020 impact as was asked earlier by Justin. In the second quarter, we'll be looking at the longer period both on the policy side and to your question about the units that would be beginning to be sold late in 2021 going into 2022.

Okay. The sensitivity on the, I guess the decremental earnings at rental was helpful. Would you think that the incremental earnings as utilization recovers is any different than the decremental you laid out?

Yes. John, I don't know if you want to give a little color. I don't believe so but John you got any additional stuff on that?

Yes. What I would say to that is, it's a fleet state constant than you would expect a kind of a similar recovery on. But we are looking at continuing to redeploy units from our rental fleet to lease applications as you heard from Robert earlier. So as you see demand start coming back online. We are going to continue to right-size our fleet through the balance of the year and hopefully gain some incremental margin from those actions.

So if it's...

Yes. So in the short term the $1 million down is also $1 million up. And in the short term the $1 million down can also be $1 million up if it goes the other way.

Okay. And then just last question on this EBITDA breakout for the segments, Robert do you think you're capturing the value of supply chain? And I'm sure you've gotten this question some recently but, how do you think about opportunities to potentially sell or spin supply chain? Is that something you guys are considering?

Yes. Look I think supply chain is an important part of Ryder and it's an important part of our future. I think the first step is making sure that we're giving all of you the transparency to be able to appropriately value that and also the appropriate value of the whole company. So that's surely what we're doing here is we're increasing the transparency. So you have the tools and the numbers that you need to run the valuations. I think given an appropriate valuation of the whole company, it's obviously a much higher number than what the stock's been trading at. So what we're trying to do here is just give you tools you need in order to appropriately value each of the components.

Do you think it could be sold, or would it have to be spun?

There's different ways to do it. It could be either one. But as I mentioned I think right now it's clearly an important part of our company and our future. We always look at what our options are from a portfolio standpoint. If we were to sell it, there would be more of a tax bill to pay versus a spin. But again, we're currently looking at how do we continue to grow this thing and how do we make it even more valuable over time.

Thank you for the content.

Thank you, Scott.

And we will now take a question from Brian Ossenbeck with JPMorgan.

Hey, thanks. Good morning. Appreciate getting me on the call. Just a couple of smaller ones on the broader used truck industry. Robert, in the past, you've given us some context on inventory levels as you see them across the broader space not just at Ryder's. So maybe you can give us some color there as to where they stand now either in April or at the end of the quarter. And then just specific to trends in pricing, did you see anything any sort of impact from the Celadon liquidation? It feels like it was a long time ago. Obviously, other things are happening now. But did that pull forward any demand in your view? And then the last part really was just on day cabs, given what's happened in the energy industry knowing you don't have a direct exposure there, but these are still utilized in that application. Can you just remind us what split of day cabs is within that inventory balance versus sleepers?

Yes. Brian, I guess what -- I'll let John give you a little more color. But what I can tell you about it the used tractor pricing which is what you're talking about is that it was behaving prior to this COVID-19 we were seeing it behaving actually slightly a little bit better than what we had expected coming into this last month. So pricing was still declined, but certainly not as quick a clip as we had originally expected. Trucks was actually a little bit worse than we had expected. So those were the -- that was kind of the offset. So as I look at that going into April, certainly what we saw was a volume decline. And that volume decline we assume over time could turn into more of an acceleration in price decline. However, I can tell you that we are certainly at historical troughs or we are heading towards historical troughs in terms of pricing. So there is a price at which I think it just bottoms out and if you don't need a tractor you don't need a tractor. So I think we're getting -- certainly what we've put in these residual -- these updated residuals is that those -- what I believe is at those levels. So I'll let John to give you a little bit more color on what we're seeing in pricing certainly post the Celadon stuff and also overall inventory levels. John?

Yes, Brian. Just on the tractor side, which I think is where your question is geared at, if you look at wholesale as well as retail pricing throughout the quarter, it kind of remained fairly steady. So we saw both on the retail side and the wholesale side, which is kind of where you would have seen the transaction impact there. And then when you look at the split, our inventory is 50% tractors, 35% trucks, and about 15% trailers. If you look at that 50% on the tractor side, day cabs is about 30% of the 50% and sleepers is about 20%. That hasn't really changed much sequentially. But if you look at year-over-year, day cabs has grown a little bit more. It went up from 20% of the inventory up to 30%. But over the last couple of months, we haven't seen much change in our inventory mix with regards to day cab/sleepers. So what I would tell you is throughout the month as Robert mentioned, pricing and kind of the activity we were seeing was fairly consistent with our expectations. Now as you get into April, we are seeing that wholesale market kind of dry up. And then we expect that hopefully to start recovering, once we get deeper into the quarter and into the second quarter here. So hopefully, that gives you color around the activity you were looking for. Robert?

Thank you. That's helpful.

Thank you, Brian. Operator next.

Yes. Kauffman with – yes, we'll go to Jeff -- with Loop Capital. Please go ahead.

Thank you very much. Hey, everybody. How are you doing?

Hey, Jeff.

I just want to try to get some detailed numbers right here. I don't know if it's where I'm signing in from, but I can't seem to download the presentation. Did you say you were going to reduce the rental fleet 5% sequentially? And the guidance was for the rental fleet to finish the year down, was it 8% or 9%? Am I -- got those numbers right or wrong?

Yes. No, what we said is we reduced it sequentially 5% in the first quarter.

Okay. In first quarter. Okay.

Now -- right. So now we're going to reduce it -- we're looking to reduce it further obviously of what we're seeing in demand. But again, we're going to start reducing the rental fleet as demand hopefully starts to come up here over the next several months. And at some point, those two meet and we get back to our target utilization. So that's -- the unknown is how -- is the pace at which that demand comes back. I do believe that April is a trough, simply because that's where everything was shut down and we'll see it start to come back.

What do you think -- understanding that this is an unusual trough and we probably finished the year in a better place than second quarter, what do you believe the right size of the rental fleet is relative to the full-service lease fleet?

Yes. The way we typically run it is 20% to 25% of the lease -- of the revenue coming from rental. So it's about 20%, 25%. Clearly, as -- the more we can bring that down, the less risk you have in the portfolio. So we have been looking to keep that on the low-end. However, when the economy comes back, we tend to naturally move initially towards more rental. Rental is basically a leading indicator. So it looks like we see rental decline pretty sharply here in March and April. As things start to pick up I would expect rental to be the first place we start to see it. So, again, I think it's in that 20% to 25% is typically the sweet spot of what we're looking for. And as things pick up, right now, it's going to be on the low end something below the low end. And as things pick up, it will start to move back again the other way.

Okay. And let me just follow-up with a depreciation and amortization question here. It looks like the gross was about $525 million in the quarter. And I'm assuming that includes the latest adjustments. So, as I think about getting through 2020, if I assume no additional changes at this point, what kind of gross depreciation rate are we running as we get to 2021?

Well, I think we've got -- a lot has to happen between now and then. It all depends on what happens also with our rental fleet and how much vehicles we sell. But let me hand that over to Scott, maybe he can give you a little bit more color. Scott, are you on?

So, yeah, the gross debt is just a little bit over $8 billion, as of the end of the quarter. And I think I mentioned that we're carrying some excess cash just given the current environment. And the revenue earning equipment is around $10 billion.

And I was thinking more as of today have those numbers changed materially, quarter-to-date?

Well, on the debt side, clearly, we did issue a medium-term note after the quarter end; the other facilities we also extended our accounts receivable facility. But that was in place prior to the end of the month. So I think, the big driver would be the kind of the note that we issued the $400 million note we issued in the beginning of the month. We do have an expected -- we do have a maturity in early May of $300 million that would -- part of those proceeds would be used to pay that down. So I don't think it's a material change from where we ended the end of the month.

Okay. Great, I appreciate...

Tesla not as good a measure because lower, that would -- credit process. Even as their inventory changing being utilized for lease versus rental. Thanks. At some point in time this fluid mechanics unless I've asked.

Yes, thank you.

Thank you. That concludes our earnings call. Please feel free to reach out to the Investor Relations team if you have any additional questions.