Ryder System Inc (R) Q1 2024 Earnings Call Transcript

Good morning, and welcome to the Ryder System First Quarter 2024 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 Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin.

Thank you. Good morning, and welcome to Ryder's First Quarter 2024 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 Fleet Management Solutions; and Steve Sensing, President of Supply Chain Solutions and Dedicated Transportation Solutions, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to Robert.

Good morning, everyone, and thanks for joining us. I'm extremely proud of our team for delivering solid results again this quarter, despite freight conditions that remain challenging. Our operating performance continues to demonstrate that the transformative changes that we've made to derisk our business model, enhance returns and drive long-term profitable growth have significantly increased the earnings and return profile of the business versus prior cycles. I'll begin today's call by providing you with key strategic updates, as well as an update on the integration of Cardinal Logistics. John will then take you through our first quarter results, which exceeded our expectations, reflecting better-than-expected used vehicle sales results and benefits from our maintenance cost savings initiative. I'll then review our outlook and discuss how we have positioned the business to benefit from the cycle upturn. Let's begin on Slide 4. Executing on our balanced growth strategy continues to drive outperformance relative to prior cycles. Across all phases of the current freight cycle, our earnings and return profile have been higher than prior cycles, demonstrating the effectiveness of our strategy. The integration of our recent acquisitions of Cardinal Logistics and Impact Fulfillment Services, or IFS, is on track. As you may recall, we completed the acquisition of Cardinal Logistics on February 1, enabling growth and further strengthening our position as a leading provider of customized Dedicated Transportation Solutions. I'll provide some additional information on this integration shortly. November 1 of last year, we completed the acquisition of IFS, which added co-packaging and co-manufacturing capabilities in supply chain, primarily supporting our CPG business. We continue to see long-term growth opportunities in all three of our business segments, supported by secular trends that favor outsourcing decisions, large addressable markets, and the value our solutions bring to our customers. Our initiatives remain focused on enhancing returns. Adjusted ROE of 17% for the trailing 12-month period is in line with our long-term target and reflects our expectations given where we are in the cycle. The impact on ROE from weakening market conditions in used vehicle sales and rental has been partially offset by our initiatives. These initiatives include pricing and cost recovery actions, which benefited returns in all segments. FMS and SCS are expected to achieve their target EBT margins for the full year 2024, reflecting our initiatives as well as execution on our enhanced asset management playbook at FMS. We continue to expect DTS EBT margins to be just below the segment's long-term target in 2024, reflecting acquisition integration and other related costs. Our strong balance sheet and solid investment-grade credit rating continue to provide us with capacity to pursue targeted acquisitions and investments, as well as return capital to shareholders. During the quarter, we repurchased 120,000 shares under our discretionary repurchase program. We currently have authorization for a 2 million share discretionary program, as well as a 2 million share anti-dilutive program with approximately $3 billion in total shares remaining under these programs. Since 2021, we have repurchased approximately 16% of our shares outstanding. We also increased our dividend by 15% in mid-2023. Our full year 2024 forecast for free cash flow is negative $175 million to $275 million, higher than our prior forecast of negative $275 million to $375 million, primarily due to lower rental capital expenditures. We're encouraged by our solid performance in the first quarter and believe that executing on our balanced growth strategy will continue to enable us to deliver higher highs and higher lows over the cycle. Slide 5 shows a comparison of key financial and operating metrics for 2018 and our 2024 forecast. In 2018, prior to the implementation of our balanced growth strategy, we generated comparable EPS of $5.95 million through return on equity of 13%. This was during peak freight cycle conditions. At that time, the majority of our $8.4 billion of revenue was from FMS. Supply chain revenue had a three-year growth rate of 16% and operating cash flow was $1.7 billion. Now let's look at what we're expecting from Ryder today. In 2024, a year that we expect will represent trough conditions in used vehicle sales and rental. We expect our transformed business model to generate meaningfully higher earnings and returns than it did during the 2018 peak. 2024 comparable EPS is expected to be $11.75 to $12.50 compared to $5.95 in 2018 and ROE is expected to be 15.5% to 16.5%, well above the 13% generated in 2018. Through organic growth, strategic acquisitions, and innovative technology we have shifted our revenue mix towards SCS and DTS, with 60% of 2024 revenue expected to come from these asset-light businesses compared to 44% in 2018. Supply chain three-year growth rate is also expected to increase to 20%. As a result of profitable growth in our contractual lease, Supply Chain, and Dedicated businesses, operating cash flow is expected to grow from $1.7 billion in 2018 to $2.4 billion this year. As shown here, the business is outperforming prior cycles, even when comparing prior peak to expected trough conditions. I'm encouraged by the results of our transformation thus far, and I am confident that the solid execution and momentum from multiyear initiatives position us well for 2024 and beyond. Moving to slide 6. On February 1, Ryder completed the acquisition of Cardinal Logistics. This acquisition further advances our balanced growth strategy by accelerating profitable growth in our Dedicated business. DTS continues to be an important part of Ryder's strategy to create shareholder value. Secular trends, including the driver shortage and demand for business intelligence and freight visibility technology such as RyderShare, continue to drive private fleets to pursue an outsourced Dedicated Transportation Solution. Our Dedicated business has demonstrated a resilient earnings profile over the cycle, as shown during the current freight downturn as well as during prior signs. Finally, our Dedicated business benefits from sales and operational synergies with FMS. Upselling FMS pipeline and lease customers to Dedicated has been the largest driver of new sales activity for DTS for some time. DTS also benefits from access to equipment, asset management, and maintenance services from FMS, enabling DTS to deliver increased value to their customers and drive incremental cost savings. As we reach full integration in year three, we expect net synergies realized to be between $40 million and $60 million. The expected synergies largely belong in three categories. The first category is related to vehicle maintenance costs. Prior to the acquisition, Cardinal procured maintenance services from various third-party providers; consolidating maintenance and asset management activities with Ryder is expected to generate significant cost savings and efficiencies going forward. The second category is cost savings related to vehicles financed under third-party operating leases. Approximately one-third of Cardinal's fleet is financed through operating leases with various banks and financing companies. As these leases mature, vehicles will be replaced with Ryder owned vehicles which will benefit from Ryder's lower vehicle acquisition costs and financing. The majority of synergies are expected from these maintenance and equipment cost savings. In addition, we expect to benefit from operating efficiencies as we integrate the business into our existing operations and leverage management and overheads. We expect these synergies to begin in the second half of 2024, with benefits accelerating in 2025. Our integration of the Cardinal acquisition is on track. 2024 integration costs are estimated to be approximately $10 million and represent the majority of total expected integration costs. In 2024, we expect DTS EBT percent to be mid single-digits, reflecting integration and other related costs. Our legacy DTS portfolio is expected to operate at the segment's high-single-digit target EBT percent in 2024. By 2025, realization of Cardinal synergies is expected to drive the DTS EBT percent back to the segment's high-single-digit target. On an annualized basis, the transaction is expected to add approximately $1 billion of total revenue and approximately $800 million in operating revenue, which excludes fuel and subcontracted transportation. As a reminder, approximately 85% of operating revenue will be reflected in DTS, approximately 15% in supply chain and FMS will include intersegment revenue from equipment leases and maintenance. DTS fleet count at quarter-end reflects the inclusion of 2,900 power vehicles and 6,900 trailers from the acquisition. We continue to expect the transaction to be marginally accretive in 2024 and more meaningfully accretive in 2025 after achieving synergies and completing integration efforts. We're very excited about the opportunities ahead and believe that Dedicated will continue to be an important driver of value creation for Ryder. The team is focused on a successful integration and realizing the synergies and benefits we are confident are achievable. I'll now turn the call over to John to review our first quarter performance.

Thanks, Robert. Total company results for the first quarter are on page 7. Operating revenue of $2.5 billion in the first quarter, up 6% from the prior year, primarily reflects recent acquisitions and contractual growth, partially offset by lower rental revenue. Comparable earnings per share from continuing operations were $2.14 in the first quarter, down from $2.81 in the prior year. The earnings decline reflects weaker market conditions in used vehicle sales and rental, partially offset by higher supply chain and ChoiceLease results. Return on equity, our primary financial metric, was 17% and in line with our high-teens target over the cycle. The year-over-year decline reflects weakening used vehicle sales and rental market conditions. Free cash flow for the first quarter decreased to $13 million, from $101 million in 2023, primarily due to lower proceeds from property and used vehicle sales. Turning to Fleet Management results on page 8. Fleet Management Solutions operating revenue decreased 1% due to lower rental demand, partially offset by higher ChoiceLease revenue. ChoiceLease revenue grew 9% with about half coming from organic lease growth and the remainder from intersegment lease revenue from Cardinal vehicles operating in our Dedicated segment. Pre-tax earnings in Fleet Management were $100 million and down year-over-year as anticipated. Results reflect lower used vehicle pricing compared to elevated levels in the prior year, as well as weaker rental demand. The impact from lower used vehicle pricing in the quarter was partially offset by higher used vehicle volumes. Rental utilization on the power fleet was 66%, down from 75% in the prior year. Rental results for the quarter reflect market conditions that remain weak. In addition to the sequential decline in rental activity, we typically see in the first quarter. Power fleet pricing declined 1%, reflecting a rental fleet mix with more trucks and fewer tractors. During the quarter, higher ChoiceLease results partially offset the earnings impact from weaker market conditions in used vehicle sales and rental businesses. Fleet Management, EBT as a percent of operating revenue was 8% in the first quarter and is expected to be in line with the segment's long-term target of low double digits for full year 2024. Page 9 highlights used vehicle sales results for the quarter. As anticipated, market conditions for used vehicle sales continue to weaken from elevated levels in the prior year. Compared with prior year, used tractor proceeds declined 34% and used truck proceeds declined 30%. On a sequential basis, proceeds for tractors decreased 4% and proceeds for trucks decreased 3%, slightly better than our expectations. During the quarter, we sold 6,500 used vehicles, down sequentially and up versus prior year. Used vehicle inventory increased to 8,900 vehicles at quarter-end and remains in line with our target inventory levels. Our sales volumes and inventory levels reflect higher lease replacement and rental de-fleeting activity. Although used vehicle sales currently declined, proceeds remain above residential value estimate fees for depreciation purposes. Slide 21 in the appendix provides historical sales proceeds and current residual value estimates for used tractors and trucks for your information. Turning to Supply Chain on Page 10. Operating revenue increased 11%, primarily driven by the IFS and Cardinal acquisitions. Revenue growth in our automotive, consumer packaged goods, and industrial verticals more than offset softer volumes in our omnichannel retail group. Supply chain earnings increased by $47 million from prior year. Year-over-year comparisons benefited from a $30 million asset impairment charge in the prior year. Stronger automotive performance and recent acquisitions also benefited earnings in the quarter. Supply Chain EBT as a percent of operating revenue was 6.6% in the quarter and is expected to be in line with the segment's long-term target of high single digits for the full year 2024. Moving to Dedicated on Page 11. Operating revenue increased 33%, reflecting the acquisition of Cardinal Logistics. Dedicated EBT declined from prior year, reflecting acquisition, integration, and other related costs, as well as higher insurance costs in the quarter. EBT continued to benefit from favorable driver conditions as the number of open positions and time to fill for professional drivers improves. Dedicated EBT as a percent of operating revenue was 4.2% in the quarter and below the segment's high single-digit target, primarily reflecting acquisition integration and related costs. Turning to Slide 12. First quarter lease capital spending of $582 million was slightly above prior year, reflecting planned lease replacement activity and the timing of OEM deliveries. For the first quarter, rental capital spending of $79 million was below prior year, reflecting lower planned runoff investments in the quarter. For full year 2024, we're forecasting lease spending of $2.5 billion, down from prior year. We have reduced our 2024 rental capital expenditure forecast by approximately $100 million to align with our revised outlook for a more modest frontal upturn than initially expected. 2024 rental spending is now expected to be approximately $450 million. Our 2024 average rental fleet is expected to be down 8%. In rental, we continue to increase capital spending on trucks versus tractors, as trucks have benefited from relatively stable demand and pricing trends. At year-end 2023, trucks represented approximately 60% of our rental fleet, up from 49% in 2018. Our full year 2024 capital expenditures forecast of approximately $3.2 billion is just below prior year. We expect approximately $600 million in proceeds from the sale of used vehicles in 2024, down approximately $200 million from prior year elevated pricing levels. Full year 2024 net capital expenditures are expected to be approximately $2.7 billion. Turning to Slide 13, 2024 full year forecast for operating cash flow is unchanged at $2.4 billion and our forecast range for free cash flow has increased to negative $175 million to $275 million. As shown, operating cash flow remained strong, driven by growth in our Contractual Lease, Dedicated, and Supply Chain businesses, which comprise approximately 85% of Ryder's operating revenue. Our free cash flow profile has changed significantly since the implementation of our balanced growth strategy in late-2019. Lower targeted lease growth as well as COVID effects and OEM delays resulted in lower capital spending and higher free cash flow. Proceeds from the exit of the U.K. Aframax business also benefited free cash flow in 2022. The summary, on the right side of the slide, illustrates the free cash flow generated by the business prior to investing in Fleet growth. In 2024, although free cash flow is expected to be negative $225 million at the midpoint of our range, free cash flow prior to investing in growth capital is expected to be positive approximately $400 million. Our capital allocation priorities remain unchanged and are focused on supporting our strategy to drive long-term profitable growth and return capital to shareholders. Our top priority is to continue to invest in organic growth. Strategic acquisitions have been a key contributor to accelerated growth in Supply Chain and Dedicated. Acquisitions have helped transform our Supply Chain business in terms of expanding capabilities to strengthen our core contractual businesses, as well as rebalancing our vertical mix. Balance sheet leverage of 246% at year-end 2023 was below our 250% to 300% target. And continues to provide ample capacity to fund organic growth, strategic investments as well as to return capital to shareholders through share repurchases and dividends. With that, I'll turn the call back over to Robert to discuss our 2024 outlook.

Turning to Page 14, we're raising the low end of our full year 2024 comparable EPS forecast to $11.75 to $12.50 from our prior forecast of $11.50 to $12.50. This increase reflects first quarter outperformance from used vehicle sales and our maintenance cost initiatives, partially offset by weaker-than-expected market conditions in rental for the balance of the year. We've also increased our 2024 return on equity forecast to 15.5% to 16.5%, which is in line with our stated range of mid-teens during trough market conditions and low 20s during peak conditions. Rental market conditions remain challenging. We continue to believe that 2024 will reflect trough market conditions in used vehicle sales and rental, and our forecast assumes a gradual pickup in the second half of 2024. Uncertain macro conditions are causing some customers and prospects in SCS to delay decisions, but we remain confident in the long-term secular growth trends in this segment. We continue to believe that the transformative changes that we've made to the business will continue to drive outperformance relative to prior cycles and that all segments are well positioned to benefit from a cycle upturn. We're also providing a second quarter comparable EPS forecast of $2.75 to $2.95 versus the prior year of $3.61. Turning to Slide 15. In addition to managing through the down cycle, we are also focused on ensuring that the business is well positioned to benefit from the cycle upturn. The majority of our revenue is supported by long-term contracts that generate relatively stable and predictable operating cash flows over the cycle, and each business segment has opportunities to benefit from the cycle upturn. Most of our cyclical exposure resides in Fleet Management in rental and used vehicle sales. Improved freight conditions should increase demand for these businesses. In rental, we intend to grow the fleet, as we approach a cyclical upturn to capture the incremental revenue and margin opportunity. In used vehicle sales, we'll continue to leverage our expanded retail sales network in order to maximize proceeds with the potential to generate used vehicle gains above normalized levels. An additional opportunity on the horizon for FMS is the anticipated pre-buy activity ahead of the 2027 EPA engine technology changes. The industry is generally expecting some level of pre-buy activity, given the expected impact on upfront cost and maintenance cost implications. Based on what we see today, pre-buy activity could begin as soon as late 2025, as we have historically seen higher levels of fleet growth a couple of years ahead of a change. We also would expect used vehicle pricing to be supported by demand for the old emission technology, increased engine complexity and costs generally favor the outsourcing decision, which would benefit lease sales activity. In Dedicated, improved driver availability and lower recruiting and turnover costs are benefiting earnings but have been a headwind for new sales and revenue growth. As the freight cycle strengthens and driver availability becomes more challenging, we expect to see incremental sales opportunities and improve revenue growth in DTS, as private fleets seek solutions to address this pain point. In Supply Chain, weaker volumes in our omnichannel retail vertical have been headwinds to revenue and earnings. We continue to believe in the long-term growth prospects for our e-commerce fulfillment and last mile delivery of big and bulky goods and have expanded our footprint to support this business. We expect supply chain results to benefit as volumes for these services recover and the incremental footprint is leveraged. We've been pleased by the overall business's outperformance during this down cycle and have appropriately positioned all three business segments to benefit from the cycle upturn. Turning to Page 16. Ryder is delivering value to our shareholders with more to come. Since implementing our balanced growth strategy, we have generated strong returns during each phase of the cycle, and the resulting diversification of the business mix has demonstrated the resiliency of the transformed model. We achieved higher highs during the 2022 up cycle and generated significantly higher returns during the 2023 down cycle relative to prior downturns. In 2024, we continue to expect ROE to outperform prior cycles, despite expected trough conditions in used vehicle sales and rental. We continue to see significant opportunity for profitable growth supported by secular trends, our operational expertise, and ongoing momentum from multiyear initiatives. We remain committed to investing in products, capabilities, and technology that will deliver value to our customers and our shareholders. Before we go to questions, I'd like to remind everyone that we're planning an Investor Day on June 13 in New York City. So please mark your calendars. We're planning a half-day event that will feature presentations from our business leaders and will conclude with a leadership luncheon and a solution showcase where in-person attendees can learn more about our expanded supply chain capabilities, innovative technologies such as RyderShare, and the freight optimization platform under development by our Baton team, as well as innovative technologies and services that are driving Ryder's profitable growth. Advanced registration is required and is now open. More information can be found on our Investor Relations website. That concludes our prepared remarks. Please note that we expect to file our 10-Q later today. We had 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.

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

Yes, good morning. I have a question about the used truck rental market. I'm wondering if you have any updated thoughts on the recovery. I know there is an expectation for it to bottom out as we reach the midpoint of the year. Regarding rental utilization, it was a bit lower than I anticipated, and I understand you've also noted that it would come in weaker. Have you seen any stabilization at these utilization rates, or should we just wait for a change?

Yes, hi, Jordan. As for the cycle concerning rental and used trucks, we are observing the longest downturn we've experienced in quite some time, lasting nearly two years. Therefore, we should be nearing the end rather than the beginning. We are looking at spot rates, which appear to be stabilizing at a low point. Class 8 production has decreased, so we should be approaching a better balance between freight and the vehicles needed to transport it, which is generally when improvements begin to happen. Additionally, our used truck pricing dropped by 3% to 4% sequentially from the fourth quarter to the first quarter, which marks an improvement compared to a more significant decline in the previous quarter where it was in double digits. We are starting to see some signs of stabilization in that area. However, in rental, as you mentioned, we are not as optimistic yet. The demand in the first quarter was lower than we anticipated, prompting us to lower our demand expectations for the rest of the year. We foresee a more modest recovery in rental during the second half. This is largely because demand has not rebounded as we had hoped and there is currently an oversupply of rental trucks in the market. While the industry has done well over time to adjust these fleets, this particular situation might take longer to resolve. Consequently, we are extending the timeline for that anticipated increase, which has influenced our forecasts for the remainder of the year.

Thank you.

Thanks, Jordan.

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

Thank you. Good morning. I would like to follow up on the used inventory situation. It is currently at its highest level in several years. Are you still anticipating a recovery in used prices in the second half of the year? If that doesn't happen, could you discuss where you currently stand regarding your residual assumptions?

Yes. As you mentioned, we exceeded expectations in the first quarter, and we’re not counting on that continuing for the rest of the year. What we anticipate for the remainder of the year is likely to hit a low point in the second and third quarters, with a potential improvement in the fourth quarter. It's difficult to predict exactly when that will happen. That’s why I want to reiterate what we said in the last call: if that improvement doesn’t occur, we would likely be at the lower end of the range we provided, particularly influenced by rental performance. So, in terms of the cushion you asked about, that reflects our current viewpoint, which could change based on overall business performance. However, we remain optimistic about the contractual aspects of the business. The outlook for that segment remains strong, and any shifts in the forecast have primarily been related to UBS and rental.

I wanted to follow up on the leasing fleet, which showed strong sequential growth at the end of Q1, but we're seeing a decline in extensions and an increase in terminations. Can you provide some insight on how to consider the leasing fleet moving forward?

Yes, organically, with the inclusion of the Cardinal fleet, we expect that number to increase. We are experiencing some early terminations, but there's also significant redeployment of vehicles to other customers, which is typical for our position in the cycle. It's worth noting that last year, terminations were at historically low levels despite the market being tight. Initially, we anticipated organic fleet growth at the higher end of our range of 2,000 to 4,000, but now we expect it to be closer to the lower to mid-point, around 2,000 to 3,000. This means we're facing some pressure on growth. However, ChoiceLease remains a meaningful factor in our year-over-year improvement, driven not only by growth but also by better lease pricing initiatives and maintenance improvements. Maintenance costs exceeded expectations in the first quarter, and we anticipate continued positive trends for the rest of the year.

Thank you.

Thanks, Scott.

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

Yes, thank you. Good morning. Robert, I would like to follow up on the maintenance cost, which is clearly a significant line item. You've been focused on that for quite some time. Is this primarily a continuation of structural improvements from before Cardinal, and integrating those to achieve better efficiency? Or is it more of a cyclical situation where there is increased capacity in the system, making it easier to reduce costs, reflecting general deflation? How would you describe that?

Yes. I believe the initiatives we have been pursuing for several years are certainly making a difference. We have previously mentioned our $100 million multi-year initiative, and subsequently, we have introduced annual initiatives worth around $20 million to $30 million. We are exceeding expectations on some of these initiatives. Additionally, we are experiencing some reduction in inflation, particularly related to certain costs, which is also benefiting us. I consider these developments to be structural and they are likely to persist, especially for the remainder of the year.

Okay. That's helpful. And then just for the rest of the year, maybe you can talk a little bit through pricing and just how that's coming through right now. You mentioned overcapacity. A bit on the rental side, utilization was a bit lower. How do you see the market in terms of staying disciplined and rational even though it hasn't quite recovered from a spot-rate perspective on the leading indicator side? And then just the same thing on leasing would be helpful if people are pushing those out to where you're finding still solutions for people who want to add or grow their lease book in this market? Thanks.

Yes, that was a good question. Regarding rental, our pricing is relatively stable. There is some pressure from the surplus of equipment, but we have managed this situation effectively in previous cycles, and we are still doing well now. In terms of leasing, there is a bit more hesitation from customers, as they are not expanding their fleet as much as they did a year or two ago. Consequently, we are noticing some softness in that area. However, I still anticipate achieving our growth target of 2,000 to 4,000. The positive aspect of leasing is that we don't purchase a truck until we have a signed lease, allowing us to maintain pricing discipline and stay within our target spread range of 100 to 150 basis points.

All right. Thank you, Robert.

All right. Thanks, Brian.

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

Thank you very much. Not to beat a dead horse, but I'm trying to figure out how to think about year-end fleet numbers in rental and lease. And I guess based on what I've heard, down about 8% in rentals, so somewhere between 33,000, 34,000 units. And at least right now, 147,000 units, but that does include Cardinal. And if I take your 2,000 to 4,000, where does that kind of leave us at the end of the year on the lease fleet? And then just kind of attached to that. As we're deemphasizing tractors and we're focusing a little bit more on trucks and on trailers, is that creating a negative mix shift in the reported RPU?

On the lease side, you're correct. We initially projected around 13,000 units, which includes the 9,300 from Cardinal. Adding the 4,000 brings us to the 13,000 total. We anticipate being within the range of 11,000 to 12,000 units. It's still early, and many factors could influence our numbers for the remainder of the year, so we might exceed that projection. Currently, that's our assumption for the year-end forecast. What was your question regarding pricing?

Yes, it looks like the lease RPU was actually pretty decent. I would have inspected a little bit more of a negative mix drag, just based on how the component is changing. So kind of help me see through that?

Yes. Some of that is certainly the newer equipment coming in. Remember, the big shift to trucks though is in rental, not as much in lease. So we've been making the shift to more straight trucks versus tractors has been on the rental fleet, less so on the lease fleet.

All right. And just to clarify your comments. So I should think of the lease fleet as being around this level for the remainder of the year in terms of total units?

Well, it's going to move up from this level, right? So we've added the – we've added the Cardinal unit and then we're expecting to be up, call it, 2,000 to 3,000 units from there. So we'll get about 150,000.

Okay. Beautiful. Thank you.

And we'll take our next question from Justin Long with Stephens.

Thanks. I wanted to ask about the recent trend in both the Dedicated and Supply Chain backlogs. Just curious how the pipeline of activity has trended year-to-date relative to what you were seeing last year? Robert, you made the point about secular tailwinds, but you also have cyclical headwinds. So I'm just curious how that's netting out in terms of the pipeline for those businesses.

Yes, I'll have Steve provide some updates on the pipeline. Regarding rental, we expect Dedicated to remain relatively stable as we noted in our earlier forecast. We are definitely encountering some cyclical challenges, but rates are quite appealing, and customers are trying to capitalize on those. The availability of drivers is currently low, so companies are not facing the same difficulties in finding drivers as they did a couple of years ago. However, this is not uncommon and tends to occur in cycles. We are confident that the situation will improve.

Yes, Justin, I'll start with Supply Chain. I think if you look at the pipeline year-over-year, we're relatively flat, as Robert said, just continued delays in decisions. Typically, it was about six months. Now we're seeing that extend nine months plus. Lately, we have seen more delayed decisions, so either postponing or holding opportunities right now. So I really think it's an economic outlook for the year for these customers, maybe making a network change later in the year. And then Dedicated, we did get a pop in the pipeline year-over-year. Some of that comes from the Cardinal acquisition. But the other balance is from our marketing campaign initiatives. Same kind of story there, delayed decisions, people taking advantage of price over service right now on the Dedicated side.

Okay. Got it. Thank you.

Thanks, Justin.

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

Thank you for the follow-up. You mentioned the potential for a pre-buy next year. Where do you think the biggest benefits will be? Will it come from leasing fleet growth, rental advantages, or gains in used pricing? It's been quite a while since there was a significant pre-buy.

Yes, I believe the answer is affirmative to all your points. If we look back to 2006, around 20 years ago, the technology changes in 2007 were somewhat similar, as they involved significant cost increases without corresponding operational benefits. We did experience a considerable level of pre-buy during late 2005 and 2006. This had a notable impact, particularly on leasing, as it provided more opportunities for companies to consider decisions about replacing their fleets. They had to decide whether to buy or lease, which opened up additional market opportunities for our leasing sales. It also benefited our rental business since customers waiting for new vehicles tend to rent in the meantime. Furthermore, the appeal of vehicles manufactured before 2007 increased, which created opportunities for rental-to-lease conversions in the future. Regarding used vehicles, the sales prices of those pre-2027 vehicles entering the used truck market should see significant support, given that they precede 2027. Looking back at the vehicles we sold in 2006, we received prices well above our projected residual values back in 2014 and 2015, so I anticipate we may see a similar trend occur again during this cycle.

That's helpful, Robert. And maybe just your other bigger picture perspective, you're right, there's this huge gap in fundamentals between what the trucking companies are saying and reporting and what the truck makers are saying and reporting. Maybe your thoughts on this disconnect? And what do you think it means for new truck pricing going forward?

Yes. I believe it comes down to spot rates. We handle a substantial amount of truckload business for our customers in our Supply Chain Transportation Management division, and truckload spot rates have not recovered. They remain low, which is particularly challenging for larger truckload carriers. This situation arises largely because we still lack sufficient smaller owner-operators in the market. However, this segment of the industry is cyclical and will rebound. While I can't say it's the darkest before the dawn, I do feel we are moving toward recovery; it's just a matter of timing. In the meantime, OEMs have recently navigated a significant backlog, which has decreased. We're observing shorter lead times for vehicles compared to previous levels, and OEMs are effectively managing production during this phase. They anticipate a notable increase in late 2025 and 2026 for pre-buy, which is encouraging for both their industry and ours.

Make sense. Thank you, Robert.

Thanks, Scott.

We will now take a follow-up from Brian Ossenbeck with JPMorgan.

Yes. Thanks. Just wanted to get your comments on some of the end markets and the trends you're seeing, particularly in SCS that you kind of broaden out that would be helpful as well. And in the past, you've talked about omnichannel being a bit slow perhaps for the first quarter, first half, maybe a rebound in the second half. So, auto is pretty strong. What about the rest of the verticals as you see them ramping up or not in terms of activity into the back half and into next year? Thanks.

Yes. Again, I'll let Steve give you some color there. But certainly on the e-commerce omnichannel, there's two things going on, right? We're looking for an improvement in the demand there, still pretty soft. We're also trying to rightsize the business where we can and adjust to the cost structure as best we can. So, we're certainly looking for that to have some benefit in the second half. But the other parts of the business, if you looked at the results for the quarter, were still growing pretty strong. But Steve, why don't you give a little more color?

Yes, Brian, we're seeing continued volume in the automotive sector and industrial. So I think pretty decent outlooks there. CPG, with the acquisition of IFS, certainly, that's an area that we need to cross-sell and upsell to our core CPG customers. And I think, as Robert said, in omnichannel, it's really a volume play. If you think about the e-comm business and the last mile business, so when the economy turns back around, we're ready to go sell that business.

Thank you, Brian.

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

Okay. Thank you. Well, just as a final reminder, June 13 in New York is our Investor Day. So, I certainly hope to see all of you there and look forward to giving you a more thorough review of all the good things going on at Ryder and what our outlook is, not just for this year, but going forward.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.