Ryder System Inc (R) Q2 2024 Earnings Call Transcript

Good morning, and welcome to the Ryder System Second Quarter 2024 Earnings Release Conference Call. 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 Second 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 de-risk our business model, enhance returns and drive long-term profitable growth have significantly increased the earnings and return profile of the business compared to prior cycles. I'll begin today's call by providing you with key strategic updates. John will then take you through the second quarter results which exceeded our forecast due to better-than-expected results in ChoiceLease. I'll then review our outlook and discuss how we are well positioned to benefit from the cycle upturn. Our transformed business model and execution of our balanced growth strategy is continuing to drive outperformance relative to prior cycles. Across all phases of the current freight cycle, our earnings and return profile has been higher than prior cycles, demonstrating the effectiveness of our strategy. The integration of our recent acquisition 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. On November 1 of last year, we completed the acquisition of IFS, which added co-packaging and co-manufacturing capabilities to our supply chain primarily supporting our CPG business. We continue to see long-term growth opportunities in all three business segments, supported by secular trends that favor outsourcing decisions, large addressable markets, and the value of our solutions. Our initiatives remain focused on enhancing returns. Adjusted ROE of 16% for the trailing 12 months is in line with our expectations given where we are in the freight cycle. At our Investor Day last month, we introduced the next phase of our balanced growth strategy, which is focused on creating compelling value through operational excellence, investing in customer-centric innovation, further improving full cycle returns, and generating profitable growth. We are confident that continuing to execute our strategy while positioning ourselves for the cycle upturn will result in full cycle returns that will be further enhanced. We also expect our enhanced asset management playbook to continue to optimize returns in FMS over the cycle. Our higher return profile, reflecting the enhanced quality of our contractual portfolio is providing us with expanded capital deployment capacity, which we will use to support profitable growth and return capital to shareholders. We recently increased our quarterly dividend by 14% and announced a planned acquisition to grow our retail mobile maintenance business in FMS. Year-to-date, we have returned $207 million in cash to shareholders through share repurchases and dividends. Our full year 2024 forecast for free cash flow is now increasing by approximately $400 million to positive $150 million to $250 million due to lower expected lease capital spending. We're encouraged by our solid performance in the second 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 is one that you are likely familiar with if you've been following our business model transformation. It clearly shows how our key financial and operating metrics have improved since 2018, reflecting the execution of our strategy. In 2018, prior to the implementation of our balanced growth strategy, we generated comparable earnings per share of $5.95 and an ROE 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 3-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 de-risked business model to generate meaningfully higher earnings and returns than we did during the 2018 peak. 2024 comparable EPS is expected to be $11.90 to $12.40, more than double the 2018 comparable EPS of $5.95. ROE is expected to be up 300 to 350 basis points to a range of 16% to 16.5%, above the 13% generated during the prior cycle peak. Through organic growth, strategic acquisitions, and innovative technology, we've shifted our revenue mix towards supply chain and Dedicated with approximately 60% of 2024 revenue expected to come from these asset-light businesses compared to 44% in 2018. As a result of profitable growth in our contractual lease supply chain and Dedicated businesses, operating cash flow is expected to increase 40% 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 an expected trough. I'm encouraged by the results of our transformation thus far and confident that solid execution and momentum from multi-year initiatives positions us well for 2024 and beyond. I'll now turn the call over to John to review our second quarter performance.

Thanks, Robert. Total company results for the second quarter on Page 6. Operating revenue of $2.6 billion in the second quarter, up 10% from the prior year primarily reflects recent acquisitions. Comparable earnings per share from continuing operations were $3 in the second quarter, down from $3.61 in the prior year. The earnings decline reflects weaker market conditions in used vehicle sales and rental, partially offset by higher contractual earnings. Return on equity, primary financial metric was 16%. The year-over-year decline reflects weaker used vehicle sales and rental market conditions. Year-to-date free cash flow increased to $71 million from $16 million in the prior year, primarily due to lower capital expenditures partially offset by higher working capital needs related to recent acquisitions and lower proceeds from the sale of used vehicles and properties. Turning to fleet management results on Page 7. Fleet Management Solutions operating revenue increased 2% due to higher ChoiceLease revenue, partially offset by lower rental demand. ChoiceLease revenue grew 10%, with about half coming from organic lease revenue growth and the remainder from intersegment lease revenue from Cardinal vehicles operating in our Dedicated segment. Pretax earnings in fleet management were $133 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. Rental utilization on the power fleet was 69% and down from 75% in the prior year. Rental results for the quarter continue to reflect market conditions that remain weak. We saw some seasonal improvement in rental demand from Q1 to Q2, but the increase was below what we typically see and not enough to signal a freight recovery. Our fleet pricing was in line with the prior year. During the quarter, higher ChoiceLease results and benefits from our maintenance cost savings initiatives partially offset the earnings impact from weaker market conditions in used vehicle sales and rental. Fleet Management EBT as a percent of operating revenue was 10.4% in the second quarter and is expected to be low double digits for full year 2024, in line with our expectations given where we are in the freight cycle, but below our recently increased long-term target of low teens. Page 8 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 the prior year, used tractor proceeds declined 19% and used truck proceeds declined 27%. On a sequential basis, proceeds for tractors increased 5% and proceeds for trucks decreased 10%. Tractor pricing remained relatively stable, whereas truck pricing continued to decline. During the quarter, we sold 6,000 used vehicles, down sequentially but up versus the prior year. Used vehicle inventory increased to 9,500 vehicles at quarter end, reflecting higher lease expirations. Inventory was just above our targeted inventory range and is expected to decline as fewer rental units are expected to be out serviced during the balance of the year. Although used vehicle pricing declined, proceeds remain above residual value estimates used for depreciation purposes. Slide 19 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 9. Operating revenue increased 14%, driven by recent acquisitions and organic growth across all industry verticals. Supply chain earnings increased by $9 million from prior year, primarily reflecting stronger automotive performance. Supply Chain EBT as a percent of operating revenue was 8.6% in the quarter and is expected to remain in line with the segment's long-term target of high single digits for full year 2024. Turning to Dedicated on Page 10. Operating revenue increased 48%, reflecting the acquisition of Cardinal Logistics. Dedicated EBT increased from prior year, reflecting improved operating performance partially offset by acquisition integration and other related costs. EBT continued to benefit from favorable driver conditions, as the number of open positions and time to fill for our professional drivers continue to improve. Dedicated EBT as a percent of operating revenue was 7.6% in the quarter and in line with the segment's long-term high single-digit target. Turning to Slide 11. Year-to-date, lease capital spending of $933 million was below prior year, reflecting lower lease sales activity. Year-to-date, rental capital spending of $294 million was also below prior year, reflecting lower planned rental investments. We reduced our full year 2024 lease capital spending forecast by approximately $400 million due to lower sales activity, reflecting delayed decisions and economic uncertainty, as well as increased redeployment activity. 2024 lease spending is now expected to be approximately $2.2 billion, and our year-end lease fleet is expected to increase moderately from second quarter loans. Our forecast for rental capital spending is unchanged from our prior forecast, and our 2024 year-end rental fleet is expected to be down by approximately 2% year-over-year. 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 for trucks is now expected to be approximately $2.9 billion and below prior year. We expect approximately $600 million in proceeds from the sale of used vehicles in 2024, with full year net capital expenditures expected to be approximately $2.3 billion. Turning to Slide 12. Our 2024 full year forecast for operating cash flow is unchanged at $2.4 billion, and our forecast for free cash flow has increased to a range of positive $150 million to $250 million. As shown, operating cash flow remained strong, driven by growth in our contractual lease, dedicated, and supply chain businesses, which comprise over 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. FMS 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, since we do not expect fleet growth given market conditions, our increased free cash flow forecast of positive $200 million at the midpoint of our range is the same as our forecast for free cash flow prior to growth. Our capital allocation priorities remain unchanged and are focused on supporting our strategy to drive long-term profitable growth and return capital to our shareholders. Our top priority is to continue to invest in organic growth. Balance sheet leverage of 245% at the end of the quarter was below our 250% to 300% target range and continues to provide ample capacity to fund organic growth and 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 our outlook on Page 13, we continue to see freight conditions that remain weak and the timing of the cycle inflection remains uncertain. We're updating our full year 2024 comparable EPS forecast to a range of $11.90 to $12.40 from our prior forecast of $11.75 to $12.50. The high end of our forecast range continues to assume a gradual recovery in rental and used vehicle sales, although later in the year, while the bottom end reflects ongoing weak conditions for these businesses. Our 2024 ROE forecast is 16% to 16.5%. The extended freight downturn and economic uncertainty have been causing some customers and prospects, at least in dedicated supply chain, to delay decisions or downsize their fleets. These near-term contractual sales headwinds are consistent with where we are in the cycle and the current economic environment. We remain confident in the long-term secular growth trends for all our businesses. 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 the cycle upturn. We're also providing a third quarter comparable EPS forecast of $3.30 to $3.50 versus the prior year of $3.58. 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. As we outlined at our recent Investor Day, we expect an annual pretax earnings benefit of approximately $200 million by the next cycle peak. This is in addition to the $150 million in pretax earnings we expect from the contractual growth and strategic initiatives such as lease pricing, maintenance cost savings initiatives, realization of the Cardinal synergies, and optimization of our multi-client network. Although the majority of our revenue is supported by long-term contracts that generate relatively stable and predictable operating cash flows over the cycle, each business segment still has the opportunity to benefit from the cycle upturn. Most of our cyclical exposure resides within fleet management in rental and used vehicles sales; as a result, we expect the lion's share of the $200 million benefit to come from the cyclical recovery of these two businesses. In Dedicated, improved driver availability and lower recruiting and turnover costs are benefiting earnings but have been headwinds 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 improved revenue growth in Dedicated as private fleets seek solutions to address this pain point. In supply chain, weaker volumes in our omnichannel retail vertical have been a headwind to revenue and earnings. We expect supply chain results to benefit as volumes for these services recover and the incremental footprint is leveraged. We also expect improved freight conditions and reduced economic uncertainty will benefit contractual sales activity for lease, dedicated, and supply chain. We've been pleased by the business outperformance during this downturn and have appropriately positioned all three segments to benefit from the cycle upturn. An additional opportunity on the horizon for FMS is the anticipated pre-buy activity ahead of the 2027 EPA engine technology changes. We would expect this to benefit ChoiceLease sales activity and longer-term support used vehicle pricing due to demand for the old emissions technology. 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 transport model. We achieved higher highs during the 2022 up cycle even after adjusting for outsized used vehicle gains 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 rentals. 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. 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 each. If you have additional questions, you're welcome to get back in the queue that will take as many as we can. At this time, I'll turn it over to the operator.

Our first question will come from Christyne McGarvey with Morgan Stanley.

Would love to just start on the guidance and digging in a little bit more, particularly at the high end. It seems like cycle recovery sort of pushed out to the right a little bit. But would just love to hear what you guys are seeing in sort of what's underpinning that? It does seem like some of the early cycle data points that we track are seeing a little bit of life. So I would just be curious about your thoughts on that.

Thanks, Christyne. Let me just reiterate the range that we gave and thinking around that range. The higher end of the range continues to assume a gradual recovery in rental and used vehicles in the second half. The lower end of the forecast contemplates that there will be no pickup in the second half of point force. So just ongoing weak conditions. In terms of what we're seeing, we have not seen an inflection certainly in rental or used vehicles. I would say maybe we're seeing some signs of stabilization and maybe a real troughing. I'll mention three that we see in our business in the second quarter. First, we saw a seasonal uptick in rental in the second quarter. We'll see that as we go into the third. Another is that lease miles per unit, which is typically an indication of how much our lease units are being utilized. We saw that increase in the second quarter for the first time in a while. And then also around tractor pricing, used tractor pricing. I know we've reported it up sequentially about 5%, but had some unusual new units that we sold in the mix this quarter. So when you take those out, it's kind of flattish. So that's really kind of a bottoming out of used tractor pricing, which I think is also a sign. So let me hand it over to Tom to give you a little more color around each of those three.

Yes. So let me start with rental and provide a little more color there. We saw six straight quarters of sequential demand declines before this second quarter period. So you do normally see seasonality in the business in rental. But last year, as we went through the year, demand declined the entire year. So this was the first quarter going from Q1 to Q2 that we actually saw a sequential increase in demand. We would typically see that just from seasonality. So it was good to finally see that trend go up. I don't think it signals a recovery in any way, but it's just a normal seasonal improvement in demand. From a lease perspective, the story may be even a little more dramatic, where we had seen 11 straight quarters of year-over-year declines in miles per unit. So a little over two years, the last time we saw miles per unit increase year-over-year in the quarter. So we did see some declines in the lease fleet, mainly due to customers downsizing their fleet. So maybe this is an indication that there is some rightsizing and rebalancing of those fleets when you see the miles finally improve year-over-year. Finally, in used vehicle sales, like Robert said, we saw an increase in tractor pricing sequentially. We did have some unusual sales for us of newer equipment, which drove that pricing up. When you take that out, the underlying normal pricing trend would have been down about 2% in tractor pricing. So kind of a flattening out of tractor pricing, if you will, sequentially. So those are the three things that we saw in the quarter that may indicate a bottoming out and maybe a slight sign of recovery.

The next question will come from Jeff Kauffman with Vertical Research.

It's interesting you're talking about the positive changes you're seeing in customer behaviors in the environment. But when I look at capital spending, it's being taken down pretty aggressively across more and more companies. And I feel like this isn't just publicly traded for higher truckload here, but we're starting to see the private slow down a little bit. I'm just curious, do you view this more as a delayed reaction where the industry P&Ls have just been under pressure and people are kind of now coming to grips with that in terms of their equipment orders because we've seen the OEMs and act research and people like that take their forecast down pretty aggressively for the second half of this year.

Thanks, Jeff. What we're observing is a shift from a very active period of new truck orders, which faced delays of over a year. There was a surge of individuals ordering vehicles and then waiting for delivery. Presently, many companies seem to be reassessing their needs; there’s less urgency to order immediately since delivery times have improved. Now, tractors can be obtained within 90 to 120 days. As a result, the rush to get in line for orders has slowed, which is typical for this stage in the cycle. It's important to note that we’re not experiencing a significant increase in sales within our contractual businesses. We are facing challenges from customers in leases who are downsizing their fleets in Dedicated, and there have been delays in decision-making. The uncertainty surrounding the election and interest rates may lead customers to delay their purchases, especially since the economy and freight market haven't shown a strong recovery yet. However, we're highlighting that the significant decline we've witnessed with our lease customers might be reaching a more stable point, as they are utilizing the units they have more frequently, which is encouraging. There is also an increased demand for rental trucks, particularly with the upcoming season. In terms of pricing, the tractor pricing we shared reflects our historical position well. After a notable drop from the peaks experienced in 2021 and 2022, it seems like we are approaching a bottom in the last few quarters.

Okay. And I don't want to detract from the terrific results we saw in Supply Chain and Dedicated. I'm just kind of curious because the theme across most calls this quarter has been we're reducing our capital spend. We're going to take fewer trucks. We're going to take fewer trailers. I did notice that the SelectCare vehicle numbers were down. What's driving that?

Yes. We continue to see that we've got a number of SelectCare customers that have elected to convert over to full service leads, and that has been a trend we've seen over the last two years. As you continue to see the SelectCare numbers, I would expect that to reduce over the balance of the year. Once we get to next year, you should see that start picking up.

No, I would also say we saw similar to the lease fleet, where our SelectCare customers were downsizing their fleet as well. We had two very large trailer fleets that were really low impact to us. So kind of large in fleet, but low in impact to the P&L. If you look at the P&L, the revenues were actually up year-over-year despite the fleet headwinds and the returns were a little bit better. So kind of a rebalancing of that fleet may be smaller but with better returns.

Okay. And then last follow-up question on this. One of the trends we've seen over the last two years is that a lot more activity on the private fleet side than the public for-hire fleet. Are you sensing any change in terms of private fleet customer thinking on the need to expand the fleet?

I believe that the private fleet expansion was likely influenced by the truckload capacity shortage we experienced during the spike in 2022. We observed that our lease customers were actively seeking vehicles at that time. Now that those vehicles have arrived, they appear to be reaching a stabilization point regarding the quantity they require in their fleets. While some downsizing is still occurring, the increase in lease miles per unit suggests that we might be approaching a closer balance.

And we'll take a question from Jordan Alliger with Goldman Sachs.

Question on Dedicated. At least what I was thinking, especially with the acquisition and what have you. The margins seem to be tracking right in that high single-digit range, longer-term target, maybe a little bit ahead of sort of what I was thinking or where we were thinking. So curious if you could maybe talk to some of the drivers behind the performance? And then specifically, do you think you could sort of stay maybe closer to this type of level quicker than expected?

We are very pleased with the results this quarter in Dedicated. While some of it can be attributed to a seasonal increase, the earnings growth was mainly due to improved performance of our base business. This highlights the strength of the long-term contracts in our dedicated, supply chain, and lease segments. Even in a challenging environment, we are seeing earnings growth from these areas, which is somewhat unique for our industry given the volatility we experience. These segments are significantly contributing to the company's overall earnings and are helping to offset some of the fluctuations in our rental and used business, aligning with our balanced growth strategy. Dedicated has shown strong performance, as has supply chain, with good earnings growth. Additionally, our lease business also outperformed this quarter. Overall, we are quite satisfied with what we've observed. It's a bit early to predict the full-year performance in Dedicated, but we feel optimistic about the projections we provided at the start of the year. We anticipate that our contractual businesses will align closely with those expectations.

And our next question will come from Brian Ossenbeck with JPMorgan.

So I just wanted to see, given there's some signs of stability, but a little bit of uncertainty out there and some pulling back from the customers, what are you seeing in terms of competition and pricing trends across the different segments? And I guess particularly interested in maybe some of the shorter-cycle stuff there has been a bit of extra capacity over the market, but also on Dedicated because it does seem like there's this lower for longer environment has caused maybe some behavioral changes to push for that last cut on pricing. So some comments on competition and price would be helpful.

I'll discuss the contractual businesses briefly. In leasing, we usually don't acquire a truck until we have a signed lease, which means there's no rush to flood the market with equipment. There is some redeployment of rental equipment that can lead to more competitive pricing, but overall, pricing discipline remains intact. Regarding the Dedicated business, there is increased pressure as customers aim to leverage lower spot and truckload rates for standard freight. However, for customized Dedicated services, which is our primary focus, we face fewer challenges. This is reflected in some customers returning freight they initially moved over in 2022, which was more standard freight. The core of our Dedicated business remains robust. From a competition perspective, the market behavior seems rational, especially for services requiring specialized handling. In supply chain, the main challenge is encouraging customers to make decisions. While pricing in traditional supply chain operations hasn't shifted significantly, some areas, particularly in multi-client e-commerce and supply chain activities, may experience more aggressive pricing. Overall, in the traditional contractual business, we maintain good pricing discipline.

Okay. To clarify the guidance and the anticipated recovery included in it, the range between the top and bottom ends is not very broad, particularly considering how much it can fluctuate with factors like rentals and used items. It appears to suggest a modest recovery in the latter half of the year that you're anticipating, which seems small. I just wanted to gain a clearer understanding of that.

Yes. For the high end of the range, we expect rental utilization to return to the mid- to high 70s, which is what we consider more normalized, with some gains from our current position. We finished Q2 just under $20 million and anticipate being slightly above that in the second half, especially in the fourth quarter. So we expect a modest increase for the remainder of the year, primarily in the fourth quarter. On the lower end, the expectation is mainly a slight seasonal increase in rental during the second half. The used market is not making significant progress, likely remaining flat or declining from our current levels. Therefore, the difference between the top and bottom of the range is minimal. Of course, there are various possibilities in between, and we believe this range is quite reasonable regarding what's achievable, depending on how the market develops over the next few quarters.

And we'll take a question from Scott Group with Wolfe Research.

I want to follow up on that last point. When I look at the third quarter guidance, it shows a substantial increase from Q2 in terms of earnings, likely a bit higher than the usual seasonal pattern. It seems that this does not indicate a significant improvement in the used and rental markets in the third quarter. Is that correct? Is the core earnings improvement the main factor, or am I misunderstanding, and is there an expectation in the Q3 guidance that the rental and used segments will improve?

No, you're correct. It's about core earnings improving from Q2 to Q3, with an increase expected in the fourth quarter, not due to seasonal factors but rather transactional ones. We anticipate a slight improvement in Q4. However, when looking from Q2 to Q3, the growth will mainly come from the contractual business continuing to perform well.

Okay. That makes sense. I think you mentioned that used inventories are above the long-term target. Is it accurate to say that the tractor price is now in the residual value range? Is there a chance that the situation with used inventory will improve given current levels? And should we consider any adjustments to our residual assumptions?

Yes. I'll let John give you a little color on that.

Yes, we currently have inventory levels slightly above our target range of 7,000 to 9,000, sitting at 9,500. We've reduced the rental fleet, which contributed to that higher inventory level. For the remainder of the year, we do not anticipate any further significant decreases in our rental fleet. Therefore, we should see our inventory levels begin to decline as we approach the end of the year. While the decrease won't be drastic, we certainly do not expect further increases. Additionally, we've noticed relative stability in the tractor classes over the past two quarters, with only small declines. Adjusting for the specific transaction mentioned earlier, stability continues in that area. We anticipate some recovery due to the demand imbalance we've experienced in recent quarters, and we may reach an inflection point in the fourth quarter. Overall, as we wrap up the year and move into 2025, we should observe an improvement in used vehicle market conditions. We have provided our standard slide, showing that we are currently above our residual value estimates, and even on the tractor side, we have enough room to accommodate any modest reductions.

Okay. And then if I could just ask one more. I know you talked about prebuy at the Analyst Day a month ago, but I guess we've had the Chevron ruling since then. I don't know. Does that in any way change your views on how you think about timing, magnitude of a prebuy in '25?

Yes. I think, Scott, first of all, I want to make sure we're clear that we're not an OEM. So the prebuy doesn't have as big of an earnings impact on us in the short term as it would for an OEM. During a pre-buy, it gives us an opportunity to win more business because you got more customers making decisions. They pull forward some customers and we're going to renew a year out. So there's certainly an opportunity to win more business. But the earnings for that lease will come in over the next six years. So it's not a big driver one way or the other. You'll have some additional capital probably because of the way that will work. Where it does provide us a more significant opportunity is if it behaves the same way it did in other technology changes, it does provide a lift for used equipment for the years after the technology change. The equipment we're buying today and they've bought over the last few years should be more valuable in the used truck market because that older technology becomes more desirable from a business and economic standpoint. So that's really how I would say you should think about the prebuy for Ryder. For when can it happen? Clearly, it should happen in 2026. Will it start early? I mean I think back in 2006 and '07, which is probably similar to this one. It started in the kind of second half of 2005. So if it follows the same pattern, you would expect to see it starting in the second half of '25. Scott, I could clarify one of the things. On the high end of our range, just to be clear, I told you, it's the contractual businesses that are helping us from Q2 to Q3. I also want to mention, we did say we’re assuming that on the high end that our utilization for rental will get back to more normalized levels. So we are looking for an uplift in Q3 for utilization. And to put that in perspective, I think Tom gave you a little color where we are today versus...

Yes. So we finished Q2 at 69%. You see that number. We're sitting here today at around 73%. So it's up 4 percentage points, and that's the seasonal uptick expected to give. That 4% improvement is going to bring with it a little bit more return as well.

So we're early in the quarter, we're at 73%. We would expect that to come up some, and if it behaves that way, it should continue to rise in August and September. So that's still TBD but hopefully gives you a little color on where we're at.

And moving on to Daniel Imbro with Stephens.

One thought on the Dedicated market. You guys noted in the slides, I think a lot of the DTS growth from Cardinal. If we exclude the Cardinal, I guess, how is the rest of the business growing either on a revenue or an EBT basis? And then related, obviously, the integration is progressing. You have the financial capacity, but do you have enough human capital or operational bandwidth to integrate another large deal outside of the business today? Just curious about your appetite at that scale.

If you look at Dedicated excluding Cardinal, it’s kind of flattish on the growth side. Earnings are growing because of operational improvements, but flattish on the top line primarily as customers have downsized their fleets in some cases and held off decisions that were on the margin moving into truckload. In terms of bandwidth, we could integrate another acquisition if we found another perfect acquisition, however, we're really focused on making sure we get this one right and that we get it on track in terms of all the activities we have to do. We've got synergies to deliver for next year that we've already outlined is between $40 million to $60 million, and we feel good about where we're at. Integration is going well. So we are focused on making sure we get this right and not rushing into anything new.

Great. That's helpful. And I could squeeze a follow-up question on the guide. Used vehicle sales obviously weighed on 2Q. And I think job prices have kept moderating at least a bit, there was some OEM chatter around potentially a new truck price pressure coming in the back half. So I'm just curious, are you guys embedding that used vehicle sales remain pressured in the guide? Is that incorporated into the outlook today?

Yes, it is. Well, as I mentioned, the high end of our range has some uplift as we get into the second half, probably more to the fourth quarter. The low end has continued softness in the used truck market.

And the next question comes from Christyne McGarvey with Morgan Stanley.

Maybe just on the supply chain business. Just want to dig in a little bit more. You alluded to it at the top of the call, but what you guys are seeing in sort of the e-commerce omnichannel verticals and what customers are currently telling you about their volume outlook as you look to the back half of the year in peak season.

Sure. As you know, we've had some softness in that business over the last 1.5 years. I'll let Steve give a little more color on what we’re seeing in the e-commerce business.

Yes. Right now, we're fairly stable year-over-year. In terms of the omnichannel business, particularly with e-commerce and last mile, it remains relatively flat. Our customers are currently anticipating a slight increase, likely due to seasonal trends as we approach the peak period, but I would say there's nothing significant at this stage.

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 all. Thanks for being on the call, and we look forward to seeing you guys get on the road. Have a good day.

And that does conclude today's conference. We do thank you for your participation, and have an excellent day.