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Text: 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.
John was most recently President of Fleet Management Solutions and brings a wealth of experience to the CFO role, having held various senior operational and financial roles during his 20-year tenure at Ryder.
Tom brings a great depth of experience to the leadership role in FMS from his 28-year career at Ryder, having most recently served as Senior Vice President and Global Chief of Operations for the FMS business.
John will take you through our second-quarter results, which exceeded our expectations.
I'll then review our updated outlook for 2021, discuss the significant progress we're making on actions to achieve our ROE target, and review our initiatives to mitigate the impact of future cyclical downturns on our business.
With that, let's turn to our strategic update.
Secular trends continue to support our strategy to accelerate growth in our supply chain and dedicated businesses while targeting moderate growth and increased returns in our fleet management business.
We're seeing strong sales and pipeline growth across all our businesses, driven by secular trends that favor outsourcing as well as increased focus by customers on supply chain resiliency and the use of innovative technology solutions.
Trends that we saw accelerate during the pandemic, such as e-commerce, and the demand for last-mile delivery of big and bulky items remain strong and support the strategic investments we're making in these fast-growing areas.
We remain focused on increasing returns and are pleased with the significant progress we're making to achieve our ROE target.
Multiple years of lease pricing increases that began with a focus on de-risking our portfolio through lower residual assumptions and cost updates are benefiting returns.
Most recently, we began implementing additional pricing actions to improve future lease returns using data analytics around customer segmentation, application, equipment type, and other key drivers of lease returns.
Strong freight conditions combined with our initiatives, resulted in better-than-expected results in used vehicle sales and rental.
We're seeing the benefits of dynamic pricing in used vehicle sales and rental as well as our prior investments to increase retail used vehicle sales capacity.
We now expect to achieve ROE in the range of 16% to 17% this year, above our long-term target of 15%.
Later in the call, we'll review additional enhancements we're making to our playbook to improve returns over the cycle.
Moving on to cash flow.
Our year-to-date free cash flow is $602 million, down $10 million from the prior year as higher vehicle capital spending was largely offset by higher proceeds from the sale of used vehicles and property.
We're increasing our full-year free cash flow forecast to $650 million to $750 million, up from $400 million to $700 million, primarily to reflect the anticipated impact from delays for new vehicle deliveries from the OEMs. We're encouraged by our performance and by the market trends we're seeing in the areas that we're investing for future growth.
We continue to invest in technology and other areas to address industry disruption in order to enhance our business model and position the company for long-term success.
Slide five provides an overview of the investments we're making to drive accelerated growth in our supply chain and dedicated business, a key element in our strategy to generate higher returns and long-term profitable growth, developing new and enhanced products, such as Ryder Last Mile, e-commerce fulfillment and freight brokerage is critical for us to leverage growth trends in supply chain and dedicated.
Innovative technology enables us to deliver value-added logistics solutions that are in high demand.
RyderShare, our visibility and collaboration tool, is a strategic differentiator for us, and its capabilities have moved to the forefront of our sales discussions.
RyderView is our proprietary customer interface that supports self-scheduling and delivery execution for Ryder Last Mile.
Enhanced order management and fulfillment software supports our growing presence in e-commerce fulfillment.
Sales and marketing effectiveness is key to our brand awareness and communicating the broad array of logistics and transportation solutions we offer.
Our Ever better campaign and increased digital marketing presence have driven an increase in qualified sales leads.
We're also expanding our sales force and investing in the capabilities and their capabilities to drive additional growth opportunities.
RyderVentures, our corporate venture capital fund, aims to invest $50 million over the next five years through direct investment in start-ups, primarily where we can partner to develop new products and services for our customers.
We've invested in areas including e-commerce micro fulfillment, a tech-enabled hub and spoke transportation network, and an AI-enabled dispatch product for small- to medium-sized fleets.
In addition, we continue to evaluate strategic M&A opportunities focused on adding new capabilities, geographies, and our industry verticals, which we view as another important way to accelerate growth, especially in our supply chain and dedicated business.
Slide six takes a closer look at Ryder Last Mile, which provides final mile delivery of big and bulky goods through a nationwide network of hub and agent locations that service every ZIP code in the Continental U.S. The Ryder Last Mile offering was launched in 2018 as a result of a strategic acquisition.
Since then, online purchases of big and bulky goods, such as furniture, exercise equipment, and home appliances have accelerated, driving demand for a seamless home delivery experience.
We've been pleased with the strong revenue growth in Ryder Last Mile.
RyderView is our proprietary customer-facing technology that allows consumers to self-schedule their deliveries and provide them with real-time delivery updates.
Our centralized customer support team is key to the execution of a qualified delivery experience.
We carefully monitor customer delivery feedback to ensure that service levels are maintained.
We're making strategic investments in this area in order to continue to enhance the capabilities and customer experience for this important product offering.
We're enhancing RyderView's capabilities and plan to launch Version 2.0 later this year.
Enhancements include easier and more convenient self-scheduling and rescheduling of deliveries as well as the option to schedule those deliveries at the point of sale.
We're enhancing the software used for the delivery route optimization.
We're also rolling out a customer experience that is branded for our customers, the retailer so that RyderView 2.0 serves as an extension of their brand.
We continue to expand our geographic footprint in order to place us closer to the end customer and improve delivery speed.
We recently announced the addition of two new fulfillment centers in Milwaukee and Philadelphia.
In addition to future geographic expansion, we'll also look at opportunities to add new services and capabilities or industry verticals through strategic M&A or RyderVentures.
We're confident that RyderView 2.0 will be a market differentiator that will enhance the customer experience and propel further profitable growth for Ryder Last Mile.
Total company results for the second quarter on Page seven.
Comparisons reflect COVID effects in the prior year, which most significantly impacted second quarter 2020 results in used vehicle sales, rental, and SCS automotive, all which have recovered quite well since then.
Operating revenue of $1.9 billion in the second quarter increased 18% from the prior year, reflecting double-digit revenue growth across all three of our business segments.
Comparable earnings per share from continuing operations was $2.40 in the second quarter as compared to a loss of $0.95 in the prior year.
Higher earnings reflect improved performance in FMS from higher gain on the sale of used vehicles, a decline in depreciation expense impact related to prior residual value estimate changes, and improved rental and lease results.
Return on equity increase, reflecting the declining depreciation impact, higher gains, and improved lease and rental results.
We expect continued improvement in ROE, our primary financial metric, as we move past the earnings impacts from prior residual value estimate changes and COVID, and continue to benefit from our actions to increase returns.
Year-to-date free cash flow was $602 million below prior year as planned.
Turning to FMS results on Page eight.
Fleet Management Solutions operating revenue increased 14%, primarily reflecting higher rental and lease revenue.
Rental revenue increased 58%, driven by higher demand and pricing.
Rental pricing increased by 13%, which is significantly higher than we've seen historically, reflecting pricing actions taken over the past year, prior year COVID effects, and a larger mix of higher-return pure rental business in the current quarter.
ChoiceLease revenue increased 5%, reflecting higher pricing and miles driven, partially offset by smaller fleet.
FMS realized pre-tax earnings of $158 million are up by $262 million from the prior year.
$131 million of this improvement resulted from lower depreciation expense related to the prior residual value estimate changes and higher used vehicle sales results.
Improved rental and lease results also significantly contributed to increased FMS earnings.
Higher lease pricing and miles driven were partially offset by a smaller fleet.
In rental, higher demand and pricing drove higher results.
Rental utilization on the power fleet was 80% in the quarter, significantly above the prior-year 56%, which included COVID impact, and was close to historical second quarter high.
FMS EBT as a percentage of operating revenue was 12.9% in the second quarter and surpassed the company's long-term target of high single digits.
For the trailing 12-month period, it was 6.3%, primarily reflecting higher depreciation expense from prior residual value estimate changes.
Page nine highlights global used vehicle sales results for the quarter.
Used vehicle market conditions continue to be robust with strong demand meeting tight supply.
Globally, year-over-year proceeds were up 73% for tractors and 72% for trucks.
Sequentially, tractor proceeds were up 22% and truck proceeds were up 27% versus the first quarter.
Higher sales proceeds primarily reflect significantly improved market pricing.
As you may recall, in the second quarter of last year, we provided a sensitivity noting that a 10% price increase for trucks and a 30% price increase for tractors in the U.S. would be needed by 2022 in order to maintain current policy depreciation residual estimates.
Since the second quarter 2020, U.S. truck proceeds were up 59% and tractor proceeds were up 67%.
Although these increases are not age or mix-adjusted, they are generally indicative of pricing improvements that have occurred since the second quarter of 2020.
As such, with these improvements, average pricing in the U.S. for trucks and tractors is above residual values applied for depreciation purposes.
During the quarter, we sold 6,000 used vehicles, down 5% versus the prior year, reflecting lower trailer sales.
Sequentially, sales volumes declined due to lower inventory levels.
Used vehicle inventory held for sale was 4,300 vehicles at quarter-end and is below our target range of 7,000 to 9,000 vehicles.
Inventory is down by 9,700 vehicles from the prior year and down by 1,900 vehicles sequentially.
Turning to supply chain on Page ten.
Operating revenue versus the prior year increased 32% due to new business and increased volumes and COVID effects in the prior year.
Growth was driven by double-digit percentage increases in the automotive, retail, consumer packaged goods, and industrial sectors.
SCS automotive business experienced intermittent customer plant shutdowns in the quarter due to a global shortage of parts.
We have included an estimated impact from potential shutdowns in our balance of year forecast as the situation remains fluid.
SCS pre-tax earnings increased 11%, benefiting from revenue growth, partially offset by strategic investments in marketing and technology as well as increased incentive compensation and medical costs.
SCS EBT as a percent of operating revenue was 7.7% for the quarter and below the company's long-term target of high-single digits.
However, it was 8.2% for the trailing 12-month period, in line with our long-term target of high single digits.
Moving to dedicated on Page 11.
Operating revenue increased 12% due to new business and higher volumes.
Revenue growth from new DTS business can be largely attributed to wins from competitors and private fleet conversions.
DTS earnings before tax decreased 38%, reflecting increased labor costs, higher insurance expense, and strategic investments.
Labor costs are being impacted by an exceptionally tight driver market.
Driver turnover is up significantly, and open positions are taking longer to fill.
We're working with customers to adjust rates where needed to recoup the incremental wage and other costs, and this will take some time to address.
We're also continuing to implement automatic contract triggers that allow for more real-time wage cost adjustments.
We've increased our recruiting headcount and remain focused on maintaining a quality work environment, where most drivers get home every day while providing competitive wages and benefits.
Our strategic investments are positively impacting sales performance, and we expect this to provide accretive earnings in the future.
DTS EBT as a percentage of operating revenue was 5.1% for the quarter.
It was 6.9% for the trailing 12-month period, below our high single-digit target.
Turning to Slide 12.
Lease capital spending of $501 million was above prior year as planned due to increased lease sales activity.
Lease returns are benefiting from pricing initiatives and support a more normalized lease capital investment.
Rental capital spending of $397 million increased significantly year-over-year, reflecting higher planned investment in the rental fleet.
We plan to grow the rental fleet by approximately 13% in 2021, mostly in light- and medium-duty vehicles in order to capture increased demand expected from strong e-commerce and free-market activity.
Our full-year 2021 forecast for gross capital expenditures of $2.2 billion to $2.3 billion is at the high end of our initial forecast range and is shown in the chart at the bottom of the page.
This is up from 2020 when spending was well below normalized replacement levels primarily due to COVID.
Turning to Slide 13.
Our 2021 free cash flow forecast has increased to a range of $650 million to $750 million from our previous forecast of $400 million to $700 million.
This reflects the expected impact from OEM vehicle delivery delay due to the chip shortage.
2021 forecasted free cash flow is below prior year's record level under COVID conditions but is well above our historic levels.
It also reflects our strategy to balance growth in the capital-intensive FMS business, with generating positive free cash flow over the cycle.
Balance sheet leverage this year is expected to finish below 250%, which is the bottom end of our target range.
Importantly, as Robert mentioned, we now expect to achieve ROE of 16% to 17% this year, with a declining depreciation impact and a stronger-than-expected recovery in the used vehicle sales market.
Rental demand recovery and lease pricing initiatives are also expected to contribute to our increased ROE forecast.
Higher year-to-date comparable EBITDA, which excludes the impact of gains and losses on used vehicle sales, reflects revenue growth and improved operating performance.
Turning now to our earnings per share outlook on Page 14.
We're raising our full-year comparable earnings per share forecast to $720 million to $750 million from a prior forecast of $550 to $590 and well above a loss of $0.27 in the prior year, which included COVID effects.
We're also providing a third-quarter comparable earnings per share forecast of $1.95 to $2.05, significantly above our prior year of $1.21.
Third-quarter earnings are expected to be down sequentially, reflecting lower expected gains from fewer used vehicles sold due to lower inventory levels as well as the estimated impact on SCS automotive due to the chip shortage and plant retooling.
Our forecast assumes that strong freight and economic conditions continue into 2022 and a continuation of the current tax policy.
Lease, rental, and used vehicle sales performance are the key drivers of higher expected results.
We expect lease to benefit from our pricing actions, increased sales activity, and improved operating performance.
We also expect pricing in rental and used vehicle sales to remain strong.
We're forecasting quarterly gains around $35 million for the balance of the year, reflecting higher pricing, partially offset by fewer vehicles sold due to low inventory levels.
In FMS, the depreciation impact from prior residual value estimate changes is expected to continue to decline, resulting in a year-over-year benefit of approximately $40 million in the third quarter of 2021.
This benefit does not include any potential impact from gains or losses on sale or valuation adjustments, accelerating outsourcing trend in supply chain, including growth in e-commerce and last-mile delivery, support strategic investments in new products and technology aimed at driving future growth opportunities.
We expect labor markets to remain under pressure, particularly with drivers.
Private fleets are also experiencing this pain point, which we expect will continue to drive additional sales opportunities for our dedicated offering.
We are focused on initiatives to attract and retain drivers and be the employer of choice.
In supply chain and dedicated, we're on track to meet or exceed our high single-digit revenue growth targets.
Supply chain and dedicated returns are also anticipated to be impacted by higher labor costs as well as strategic investments in new technology and our brand awareness campaign.
Finally, the semiconductor shortage is expected to delay the delivery of some vehicles in FMS. We expect the impact of delivery delays to be offset by higher lease sales activity in the first half of the year as well as higher rental utilization and pricing.
Turning to Slide 15.
I'd like to provide a brief reminder regarding our planned actions to increase returns and achieve our ROE target.
As shown on the chart, the biggest driver is moving past higher levels of depreciation impact related to prior residual value estimate changes.
Slide 16 highlights the progress we're making on the five key areas from the prior page.
Strong used vehicle market conditions are expected to continue in 2021, and we're capitalizing on those trends through pricing actions and our expanded retail sales channel.
We expect the earnings benefit from the declining depreciation impact to continue.
In rental, strong year-to-date performance and our planned rental fleet growth are supported by strong pricing and demand trends.
In FMS, results continue to benefit from our lease pricing initiatives.
Revenue on leased vehicles increased year-over-year by mid-single digits, reflecting these pricing actions with additional opportunity going forward as we replace expiring leases at higher pricing levels.
Our multi-year maintenance cost initiative delivered more than $50 million in annual savings through the end of last year, and we are on track to achieve an additional $30 million in savings in 2021.
Cost actions also include exiting underperforming assets in locations that we expect will improve our long-term returns.
We're investing in strategic initiatives to accelerate growth in our higher return supply chain and dedicated businesses.
Slide 17 provides an updated view of the expected performance of our lease portfolio as a result of the pricing actions taken.
Substantially, all leases, with the exception of those signed in 2013, are expected to perform above our target return.
The leases signed in 2013 represent only 8% of our lease fleet.
The majority of the power fleet in this cohort will be replaced in the balance of 2021 at higher pricing.
As a result of our pricing and cost actions since 2014 as well as the analytics-driven pricing changes we are incorporating now, we expect the returns on our lease portfolio to continue to increase as the portfolio turns over to more recent and higher returning vintage years.
Although we are encouraged that we expect to exceed our target ROE of 15% in 2021, we remain focused on taking action -- additional actions to position our business to generate long-term returns of 15% ROE over the cycle.
As such, we're implementing actions to mitigate the impact on returns from future cyclical downturns.
These actions include maintaining balance sheet flexibility through a disciplined capital allocation strategy that will enable us to pursue higher return investments and strategic M&A opportunities as well as share repurchases.
In ChoiceLease, we're replacing certain leased vehicles prior to contract expiration during an upcycle in order to reduce the number of used vehicles that we need to sell during a downturn.
In rental, we're planning to shift our asset mix for better returns by growing our light- to medium-duty truck fleet, as we view this asset class as less susceptible and heavy-duty tractors to the impacts of the freight downturn.
This quarter, we completed an analysis of our residual values and life expectancies of our entire fleet, which included, among other factors, reviewing vehicles by class, condition, expected sales, availability of equipment, and technology changes.
As part of this review, we also factored in a potential future cyclical downturn on used vehicle prices.
As a reminder, in recent years, we significantly lowered the residual value estimates for our entire fleet to a level where used tractor prices have only been below these estimates in four of the last 21 years.
However, based on our most recent analysis, we made an additional modest reduction in residual values, primarily for certain tractors.
This change is intended to further reduce the probability of losses or need for accelerated depreciation during a potential cyclical downturn, even if tractor pricing returns to historical trough levels like they did in the early 2000s and in 2020.
We expect these changes will increase depreciation expense in 2021 by $18 million, representing approximately 1% of total depreciation expense for the year.
Before we go to questions, please note that we expect to file our 10-Q later today.

user
q2 non-gaap earnings per share $2.40 from continuing operations.
sees q3 non-gaap earnings per share $1.95 to $2.05.
sees 2021 capital expenditures of $2.2 billion - $2.3 billion.
ryder system - in scs & dts, on track to meet/exceed revenue growth targets, but anticipate returns to be impacted by increased labor, insurance costs.
now expect nearly all of our leases to perform above target returns.

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