We’re not seeing — we’re not expecting a big seasonal pickup in truck rental in Q4. It could still materialize. I mean here we are at the third week of October. It’s kind of the way we’re seeing it, it’s not a pickup, but still could happen. But that’s really the difference in the Q3 to Q4 guide. In terms of 2024 puts and takes, I think you asked that question in the last one, not a whole lot has changed, since the comments I made then, I think it’s important to know that we’re consistent with our balanced growth strategy. We expect our ROE next year will certainly be within our stated range of mid-teens to low 20s, depending on where we are in the cycle. So if we don’t get any help from rental and used trucks, you could be in the mid-teens.
If you get some help, we could be in the high teens. We expect the biggest drivers of earnings growth are going to come from the top-line growth of our contractual businesses, are about 85% of the revenue, which is Lease, Supply Chain and Dedicated. Lease and Supply Chain, we expect will be at their target growth rates. And just as a reminder, Lease is mid-single digits, and Supply Chain is low double-digits. Dedicated, it’s still too early to tell. It could be off of their targets of high single-digits because of the sales softness that we’ve seen this year as the freight market has softened, you’ve got less customers really running to do Dedicated. But as the freight market comes back, you’re going to see Dedicated sales pick back up, and certainly, we’d expect to be back at those levels.
As far as the transactional rental and used vehicles that are more than tied to the freight market, again, it’s still early to tell what the whole freight market is going to do. But I would expect those to have continued softness in the first half of the year and then a possible pickup in the second. I guess the extent of that pickup will determine whether the used vehicle sales and rental, what the impact of used vehicle sales and rental will be on our earnings next year. But again, another reminder, we’re going to continue to leverage our zero-based budgeting process to find other cost savings opportunities, probably throttling — maybe throttling some of our strategic investments as needed. Again, focused on making sure that we deliver on our returns commitments to our shareholders.
And again, it’s — again, what we expect next year is to again deliver on our goals for the balanced growth strategy with higher highs and higher lows.
Scott Group: Can I just try to ask just maybe a little differently. So like you started the year saying $11 to $12 of earnings and now you’ll do closer to $13. How much of that incremental $1 to $2 do you think is temporary or more part of like you originally gave us a normalized earnings number a year ago. Should we just add $1 to $2 to that normalized earnings number and that’s the new normal, if that makes sense?
Robert Sanchez: Yes. No, I would say a good chunk of that year-over-year improvement — I’m sorry of that forecast improvement was in used vehicle sales, right? So you saw used truck prices did not come down as deeply as we had originally forecasted. So that’s what drove a good chunk of that. The base business continued to perform really well, maybe a little bit better than what we had originally expected. But I would tell you, the big improvement versus our original forecast was primarily around used vehicle sales, partially offset by rental being a little bit worse than we had expected.
Scott Group: But you still feel very good about whatever you told us was normalized earnings, nothing really — nothing is changing there at all?
Robert Sanchez: Absolutely. I would tell you, more confident now than we were at the beginning of the year.
Scott Group: Okay, helpful. Thank you, Robert.
Robert Sanchez: Thank you, Scott.
Operator: We’ll go next to Allison Poliniak with Wells Fargo.
Allison Poliniak: Hi, good morning. Robert, can you just turn to Supply Chain Services. You mentioned the diversification that you guys have achieved so far to date. How are you thinking of that diversification today? Do you think is there more to do on that side? Does the mix need to shift a bit more? Just any color there? Thanks.
Robert Sanchez: Yes. We’re coming from a business that was really originated with automotive, right? We were very heavily into the automotive logistics business. Still a very good business for us, but we’re now down where auto, I think represents 27% of our revenues. So we’ve really been able to diversify into CPG, we’ve diversified into retail e-commerce, last mile. As you saw, we now did an acquisition to — or we’re in the process of doing acquisition to be able to offer co-packaging and co-manufacturing services to CPG and some of the other verticals. So we feel really good about where the balance is today. You’re going to see us maybe do some additional acquisitions if they become available in some of the other industry verticals.
But I think we have a very good balance of business across our Supply Chain business today. I think as is shown, as we’ve gone through the last few cycles where some industry verticals have been up and some have been down and overall Supply Chain has continued to improve their earnings year-over-year. Yes. Health care, I think is another area that we are probably underrepresented right now. We’ve got a few what I would call, flagship accounts, but we want to continue to grow that.
Allison Poliniak: Perfect, thanks for the color.
Robert Sanchez: Thanks, Allison.
Operator: We’ll go next to Brian Ossenbeck with JPMorgan.
Brian Ossenbeck: Hey, good morning. Thanks for taking the question. Just two quick ones. Robert, maybe you can talk about the puts and takes for used trucks, tractors, in particular, it looks like things have stabilized maybe a little bit better than we and you had anticipated, but you got some more production ramping up, the truck market is still pretty weak. So I guess looking to see what you would need to see happen to sort of reach that residual value, which you’re still above by a good amount. And then secondly, we’ve heard more about competition. Is this part of the freight cycle, not too big of a surprise, but I just wanted to see how it was trending from your perspective, especially in Dedicated, where there’s been some contract shifting, some share shifting based on the increased competition. Your thoughts there would be appreciated. Thank you.
Robert Sanchez: So Brian, thanks for the question. Look, I think on the used tractor side, we’re seeing the decline that we — that we had originally expected at the beginning of the year. Actually, like I mentioned earlier, came in a little bit better than we expected, but a decline nonetheless. You’ve got it in our appendix as to where we are from a used truck pricing standpoint. We feel really good about where we are versus our residuals and where we think pricing can go versus our residuals. So we’re not concerned on that end. I think the cycle is going to play itself out over the next several quarters. I think you’re — we’ve probably seen the biggest of the declines, and then you’re going to see it over time, begin to flatten out and eventually come back as the freight cycle returns.
As far as new Class 8 production, that’s going to be a driver as to when the used truck market bottoms out. So we think that new production will probably start to slow down as we get into the first half of next year, and that will be helpful for new tractor — I’m sorry, for used truck prices. We’re very happy about the fact that we have expanded our retail network, and we’re now being able to leverage expanded retail network to retail more of these used trucks as opposed to having to wholesale them. We’re also being very cognizant of our inventory and making sure that we stay within our target range, which we’re right smack in the middle of that right now. So we’re going to continue to monitor that very closely and make sure that those tractors are moved out to the secondary market at good prices, but not allowing inventory to really come up.
