Q4 2020 Ryder System Inc Earnings Call
[music].
Please standby we're about to begin.
Good morning, and welcome to the Ryder systems fourth quarter, 'twenty and 'twenty earnings release Conference call.
All lines are in a listen only mode until after the presentation.
Today's call is being recorded.
If you have any objections.
Please disconnect at this time.
I would now like to introduce Mr. Bob Brunn, Senior Vice President Investor Relations corporate strategy and new product strategy for Ryder.
Mr. Brunn, you may begin.
Thanks, very much and good morning, and welcome to Ryder's fourth quarter 2020 earnings conference call I'd like to remind you that during this presentation and you'll hear some forward looking statements within the meaning of the private Securities Litigation Reform Act from 995.
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.
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 and Ryder's filings with the Securities and Exchange Commission, which are available on Ryder website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and Scott Parker Executive Vice President and Chief Financial Officer and.
Additionally, John D. As President of Global Fleet management solutions, and Steve sensing President of global supply chain solutions, and dedicated transportation or 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.
And our call. This morning will provide an overview of 2020 and review our fourth quarter results. We'll then turn our will then discuss our outlook for 2021 and review the progress we're making on actions to achieve our ROE target.
Following our prepared remarks, we'll open the call for questions with that let's turn to an overview of 2020.
We're encouraged to see economic and freight conditions continue to improve which is benefiting all areas of our business.
Market awareness of the importance of supply chain reliability has increased as a result of the pandemic.
We believe and accelerating trends and the areas such as E commerce fulfillment last mile delivery and.
Big and bulky goods, and onshoring and near shoring will continue to support growth opportunities and.
Especially in our supply chain and dedicated businesses.
We made important progress on our actions to achieve target returns and expect to continue that to continue in 'twenty and 'twenty one.
Despite the numerous challenges faced in 'twenty and 'twenty, we remain focused on investing and innovative customer solutions and branding that support our long term strategic objectives.
And the second quarter, we launched Ryder share, our freight visibility and collaboration platform and our and.
Encouraged by the traction we've already seen with nearly 2 million shipments track to date with supply chain and dedicated customers.
And the third quarter, we launched a brand awareness campaign communicating writers broad range of logistics capabilities, which has resulted in an increase in sales leads and website activity.
We also launched Ryder ventures, our corporate venture capital funds focused on investing and disruptive technologies that is intended to help bring new and innovative products to our customers.
Full year, 'twenty and 'twenty earnings were negatively impacted by the depreciation from prior residual value estimate changes and COVID-19.
These headwinds were partially offset by higher lease results and lower maintenance costs.
The depreciation impact is expected to decline going forward and vehicle residual value estimates are set at or near historic lows.
Supply chain automotive activity was impacted by COVID-19, but has recovered.
Rental and used vehicle sales were also impacted and continue to improve.
During 2020, and we generated record free cash flow of $1 $6 billion due to lower capital spending and our leverage was reduced to within our target range as of year end.
While 'twenty and 'twenty presented unprecedented challenges I am extremely proud of the many ways in which the Ryder teams supported our customers and our communities safely and efficiently.
Though we still have work ahead of us I'm confident that Ryder is well positioned for 'twenty and 'twenty one.
At this point I'll turn it over to Scott to discuss fourth quarter results and key trends that we saw and each of our business segments.
Thanks, Robert and total company results for the fourth quarter on page five.
Operating revenue of $1 8 billion from the fourth quarter was in line with the prior and here is higher revenue and supply chain and was offset by lower revenue and heat management and dedicated.
Comparable earnings per share from continuing operations was 83 cents per share and the fourth quarter as compared to a loss of one and the prior year.
Higher earnings reflect improved sales vehicles used vehicle sales results and a declining depreciation expense impact related to prior residual value estimate changes.
Improved lease and rental results also contributed to higher earnings.
Adjusted ROE.
And the trailing 12 month period reflects lower earnings mainly due to depreciation expense related to prior residual value estimate changes and COVID-19 impacts.
And I could see cash flow and 2020 reflects lower capital spending and improved working capital.
Net.
Turning to Fms results on page six fleet.
Fleet management solutions operating revenue decreased by 3%, primarily due to lower rental revenue, partially offset by higher lease revenue.
Rental revenue declined 7%, reflecting lower demand.
We offset by a 6% increase and pricing.
Choice lease revenue increased 1%, primarily due to 4% higher pricing and lease vehicles.
Partially offset by the impact of a lower active fleet due to reduced sales and renewal activity.
Yeah.
Fms realized pre tax earnings of $60 million, which includes $86 million and depreciation expense impact related to the prior residual value estimate changes net.
Net of realized gains on the sale of these vehicles.
This impact is lower than the prior year.
<unk> and a year over year earnings benefit from $62 million.
Included including this benefit total Fms pre tax earnings improved by $141 million.
Results also benefited from higher lease performance, reflecting lower insurance costs from the discontinuance of our lease liability insurance extension program and higher pricing.
Rental results benefited from lower maintenance costs.
Including benefits from our cost savings initiatives and earlier actions taken to align the fleet with lower demand due to COVID-19 and higher pricing.
Utilization on the power fleet was 79% and the fourth quarter.
Above the prior year of 76% on a 16% smaller fleet.
Utilization improved throughout the quarter as we saw incremental demand.
Fms EBT as a percent of operating revenue for the fourth quarter was 5%.
For full year 2020, it was negative three 1% below the company's long term target of high single digits, primarily reflecting depreciation expense from prior residual value estimate changes.
Page seven highlights global used vehicle sales results for the quarter.
We're encouraged by the continued improvement and the used vehicle market conditions with double digit price increases for both tractors and trucks.
Globally year over year proceeds were up 15% for tractors and 22% per trucks.
Sequentially tractor proceeds were up 13% and truck proceeds were up 16% versus the third quarter.
Higher sales proceeds primarily reflect improved market pricing and to a lesser extent, a higher mix of vehicles sold through our retail channels.
And the second quarter call, we provided the sensitivity knowing that a 10% price increase for trucks and a 30% price increase for tractors and the U S as needed by 2022 and.
Order to maintain our current policy depreciation residual estimates.
And so second quarter U S truck proceeds were up 20% and tractor proceeds were up 24%.
Although these increases are not age from mix adjusted they are generally indicative of pricing improvements that have occurred since the second quarter of 2020.
As such based on these improvements current truck residual values have exceeded levels that would not require additional policy residual value adjustments and our current tractor values are approaching those levels.
During the quarter, we sold 7000 used vehicles up 17% from the prior year.
Reflecting improved market conditions and investments and expanded our retail sales capacity.
These day flow inventories held for sale was 7700 vehicles at quarter end and is squarely within our target range of seven and 9000 vehicles.
Inventory was down 1700 vehicles from the prior year and down 3000 vehicles sequentially.
Turning to supply chain and on page eight.
Operating revenue versus the prior year increased 8%, primarily due to new business higher pricing and increased volumes.
Growth was driven by the consumer packaged goods retail and automotive sectors.
SCS pretax earnings increased 5%, reflecting higher pricing and new business.
Partially offset by favorable insurance claims development and the prior year and higher compensation related costs.
S E T as a percent of operating revenue was six 8% for the quarter.
It was $8 six for the full year in line with our long term target of high single digits.
Moving to dedicated on page nine.
Operating revenue versus the prior year was down 4%, reflecting the impact of lower contractual sales and late 2019 and early 2020.
Dts earnings before tax decreased 16%.
Favorable prior year insurance claims development, partially offset by improved operating performance.
Etfs EPS EBT as a percent of operating revenue was six 6% for the quarter.
It was seven 9% for the full year in line with our high single digit target.
I'll turn the call back over to Robert to discuss our outlook for 2021.
Thanks, Scott as a reminder, page 10 highlights our primary long term financial target of 15% Roe over the cycle.
The segment operating revenue growth and pre tax earnings goals. We previously outlined and that are shown here are key components to achieving this target.
As we mentioned before reaching our adjusted ROE of 11% to match our cost of equity is just an interim target.
On page 11, we've outlined some key assumptions for our 2021 outlook.
As visibility has improved from last year, we thought it was an appropriate time to reinstate financial guidance, albeit with somewhat wider ranges than in the past due to lingering uncertainty regarding COVID-19 and the overall economy.
Our 'twenty 'twenty, one and forecast was based on our assumption of a moderate and macroeconomic growth environment for the year.
For the full year, we're expecting mid single digit operating revenue growth for the total company.
SCS and Dts are expected to grow by high single digits in line with their long term targets.
Fms operating revenue growth and is expected to be near the lower end of its mid single digit target due to lower lease sales.
We expect our full year tax rate to be.
To be and its normal range of the high Twenty's, assuming the current tax policy.
And Fms the depreciation impact from prior residual value estimate changes is expected to continue to decline, resulting in year over year earnings benefit of approximately $220 million for the full year of 2021 $50 million and the first quarter of 2021 and $100 million and the full year of 'twenty and 'twenty.
Two.
These benefits do not include any potential impact from gain gains or losses on sale or valuation adjustments.
Rental revenue used vehicle sales results and lease sales activity are all expected to be higher in 'twenty and 'twenty one.
And Ses, we expect higher contractual sales activity and pretax earnings as a percent of operating revenue to remain in the high single digit target range driven by improved operating performance, partially offset by increased strategic investments.
D T S.
<unk> sales activity is also expected to be higher than the prior year. However, pretax earnings as a percent of operating revenue is expected to be slightly below the high single digit target range has increased strategic investments offset the benefits of growth.
Turning to page 12, as we laid out in late 2019, we continue to execute on our capital allocation strategy to achieve our long term ROE target of 15% and generate positive free cash flow over the cycle.
We're focused on accelerating growth and our higher ROE supply chain and dedicated businesses with moderate growth and our capital intensive Fms business.
We remain committed to our dividend subject to board approval and plan to continue to reduce leverage to improve balance sheet flexibility for strategic opportunities and or future share buybacks.
We also plan and continue to invest and capabilities that will provide long term revenue and earnings growth opportunities for Ryder and leverage disruptive technologies and our industry.
These capabilities may develop organically through acquisitions or via strategic partnerships and investments.
I'll turn the call back over to Scott to discuss capital spending and cash flow.
Yeah.
Thanks, Robert turning to slide 13 full year gross capital expenditures shown and the chart at the bottom of the page are expected to be between two and $2 $3 billion and 2021 up from $1 1 billion last year.
This increase reflects higher investments and the lease and rental fleet following a year and 2020 per spending was well below normalized replacement levels, primarily due to COVID-19.
And 2021. These capital expenditures are expected to be between one four and $1 6 billion up.
Up from around $850 million and 2020.
And these sales activity and is forecasted to improve as a better economic environment.
<unk> and increased capital spending.
However, a modest decline and lease fleet is it still expected due to low sales activity and late 2020 and early 2021.
Forecast at least spending this year is in line with a normalized replacement spending about one three to $1 4 billion as shown by the dotted line on the chart.
Rental capital expenditures are expected to be between 500 and $600 million up significantly from $85 million last year.
Approximately $250 million will be used to grow the rental fleet by approximately 10% and order to capture increased demand expected from strong E commerce and trade market activity.
The remaining investment will be used to refresh the fleet.
As shown on the chart forecasted rental capex spending and 2021 is above the normalized levels rental replacement of $450 million.
Following a well below replacement spending last year.
Turning to slide 14 to.
2021 free cash flow is expected at 400 to 700 million and reflects our strategy to balance growth and your capital intensive that's enough business with generating free cash flow over the cycle.
2021, and forecasted free cash flow was below the record levels last year under COVID-19 conditions, but is well above historical levels.
Balance sheet leverage this year is expected to remain within our target.
Importantly, we expect to approach our interim ROE target of 11% this year.
Driven primarily by the declining depreciation impact from prior residual value estimate changes.
And so demand recovery and initiatives, including maintenance cost savings are also expected to contribute to higher returns.
Comparable EBITDA increased in 2020, reflecting contractual growth and improved operating performance.
We expect comparable EBITDA to continue to increase and 2021.
I'll turn the call back over to Robert to discuss our strategic initiatives.
Slide 15 highlights some of the key strategic initiatives and investments and technology that we expect will enhance the customer experience and provide long term revenue and earnings growth.
And we're continuing to expand the capabilities of our visibility and collaborative logistics platform brighter share.
Launched in the second quarter of last year Ryder share offers deeper capabilities and our competitor solutions and is translating to efficiency gains and and improved customer experience.
In addition, ridership provides us with a strategic advantage that is enabling us to win more business and larger deals.
And we're continuing to leverage our ecommerce capability by utilizing strategically located E fulfillment sites and last mile facilities capable of reaching 99% of the U S consumer and two days or less.
Additional planned investments include enhancements of order management and fulfillment software.
We believe these investments will position us well to leverage trends towards increased E commerce activity.
We're encouraged by the continued profitable performance of Ryder last mile, which provides home delivery and white glove installation for everything from furniture to large appliances.
We realize the leverage and Ryder last mile network and delivered returns last year above our overall target for supply chain solutions.
We launched an exciting brand awareness campaign and the third quarter that highlights riders broad range of logistics capabilities, where.
And we're encouraged by the increase in sales leads and traffic to Ryder Dot com following the campaign.
Which will continue to run in 2021.
We're continuing to expand our retail and used vehicle sales capacity, we increased the number of retail sales locations by 25% and have an additional 5% increase plan for 'twenty and 'twenty one.
In addition to physical locations. We're planning, we're also expanding our online sales capabilities with investments and technology and sales head count.
We're continuing to invest in our multiyear maintenance cost savings initiative, which has already generated annualized savings of $50 million with an additional 30 million and forecast for 2021.
Included in this initiative has enhanced shop workflow and productivity, which is expected to lower maintenance cost and improve the customer experience.
Turning now to our EPS outlook on page 16.
We're forecasting four year comparable EPS of $4 15 to $4 65, well above a loss of 27 cents and the prior year.
The key drivers of the earnings improvement, our depreciation and used vehicle sales tailwind and.
Prove rental demand and contractual growth.
We're also providing a first quarter comparable EPS forecast of 50 to 60.
Significantly above the prior year loss of $1 38.
Turning to page 17, and supportive of our expectation to approach our 11% interim ROE target in 2021, and I'll provide you with an update on our actions to increase returns and.
As shown in the chart, we expect to make continued progress towards our long term adjusted ROE target as we move past higher levels of depreciation impact related to prior residual value estimate changes.
The declining depreciation impact was a key contributor to the improvement and ROE since the second quarter of last year.
In addition continued cyclical recovery and rental demand and utilization is expected to provide earnings and returns benefits.
The remaining improvement needed to reach our ROE target is expected to come primarily from initiatives that include lease pricing increases that are more targeted to certain applications and customer segments.
Cost actions, including our multiyear maintenance cost savings initiative.
And accelerated growth and our supply chain and dedicated businesses.
Slides 18, and 19 highlight the progress we're making on our five key areas I just outlined.
And improved used vehicle market conditions are expected to benefit used vehicle sales performance and returns and 2021.
We're continuing to expand our retail and used vehicle sales capacity through that.
A combination of digital investments and physical locations as noted earlier.
And rental we've aligned our fleet size with changed market conditions, and we're pleased to see higher year over year utilization and the fourth quarter versus the prior year.
We're now planning to increase the size of our rental fleet to capture higher expected demand driven by a strong E commerce and freight environment full.
Full year, 2021 rental pricing and utilization are expected to improve versus the prior year.
And Fms results continue to benefit from our lease pricing initiatives.
Revenue on new leased vehicles increased year over year by mid single digits, reflecting these pricing actions.
We're also using data analytics to further refine portfolio pricing optimization and capital allocation decisions.
Turning to slide 19 and.
And 2020, we delivered $30 million and annual savings are expected from our multiyear maintenance cost savings initiative further contributing to higher returns on lease and rental vehicles.
Program to date savings are above $50 million and we expect to achieve an additional $30 million and savings in 'twenty and 'twenty one.
And it turns are also benefiting from the discontinuance of our lease liability insurance extension program last year.
We're investing and strategic initiatives to accelerate growth and our supply chain and dedicated businesses. These.
These include our brand awareness campaign, and continued investments and Ryder share and our E commerce fulfillment solutions.
We continue to see strong trends that support logistics and transportation outsourcing and believe we're well positioned to leverage these compelling opportunities.
That concludes our prepared remarks this morning.
Before we go onto questions. Please note that we expect to file the 10-K later next week.
We had a lot of material covered today. So please limit yourself to one question each and 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 will turn it over to the operator open up the line for questions.
Thank you and.
And if you would like to ask a question. Please signal by pressing star one and.
Telephone keypad, if they're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
And again press star one to ask a question well pause just for a moment and hello, everyone and an opportunity to signal for questions.
And we will go ahead and take our first question.
From Stephanie Benjamin Suntrust. Please go ahead.
Hey, good afternoon everybody.
Hi, Stephanie.
And you know Robert on prior calls and kind of called out of Spokane to moderate and nice growth. This year and you know just given the acceleration and the freight environment has that focus changed at all I guess said another way you know how are you thinking about thinking about prioritizing new lease growth from our lease renewals.
And pricing I guess, particularly in relation to the guidance you've laid out and that's in that segment.
Sure. Thanks.
Yeah 70, that's a good question where were we.
We mentioned beginning in 2019, we really talked about.
And I.
Changing our capital allocation strategy, and really focusing on accelerating the growth and the supply chain and dedicated business and moderating the growth and our.
And our more asset intensive leasing business. So as as we it's part of doing that is we've also been putting through some price increases and our and our lease portfolio, which we're beginning to really see the benefits of that so as we go into next year. We expect to continue to do that maybe more surgically than we did over the last couple of years.
And so with that I expect that there will be.
We'll start to eventually see growth and the lease portfolio.
More towards the tail end of the year sequentially.
And then we're going to we're going to continue to really try to make sure that we're getting.
And the appropriate returns on that business. So I would say growth, we're still going to have growth, but just probably wont see that until.
The tail end of next year.
Sorry, this year the tail end of 'twenty and 'twenty one.
Got it thank you so much.
Thank you Stephanie.
And if you find your question has been answered you may remove yourself from the queue by pressing star one.
All up and it does it too.
And we'll go ahead and take our next question from Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks morning, guys. So one and Scott can you just share with us what the assumption is for gains on sales. This year and then can you talk about any impact you're seeing on the supply chain side from from some of these auto issues and if this is spilling over into your ability to get trucks. This year.
<unk>.
Sure well the assumption of art gives us and we didn't we didn't.
And those who have been following the company and while we didn't give a waterfall. This year just because of all the different things that are going on but as.
As it relates to gain on sale and you just think about the gain on the gains that we had the UBS net that we had and in.
And the fourth quarter, which was about 18 million and.
That's a pretty reasonable run rate going forward I think.
From this year will probably be a little bit below that run rate in 'twenty and 'twenty, one primarily because of volume. So even though we expect price increases which would help days are going to have less volume just fewer units to sell so overall slightly below that run rate.
And then around all around the semiconductor issue and auto.
We have built and we've had a little bit of and impact from that I wouldn't say, it's a major impact we've built some of that into the forecast and clear with the range that we have we think we.
We've got a pretty good handle on it but Steve I don't know if you want to add anything on that.
Yes, Robert I would just say, we're working with each one of our Oems a very diverse customer base and right.
Right now, we're just taking it really week to week, but I think it's been as Robert said minimal impact to date.
And just to be clear, you're talking and minimal impact in terms of your supply chain auto business or minimal impact in terms of your ability to start getting trucks.
Yeah.
That was on the supply chain and break on the on their ability to have to get trucks, we haven't had a big impact yet.
Managing through that it would be primarily probably on the rental side that we would feel it but we also have some flexibility of when we sell our rental trucks to be able to accommodate that so Jon I don't know if you want to add anything to add to that on what we're seeing.
Yeah. So as Robert stated, we we havent seen the impact yet we are monitoring the situation. We do expect some level of disruption as we've seen a record ramp up and and vehicle manufacturing activity.
With that class eight production moving up following the Covid decline.
So we do expect some level of disruption as we get into the year and certainly that will elongate some of the lead times for some of the vehicles, but for now we.
We haven't seen any impact on the business as of yet.
Got it. Thank you guys I'll get back in queue. Thanks, Scott.
Well go ahead and take our next question from Todd Fowler from Keybanc capital markets. Please go ahead.
Great. Thank you and good morning.
I appreciate the effort and putting out full year guidance I know theres a lot of moving parts. This year, but they're just thinking about the first quarter as a percent of the overall guidance for the full year. It seems a little bit lower and then maybe where you've gone from a seasonal standpoint. So maybe you can talk about you know the seasonality that you're expecting throughout the year and kind of the cadence of earnings relative.
Where we're at and the first quarter and then just on the free cash flow guidance 400, and $700 million is that the right way to think about a normalized range with what you're targeting from a capex standpoint going forward.
Yeah.
Yes, I guess the first thing from a sequential standpoint, if you look at the first quarter, we are seeing the normal sequential.
Seasonal I would say slow down that you get in the first quarter and transportation and so rental utilization.
Sequentially down from the fourth.
Lower gains on sales primarily due to volume so less units that are sold and the first quarter versus the fourth.
Maintenance costs, usually come up a little bit with the weather and then lower lease miles. So it's probably those are the big drivers really of the sequential.
<unk> decline.
And I think so but I think as you look and as a percentage of the total for the year I think we're also getting you know and.
Improvement throughout the year right rental picks were expecting to pick up seasonally which would give us more earnings later in the year plus we're growing the rental fleet and as we mentioned, we're growing the rental fleet and 10%.
And in addition to that remember the benefit that we're getting from less depreciation.
<unk> due to the prior residual value estimate changes those are also growing somewhat and the second half of the year. So that might be why you have a little bit less and the first quarter, then and the prior periods and then your second question around free cash flow I think from and we've got built and there are a little bit of growth and rental about $100 million and and then.
And lease kind of a replacement level from a capital standpoint. So if you were really look at normalized.
Only replacement capital.
Probably a little bit above that range that we're giving this year because that does have some growth and it so you'd probably be up closer to that $7 million to $800 million.
Free cash flow number and if it was just it was just replacement capital.
Got it okay, I squeezed two and with one so I'll turn it over but that was really helpful and both of those things Robert.
Alright, Thank you Bob.
We'll take our next question from Allison Plenty Act from Wells Fargo. Please go ahead and Hey.
Hey, guys good morning, and.
Just wanted to touch on the brand awareness campaign and I know, it's early stages, but any color or commentary that you can provide and I know you talked about increasing sales leads but any color on either the quality conversion rates relative to what you were anticipating at this point.
Yeah, we're very pleased with what we're seeing so far and this is a multi channel type campaigns and so you'll see us on some of the news networks with a lot of it is also online and we are seeing the pipeline and really grow in terms of.
Leads that we're getting so I'll, let Steve because it's primarily around supply chain and dedicated I'll, let Steve give you a little bit more color on that Steve.
Yes, Alex and we did see higher than expected leads generated from the campaign and you know typically these sales cycles and our business are anywhere from.
And from six to 18 months. So we have seen about a 50% uptake of our expectation in Q4, and expect that really to impact us and the back half of 'twenty, one and so exciting interest really across the board across dedicated.
And all of our supply chain solutions and services as well.
And I guess I forgot what out there.
A key part of our strategy is really accelerating growth and supply chain and dedicated we want to get and that high single digit range.
And maybe and maybe one day, even above that and and really this is a key part of that right getting the campaign to get the awareness out there and then the investments that we're making in <unk>.
Ryder share and he fulfillment or our other important pieces of it but that's where we're putting our efforts and our money as we get into as we get into now 2021.
Great. Thanks for the color.
Thanks Al.
We'll take our next question from drug and Alexander from Goldman Sachs. Please go ahead.
Yeah, Hi, good morning.
Question for you on the on the Dts business you mentioned.
You know some drag to margin relative from long term target students.
I guess strategic investments, presumably I'm, assuming that's technology and software investments that are impacting that and just sort of wondering if that's the case and then being when we get past 2021 does that temper and your expectation is you know we move back towards that longer term target range.
And I guess the quick answer is yes.
The investments are and technology. So you can think about Ryder share is really shared between dedicated and supply chain and they're paying for some of that.
The investments and the AD campaign also being paid partially by dedicated.
And then and then investments and really helping to accelerate the growth of and we're coming from a year and dedicated we didn't get the growth we want it. So we're putting more investment and sales and marketing there too. So yes. They are kind of to get us back up to the run rate, we need to be where you can get our market, where we can see our margins come back within our target range.
Okay.
And we'll go ahead and take our next question from and Justin Long from Stephens. Please go ahead.
Thanks, and good morning.
So I was wondering if you want and good.
Morning, I was wondering if you could share your expectation for the RFC spread this year and based on the guidance you just provided and then on rental circling back to that you talked about and a 10% growth and the fleet, but any color you can provide around what you're assuming for the progression of the freight market from here.
And how that could impact utilization.
Sure well I mean, let me take the first one of them and we mentioned on their call art.
And what we're estimating this year, we're going to approach our 11% Roe.
And so as you know our target is to our interim target was 11% and we want to get to 15%.
So we feel good about that we feel good about the trajectory as you know a good portion of that is just the fall of the falloff of the additional depreciation from those units that.
And where we changed the residual value and they're really taking a lot of depreciation here and the final couple of years. So as those units roll off and we're getting a nice tailwind from that as we go into next year, and we talked about $220 million.
So that's going to give us a big boost and addition to that rental really improving as we go into next year utilization, we're seeing that we're seeing but rental fleet gained some traction back and we're going to grow at 10%.
So those are the two big contributors maintenance cost is another our maintenance cost initiative, we're expecting another 30 million and maintenance cost savings. So it will be well on our way to the 400 million that we announced a target a few years ago by the time, we're done with this year, we still got probably another $20 million left.
So I think all of those things really contribute and get us to that 11, and we feel good about that 11 as is for the full year of 2021. So as we go into 'twenty and 'twenty two we're really at a good run rate as we as we enter 2022 with an additional $100 million by the way of a tailwind as long as UBS holds up and additional $100 million of tail.
And from depreciation.
Okay, Thanks and.
On the rental piece and just following up on that and any more color you can provide on what you're assuming for the freight market and utilization this year.
Sure Let me let me John do you want to take that one.
Sure. So yeah on the on the rental side just to provide a little bit of color. We do expect obviously, the freight environment and continue to get.
And get stronger.
We have seen in Q4 and into Q1 good activity on the E commerce side. So.
We're planning for growth and specifically around those asset classes that are benefiting from those momentum and macro and factors.
Factors and so you can expect utilization for the full year to get back into alignment with historical levels of net 270.
And for the rental fleet.
Should expect year over year improvement each of the first three quarters now that we get past COVID-19 and get back and alignment and Q4 as we saw at the end of 2020.
And so the fleet will start kicking in really and the second half of this year as the units arrived for growth and we should be well positioned per coupon.
Very helpful. I appreciate the time.
Thanks, Jeff.
Oh go ahead and take our next question from Brian Smith from J P. Morgan. Please go ahead.
Hey, good morning, Thanks for taking the question from Roth.
I guess two and two.
Two quick follow up was on here on E Commerce, I think and elaborate a little bit more about what that mix of the business is now clear and he has got some rental activity is probably positioned for that did you see and uptick in in the fourth quarter, where you had the huge volume from the peak season, and then the follow on and to returns and then you can.
Moving on and update on the E fulfillment strategy and you guys had been been working on and then just.
And a quick clarification on non UBS.
Okay, and when they try and hit the first one on the E commerce. It sounds like you were asking more around how it impacted our rental business.
So I'll, let John and little color on that but we definitely yeah go ahead.
And I forget the rental and then other things we're doing on <unk>.
Fulfillment from the supply chain side, or however else it's.
Yep Yep entirely and the portfolio.
Okay. So first on the rental side I think John and give you a little more cover we definitely have seen a big increase overall and activities from E Commerce and our rental business. So John I'll, let you talk a little bit about we saw in the fourth quarter.
Yeah, we definitely saw tremendous pick up year over year and those light duty classes from E. Commerce, we're talking significant double digit increases year on year.
Candidly and some of those classes, we ran out of vehicles to meet the market demand. So we're investing in those classes going into next year.
We've seen that continue.
January our performance is a little bit better than normal and seasonally we had we had planned for that but we are seeing continued strong per man on that E commerce side.
Hopefully around our light duty truck classes.
So let me and I'll, let Steve talk a little about the equal Chrome and says you know as you know we have two components, we have the Ryder last mile which is the big and bulky.
And delivery final mile delivery and then we have our <unk> film and network, which is more us providing.
A fulfillment capabilities that go beyond just big and bulky and really handle parcel and anything else. So go ahead Steve.
Yes. Thanks, Robert Yeah. She is you look at those two businesses combined the small package fulfillment and the big and bulky business.
We are approaching about $400 million of gross revenue there and so up here over the last couple of years.
Let me talk about small package first so the E fulfillment, we expanded one of our locations now have over 1 million square feet cuts.
Customers and those locations year over year saw triple digit increases and volumes and we're continuing to make investments in that business.
To really make it easier for our customers to do business with us.
Creating a proprietary order management system, and we'll be rolling that out here and the back half of the year.
And then and big and bulky and again very strong quarter.
As people continue to be comfortable with with companies like us delivering products for their home versus going and picking it up and store.
And we are continuing to make investments there and our.
Our customer facing self service portal to make it easier to do business with us so seeing strong growth there pipelines are strong as well and expect a good good return share at the end of the year.
Okay.
Okay, Great and then just a clarification on the tailwind of the.
DNA is as it rolls off and it looks like and just coming back to the second quarter and about $250 million tailwind for 'twenty and 'twenty. One that gets went down about $30 million, so a little bit of a decline.
Just give us a sense as to how set those are you know at this point and and what are sort of and moving factors and assuming it's the.
The lease fleet size, so gains would have and in fact, there yeah. That's.
So good question, let me hand that over to Scott and I can clarify that for you.
Hey, Brian just to clarify back to the chart that we did and the second quarter, the total of $520 million.
Of that there was $30 million that we had.
And charges in the first and second quarter for valuation allowances of $30 million.
So when we get the T 20 change year over year, that's really from a policy and accelerated and the second half of 'twenty and 'twenty between the third and fourth quarter, we had $13 million of gains and the <unk> <unk> third quarter, and 17 18 million and the fourth quarter. So if you look at the net for 2020.
Between the valuation allowances, we took and the beginning of the year and the gains and the second half of the year net net that was a zero. So really we're still seeing the E 220 million benefit from policy and accelerated plus the piece that Robert mentioned about you know kind of expectations for gains.
Going forward and 2021.
Alright, so that turns out to 'twenty, then turns into $100 million and 'twenty 'twenty two.
So you get $100 million benefit in 2022.
Assuming that the U b S environment stays as it is.
Okay, and that's that's the primary factor, whether or not that could go up or down and stuff.
Truck price obviously.
Correct.
Okay.
Thank you for that and appreciate it.
All right Brian Thank you.
Hi.
Well go ahead and take our next question from David Ross from Stifel. Please go ahead.
Yes, good morning, gentlemen.
Good morning, David.
Yes.
M&A environment, and you guys have been growing a lot organically recently and him and he has been a little bit on pause now.
You know things are.
Moving out from a financial standpoint, and trends and you go into right direction.
How do you see Ryder.
In terms of.
Yeah acquisitive growth over the next couple of years.
Yeah, David you asked a good question we were at one of the range, we're happy to be back within our target range for our leverage because I think that opens up our ability to do some more acquisitions here over the future and the future.
So as you know we're continuing to be we're continue to look for opportunities to expand our E commerce capabilities. So whether that's new capabilities around ecommerce or increased density maybe in certain markets and we get more leverage.
We're looking at supply chain verticals, maybe some verticals that we're not in today that we might be looking out for new products and services that we can offer our customers and and.
And also obviously, we continue to look at.
And maybe even some roll ups of Fms business and so good.
Good news is that as we go forward I think we have more capacity to do some acquisitions I don't expect it to be the main driver of our strategy, which I still think the best way to grow is organically and we're going to continue to look for that from where we see opportunities.
That allow us to to either pick up new capabilities.
Or enter new markets were going on and we're gonna look at those.
And then just a quick update on Ryder, Mexico, and the growth opportunities down there.
You know Ryder, Mexico continues to be a big opportunity.
First of all I'd say, it's a very well performing operation and a good opportunity for us, especially as we get more near shoring.
Opportunity so I'll, let Steve give you an update on that but I mean, that's the big story. There is that it's and operates very well good returns and we're seeing continued growth opportunities there with multinationals that are continuing to open up and actually obviously now with Covid, it's been a little bit slower, but is there anything else, we need to add to that.
No I think just as you said it you know the majority of the growth there typically feeds and of the U S right and and supportive of a lot of Oems here. So good solid business, great performing business for us and continue to focus on that.
Excellent. Thank you.
Thanks, Dave.
Well take our next question from Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks for the follow up guys.
So I wanted to ask on the residual side how much do you think you used prices would need to raise rise from current levels to think about sort of re raising the policy assumptions and then.
Longer term so for new trucks, you are buying today are you doing anything different with your residual assumptions given the potential call. It by the end of the decade for things like electric or maybe even autonomous trucks do you think that impacts longer term residuals for for stuff you're buying today.
Yeah, well a couple of things and I guess the question around what would need to happen for it and you're saying tough for us to raise our policy and residuals.
And so that's the question yes.
Yeah.
Given what we've been throw out and I don't see us jumping to do that quickly I think what we're looking at we think our policy residuals or and a and a good place right now, especially where we're seeing the market.
And as we mentioned on the call from the truck side. We're currently selling above those policy residuals on the tractor side and the fourth quarter, we were still slightly below but getting pretty close so we're in a pretty good spot in terms of getting there by you know we've talked about mid 'twenty and 'twenty. Two so I think from that standpoint, I think those those residuals are and a good.
Place the accelerated.
Depreciation residuals are lower.
We're still continuing to depreciate those because those are the vehicles, we're going to sell between now and <unk> and 'twenty 'twenty two.
And we're continuing to depreciate those to lower levels.
And that's just the trade off between depreciation and gains and we think it's prudent and where we're at right now to continue with those with those levels, where they are given the uncertainty that can do that.
Remains and the market Scott is there anything else that you wanted to add to that.
No I think youre right and so I think on the policy side, it's something we continue to monitor and looked at it as you mentioned and Scott we look at those factors and the near term.
And you know kind of looking.
And kind of the near term and then as we kind of see the consistency of the pricing and some stability and that pricing one that would be factored into kind of our discussions around.
Policy and adults with bases are past 2022.
And and then your other question on the new units that were signed and remember our holding periods are six years seven years, So I still think.
And those Timeframes, we're still not in an environment, where we're going to have massive.
Adoption of especially on the heavier duty stuff.
Alternative fuel vehicles, but we are monitoring that closely and we're making adjustments.
And where appropriate and bringing them down further but as you know we've already lowered our residuals pretty significantly across.
All of our classes.
Okay helpful. Thank you guys.
No.
And we'll go ahead and take our final question from Brian and I'll come back from J P. Morgan. Please go ahead.
Hey, Thank you for the follow up I just wanted to ask about the Ryder Ventures fund and the last month that launched last quarter rather so.
And what was the I guess, what was the idea behind putting some capital behind there versus.
You know doing what you had before and maybe a little bit of internal development and partnerships.
So that's what's been the reaction I guess from the fleet tick and community and and is this something you put money to work with already or it's going to be a longer slower slower process.
Yeah, that's that's been and evolution for US you know we started looking at a lot of these disruptive technologies.
Back three probably four years ago and I always first started we first started coupe.
Uh Huh truck sharing app and a few of these other initiatives and that's what we really started engaging with some of these startups that they've had and that worked.
Developing this disruptive technology as we went through that we realized you know what there's some of these companies where not only can they help us from a new product standpoint for our customers.
We're in a bit of a unique position to really be able to see which of these which of these.
Companies can add value to the market into our customer base. So as we went through that you know we we found there were certain companies that we would want to actually.
And make some investment and and and and really have more of a stake because we as we bring them to our customer base. So it has been really the the announcement has been very well received it really has allowed us to see a lot more.
Companies, we've got over 100 companies I think that post our announcement that have contacted us and and want to talk to us about what they can what we can do together. So it's much more than just a venture what I would say venture capital initiative, because you know 50 million isn't going to change the world over we're talking about a five year period probably.
But it is a way for us to really engage with more opportunities.
With startups, and then US help those startups really come to market as we have a pretty good understanding of how they fit into our customer base. So that's what's exciting about it we did make our first.
Investment.
We're a company that works with the owner operators.
They came and went out yesterday about a company and we're excited about that as it was.
Investment, but still.
It's a it's and it's an important opportunity for us to work with that company to help bring them to market and I'm just called Smart huh.
And we are working with them to help bring that service to more of our dedicated and supply chain customers.
Okay, Great and I appreciate that thanks Robert.
Thank you.
And at this time, there are no additional questions and like to turn the call back over to Mr. Robert Sanchez for closing remarks.
Okay, Alright, well. Thank you everyone. Good questions. Thank you for the questions. We're really we're really pleased with kind of where and how we ended 2020 and excited about 'twenty 'twenty. One I think you know getting beginning to see light at the end of the tunnel with Covid and really seeing the.
The overall freight environment and economy really continuing to move forward at a good clip.
We think it's a great time for us to.
So to drive our business.
Pick up new customers and really and prepare this company to continue to have a great leadership position and the market. So thank you all for your interest and I look forward to talking to you guys. Soon at some of the conferences.
And that does conclude today's conference. Thank you all for your participation.
[noise].