Q1 2022 Ryder System Inc Earnings Call
Good morning, and welcome to the Ryder system first quarter 2022 earnings release Conference call. All lines are in a listen only mode until after the presentation.
Today's call is being recorded.
Any objections. Please disconnect at this time I would now.
Now like to introduce Mr. Bob Brian <unk>, Senior Vice President Investor Relations and corporate strategy for Ryder Mr. Brian .
Again.
Thanks, very much good morning, and welcome to Ryder's first quarter 2022 earnings conference call.
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.
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.
Or detailed information about these factors and a reconciliation of each non-GAAP financial measures to the nearest GAAP measure is contained in this morning's earnings release earnings call presentation, and Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website.
Presenting on today's call, Robert Sanchez, Chairman, and Chief Executive Officer, and John <unk> Executive Vice President and Chief Financial Officer. Additionally, Hayden 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.
This time I'll turn the call over to Robert.
Good morning, everyone and thanks for joining us.
I'm very pleased performance this quarter and I'm excited to share the significant progress that we're making our strategy to create long term shareholder value through a pre prints and sleep.
Okay.
Growth in our high returning some dedicated.
Begin.
Cutting you a strategic update.
This.
Quarter results.
As you can see mutations again.
Well, that's just a start.
Got it.
Please share that our two recent supply chain acquisitions.
Lastly, in Midwest warehouse and distribution system.
Are both performing well and in line with expectations.
These acquisitions support our strategy to accelerate growth asset light supply chain business.
Whiplash significantly grows our equal film it network with scalable E Commerce, and Omnichannel fulfillment solutions and Midwest expands our multi client warehousing offering.
We expect both acquisitions to be accretive to 2022 earnings.
Sales activity across all segments remains strong following record new contract wins, it supply chain and dedicated in 2021 and again in the first quarter of this year.
Challenges impacting labor supply chain and truck production continue to provide us with additional growth opportunities because they focused companies leadership.
On the importance of transportation and supply chain and drive companies to make long term outsourcing decisions.
<unk> is also benefiting as companies look to source truck capacity in this extremely tight market.
We generated record ROE of 25% for the trailing 12 month period, reflecting strong demand and pricing in our used vehicle sales and rental.
As well as benefits from our multi year lease pricing and maintenance cost savings initiatives.
Or are we also improved from a declining depreciation expense from prior residual value estimate changes.
We increased our full year 2022, ROE forecast to 23% to 25% from our prior forecast of 20% to 22%, reflecting the strong market environment and SMS.
We're on track to return to our high single digit target an EBT as a percent of operating revenue and supply chain and dedicated in the second half of the year, reflecting pricing adjustments to recover higher labor costs as well as growth.
We're executing our previously announced 300 million accelerated share repurchase program, which we expect to complete no later than October .
Our balance sheet remains strong and provides capacity for additional acquisitions and share repurchase activity.
We increased our full year 2022 free cash flow forecast.
$550 to $650 million, primarily to reflect $300 million and expected proceeds from U K asset sales related to our previously announced exit from our U K Fms business.
Slide five provides an overview of the investments, we're making to drive accelerated growth.
Fly chain and dedicated a key element of our strategy to generate higher returns.
Developing new and enhanced capabilities in e-commerce fulfillment.
Last mile delivery and freight brokerage provides opportunities to leverage profitable growth areas in the market and cross sell services.
Innovative technology enables us to deliver value added logistics solutions that are in high demand.
In previous quarters, I highlighted a ryder last mile and Ryder share offerings.
This quarter.
Discuss our ecommerce fulfillment offering which was significantly enhanced by our recent acquisition of whiplash.
Sales and marketing are a key to our brand awareness and ensuring customers are aware of the full array of supply chain capabilities.
Our ever better campaign and increased digital marketing presence have driven a significant increase in qualified sales leads.
We're also expanding our sales force and investing in their capabilities to drive additional growth opportunities.
We expect to continue pursuing M&A opportunities with a focus on adding new capabilities geographies Android industry verticals. These opportunities are an important way to accelerate growth, especially in supply chain and dedicated and we have a strong track record of success in this area.
<unk> ventures, our corporate venture capital fund aims to invest $50 million over five years and a direct investment in startups.
Our investments here advanced strategic relationships to support development of new products that benefit our customers and solidify our position as an industry leader.
We've made investments in numerous exciting areas such as autonomous vehicle technology.
E Commerce micro fulfillment and digital driver staffing and are working with these startups to address important customer needs.
Slide six provides a closer look at riders ecommerce fulfillment offering.
Recently branded rider e-commerce by Whiplash.
Through this offering we have combined the best in class E Commerce fulfillment platform with.
With industry, leading logistics expertise to bring significant value to our customers.
The combined solutions portfolio provides seamless.
Direct to consumer retail and warehouse fulfillment nationwide with the ability to deliver it to a 100% of the U S population within two days.
60% within one day.
Our proven technology platform facilitates customer on boarding and easily integrates with customer e-commerce sales platforms.
Additional customer benefits include streamlining to orders and inventory management as well as optimize carrier selection.
The platform also has the flexibility to scale to meet the needs of small to medium sized businesses as well as large enterprise brands.
The ability to seamlessly scale with growth.
Dresses, a key pain point of emerging brands looking for a partner who can support them over time.
Utilizing robotics and automation enhancements drives increased productivity lower cost improve safety and retention and enables seamless scaling within the same footprint.
We're excited about the value rider e-commerce by Whiplash brings to the market and we expect this offering will be a key contributor to accelerated growth in supply chain.
I'll turn the call over to John now to cover the first quarter results.
Thanks, Robert total company results for the first quarter on page seven.
Operating revenue of $2 2 billion in the first quarter increased 22% from the prior year.
Reflecting revenue growth in all three business segments.
Comparable earnings per share from continuing operations were $3 59 in the first quarter.
From a dollar one nine in the prior year.
Higher earnings primarily reflect improved <unk> performance in used vehicle sales rental and lease as.
As well as declining depreciation impact from prior residual value estimate changes.
Earnings also increased from improved performance in dedicated.
Return on equity our primary financial metric reached a record 25, 4% for the trailing 12 months period, reflecting improved <unk> results.
First quarter free cash will decline to 108 million from 241 million in the prior year.
Reflecting higher planned capital expenditures, partially offset by higher used vehicle sales proceeds.
Turning to often less results on page eight.
<unk> management solutions operating revenue increased 10%, reflecting 40% higher rental revenue driven by strong demand and higher pricing.
Rental pricing increased 8%, primarily due to a higher rates across all vehicle classes.
Fms realized pre tax earnings of 248 million.
By 185 million from the prior year.
$115 million of this improvement is from higher gains on used vehicles sold and a lower depreciation expense impact related to prior residual value estimate changes.
Improved rental performance also significantly contributed to increased definitely mass Ernie.
Rental utilization on the powerfully was a record 82% in the quarter and above the prior year of 73%.
Results also benefited from ongoing momentum from lease pricing initiatives, which provided a 4% increase in revenue per average active vehicle this quarter.
Partially offset by 2% smaller average active lease fleet.
We expect to see incremental benefits going forward as we reprice leases at higher rates upon renewal over approximately the next three years.
That's what Matt CVT as a percent of operating revenue was 19, 4% in the first quarter at 16, 8% for the trailing 12 months above the segment's long term target of low double digits.
Page nine highlights used vehicle sales results for the quarter.
Used vehicle market conditions remained robust due to get freight activity and tight supply conditions, reflecting continued OEM production constraint.
Higher sales proceeds reflects significantly increased market pricing.
In North America year over year proceeds more than doubled for both tractors and trucks.
Sequentially North America tractor proceeds were up 29% and truck proceeds were up 16% versus the fourth quarter 2021.
During the quarter, we sold 4300 used vehicles down 35% versus the prior year due to lower inventory levels sale.
Sales were down 20% sequentially from the fourth quarter, which include a large retail transaction.
Used vehicle inventory was 3200 vehicles at quarter end below our targeted range of 7000 to 9000 vehicles.
Average used vehicle pricing is well above our residual value estimates used for depreciation purposes. We believe our residual value estimates are appropriate based on market conditions and our outlook.
Turning to supply chain on page 10.
Operating revenue versus the prior year increased 47% due to acquisitions.
And strong revenue growth in all industry verticals, reflecting new business and higher volumes.
Operating revenue, excluding acquisitions was up 21%.
S E S E T increased 4%, reflecting revenue growth from new business.
Partially offset by lower automotive earnings due to supply chain disruptions and labor challenges.
S C. S E T as a percent of operating revenue of four 6% was below target.
We continue to expect that S. T. S. EBT percent will return to the high single digit target levels in the second half of 2022.
Reflecting growth from record sales as well as pricing improvement the volume recovery in the auto sector.
Moving to dedicate on page 11.
Operating revenue increased 25% due to new business and increased pricing.
D T S. EBT increased 56%, primarily due to revenue growth improved performance and higher gains on sale vehicles used in ETF.
These benefits were partially offset by increased labor costs.
Dedicated EBT as a percent of operating revenue was just below target at six 8%.
We continue to expect that dedicated EBT percentages will return to high single digit target levels in the second half, reflecting the new sales activity and pricing adjustments.
Turning to slide 12.
First quarter lease capital spending of 422 million was up year over year due to increased lease replacement.
First quarter rental capital spending of 180 million increased modestly year over year, reflecting higher investment in light and medium duty truck classes, which are structurally more in demand.
Our full year 2022 capex.
Capex forecast is unchanged from prior forecast provided on our earnings call back in February .
Our lease Capex forecast of 2 billion to $2 1 billion reflect higher lease replacement and growth capital versus 2021 .
In North America, we expect the average choice lease fleet to be unchanged year over year. However, the year end fleet is expected to be up approximately 4000 vehicles as vehicles are delivered later in the year.
Given this timing with the lease fleet growth growing late in 'twenty 'twenty. Two we expect this will primarily benefit earnings in 2023.
Our rental Capex forecast remains unchanged at 500 million and is below the prior year with our average fleet expected to grow by 10%.
As we discussed on our prior call in 2022 we are investing more capital in trucks versus tractors as trucks continue to benefit from strong demand and pricing trends supported by E Commerce growth.
Additionally, light and medium duty trucks, historically have been a less volatile asset class during the downturn.
Our full year 2022 forecast for gross capital expenditures remains at $2 7 billion to two 8 billion.
We expect proceeds from sale of used vehicles of approximately $1 1 billion.
This number now includes approximately 300 million in proceeds related to the exit of our U K Fms business.
And higher proceeds from the sale of used vehicles full year net capital expenditures are expected to be between $1 6 billion.
And $1 7 billion.
Okay.
Turning to slide 13 as mentioned earlier, we've increased our 2022 forecast for free cash flow in a row.
Our 2022 free cash flow forecast of $550 million to $650 million includes $300 million I'd expect the proceeds this year from the sale of U K assets as we wind down those operations.
Balance sheet leverage is 256% at the end of the first quarter and is at the low end of our 250% to 300% target range.
We expect leverage to be below our target range for the balance of the year, providing capacity for additional acquisitions or share repurchases.
2022 return on equity is expected to be between 23% and 25% rich.
Reflecting strength in Fms and recovery of SCS and Dts returns to.
To target levels in the second half of the year.
I'll turn the call back now over to Robert to provide our EPS forecast for second quarter and full year 2022.
Thanks, John .
Turning to page 14, we're raising our full year comparable EPS forecast to 13 to $14 up from the prior forecast of 11 to $12 and above our prior year of 958, we're also providing a second quarter comparable EPS forecast of $3 50 to $3 seven.
<unk> five above the prior year of $2 40.
Used vehicle sales and rental are the key drivers of our increased full year forecast. We continue to expect a very strong market conditions in used vehicle sales and rental to moderate in the second half of the year with slower freight growth, partially offset by ongoing vehicle production constraints.
Record new contract wins in 2021, and again in the first quarter of 2022 and supply chain and dedicated combined as well as our recent supply chain acquisitions are benefiting 2022 revenue growth.
We continue to expect supply chain and dedicated margins to return to their high single digit target range for EBT as a percent of operating revenue in the second half of the year, reflecting price increases to address higher labor cost.
Overall, we're pleased with the trends that favor outsourcing and results.
Of our efforts in sales marketing and new product development. We're confident in the actions that we're taking to increase returns and position and position us well to achieve our return on target.
Our return targets over the cycle.
That concludes our prepared remarks. This morning before we go to questions I'd like to remind you that we're hosting an investor day on June 3rd to be held in New York City. So please be sure to pre register is required if you'd like to attend in person.
Also please note that we expect to file our 10-Q this afternoon.
Please limit yourself to one question. Each if you have additional questions you're welcome to get back in the queue and we'll take as many questions. As we can at this time I'll turn it over to the operator.
And if you would like to ask a question. Please.
Star one on your telephone keypad.
Speaker phone. Please make sure your mute function is turned off to allow your signal to me sorry equipment.
Ken.
Wanted to ask a question.
Pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll now take our first question from Jordan.
With Goldman Sachs.
Yeah, Hi morning.
Curious I know you mentioned the pricing adjustments would be critical driver to getting the.
The supply chain in the dedicated margins to the high single digit percent in the back half I mean does this sort of suggest that.
Those pricing adjustments are a quite a locked in or and just waiting to deploy or how do you think about that and as he move hopefully looks at level. Thanks.
Yes, Jordan I'll, let Steve give you more color on that but a lot of them are locked in and it's a matter of that dip.
Deploying and also the timing, but Steve why don't you give them an update.
Yes, Jordan as Robert said, we are fundamentally changing the structure of our contracts.
We shared that with you.
Late last year. So it is that you know.
It is a process that we're going through I'd say on the SCS side. We've got a couple of accounts that were going to close up here in Q2 and on the dedicated side, maybe a little larger percentage about 15% of the business that we're still trying to negotiate through so as.
As John and Robert both said, we expect that to return in the second half.
Thank you.
Thanks Dawn.
You find that your your question has been answered you may remove yourself from the queue by pressing the star key followed by the digit Q.
We will now take our next question from Scott Group with Wolfe Research.
Hey, Thanks, good morning, guys.
Good morning, So that'll help us can you help us with the $2 of higher earnings guidance for the year is there any way to put sort of some.
Some of the buckets, how much is from used how much rental how much from anything else and then just Robert bigger picture when I when I look.
In the first quarter, 19% Fms pre tax margins.
That doesn't feel sustainable now negative margins in 1920, certainly are the right number either I'm struggling a little bit what's the what do you what do we think what should we think as a sort of the right normalized margin or range of margins for this business going forward.
Yeah, Let me, let me first address the.
The first part of your question really around.
How much how much of the raise is really used vehicle in rental versus the rest I would tell you. The majority of the raise for the full year. So the $2 increase is driven by outperformance in used vehicle in rental we saw both of those really have an extremely strong first quarter, we're continuing to see that strength in April so really.
Haven't seen any signs of a slowdown however, as part of our original plan and forecast in our current forecast we are assuming that there will be some slowdown in the second half some moderation if you will.
And both of those it is it is very difficult to tell them when thats going to happen I think everybody is trying to predict the cycle and it's it's.
Not very easy to predict so we'll see how it goes but that's the assumption that we've made if you think about earnings for the business we talked about.
On the last call, we talked about over earning based on the forecast we had given over earning from rental and.
And UBS of maybe $2 50 to three Bucks. So you add the $2 to that now and you're probably looking at 450 to $5.
Which would still get you around that $9. If you just do the math.
Uh huh.
Earnings.
Comparable earnings for 2022.
But obviously, that's not we don't expect that to happen in 2022. So if you move forward into 'twenty three 'twenty four you have to add to that $9. The growth in the base business. So the growth we're expecting to see in lease the growth in earnings we're expecting to see in our supply chain and dedicated businesses, which will will certainly offset and raise that nine.
Over time, so I think thats, probably a way to look at the whole business.
In terms of the margins we've laid out the target for Fms is being low double digit margin.
<unk> as a as really a good run rate level and long term targeting clearly we're way above that now because of what's happened with rental and UBS.
Very helpful. Thank you guys.
Okay. Thanks, Scott.
We will now take our next question from Stephanie more with less.
Hi, good morning.
Hi, Steph.
Maybe just starting with your ethnic leasing business pricing gains continuing to be really strong and I think should continue going forward with upcoming renewals. As you noted but has the lack of truckload simply truck availability impacted almost near term volume so to speak and then is there an opportunity as we look.
Forward well, you'll still have some nice pricing on renewal, but also there'll be more vehicle availability, where you'll see some nice call it volume gains as well.
Both.
Yeah, Yeah, Stephanie that's a great question, because we are seeing benefits in pricing, but we're also having some limitations on growth because of the timing of OEM delivery. So let me hand, it over to Tom who can give you more color on that.
Yeah sure. Thanks, Robert Good morning, Stephanie.
I think I mentioned this on the on.
On the last on the last call, but we are somewhat constrained by the amount of slots that we have been able to get and because of that the majority of our sales here in the first quarter, we're really with our existing customer base and focused our sales on the existing customer base, which I guess to some extent wood.
Limit our growth in the short term.
As John mentioned no by the end of the year, we do expect the lease fleet to be up.
About 4000 units year over year, which should carry well into 2023.
And we did finally see in Q1.
Sequentially, an increase in the lease fleet in North America, I want to be clear on that the North American lease fleet was actually up from Q4 to Q1 and that was the first time, we have seen that we finally turned the corner there on the lease fleet growth. So we should expect.
To see.
Some lease fleet growth, particularly in North America, as we move forward and then as supply.
As you mentioned the supply.
Opens up and we start to see more lease deliveries and the Oems produce more we should expect to get our share of that growth as well.
Thank you I appreciate the color.
Thanks, Stephanie.
Well take our next question from Jeff Kauffman with vertical research partners.
Thank you very much well congratulations first of all I mean fantastic results great to see.
So I wanted to I wanted to turn back the clock to 2018.
Atomy was booming and starting to slow down.
Rider was adding to fleet.
Some people question, whether it was too aggressive or not and then 19 and 20 of the bottom falls off don't know if that's happening this time, but just the idea that I think people are anxious about how the world is going to slow how quickly. We don't know those answers how do we avoid over growing this time around and then kind of what's being.
Done a little differently in the planning or how are you approaching this as we go into this very uncertain time later this year and next year.
That's a great question I think look there's a lot of things are different in 2018, clearly we're in a very robust environment.
Much more so even than we were in 2018 as it relates to rental and UBS.
We have we have as we've come out of this if certainly grow the lease the rental fleet, but also make sure we don't overextend that growth.
As we manage through it and make sure that we have avenues to redeploy equipment as rental we expect at some point, we'll slow down some but I would tell you what's different a few things that are really important that a different number one is the the law.
Lower residual values that we have on the books now we've certainly taken residual values to much lower levels at the beginning of 19, which in a lot of ways, especially earnings.
Of the company. We've also as we talked about in each call have.
Increase the spread on our leases, which are producing better earnings for the company also so we've we've raised the watermark. If you will of earnings for the company that even in a slow down you are going to see some.
Impact from.
Maybe less rental margin.
Less gains, but overall the overall earnings of the company are in a much different place than they were back.
So I think I think that's the biggest difference other than that I'll tell you.
Tom has a playbook that he uses to manage through.
Rental ups and downs.
We've talked a little bit about it externally, but John I mean, Tom if you want to give him a little color on some of the things that you're doing to help manage.
The ups and downs of the rental fleet through the cycle.
Yeah, this being a really thoughtful about I'll start with the lease fleet, but being very thoughtful about.
The term outs of our lease fleet, but the length of the leases that were selling today with a view towards what we expect.
The downward cycle to come or when the downward pressure on used truck pricing happens.
You were units coming through the system during that timeframe.
Then of course, our rental perspective, we always have the lover lots of redeploy equipment and move our vehicles to lease applications.
<unk>.
I think one of the things that may be different going into this cycle as well as the the growth we're seeing in supply chain and dedicated and we can use those rental assets to move into supply chain and dedicated to support their growth needs as opposed to purchasing new equipment. That's a good avenue for us as we're seeing strong growth there.
And then look we've got thousands of customers.
That need vehicles, we always have some level of replacement that happens.
In the lease fleet and we can fund those replacements with existing equipment versus buying new as well. So we run all of those plays as we go through a downward cycle and.
We believe as we go through the.
Next the next one whenever that is we will be able to run those plays and adjust the fleets are quickly.
That was a great answer and that's my one question. So thank you.
Thanks, Jeff.
We will now take our next question from Alan.
With Wells Fargo.
Hi, good morning.
Just wanted to talk instead of in line with the last question S. C. S. Could you maybe you know nice organic growth there could you talk to the pipeline of opportunities is it slowing or is it to continue to expand and I guess along with that with the recessionary fears you know how should we think of that business you know through cycles. At this point how should that perform for you just any thought.
Thanks.
Yes, well, let me just say that SCS had a record sales year last year, new contract signing and had another record first quarter.
This first quarter. So the pipeline is certainly continues to be very strong as companies are really focused on their supply chains and how they can improve them and really right in our sweet spot of of of what we do the other thing.
Hand, it over to Steve in a second but I do want to remind you that supply chain dedicated and lease are all contractual businesses multi year contracts.
So they are much less prone to swings in the economy.
Obviously supply chain has been impacted this go around because of auto but auto has a lot of pent up demand now, which we should see an improvement over the next.
Several years as all of those vehicles need to be built and that will certainly benefit our business there.
And certainly as we work through some of the.
Precedented labor issues that have been out there for drivers, but Steve do you want to give you a little more color on on supply chain.
Yeah, Robert Thank you Allison, yes, the pipeline remains very very strong as Robert said, we had another record quarter.
And here in Q1.
With a re launch of our ever better campaign from a TV perspective in late summer of this year. So we had great trend traction over the last couple of years with that contributed a very large percentage of the pipeline.
Yeah, you bet.
Undermine to the pent up demand in automotive.
We hope that that's going to come back in a big way here in the back half of the year.
Our continued investment if you look back to slide five.
Our continued investment in brokerage is it good on route for us as well.
Well as our technology and bathroom Ryder share is a differentiator in the market.
And as contributed both on the SCS and Dts Sad and then our continued investment in our e-commerce platform as well as our router view to that area, which is the big and bulky last mile customer facing technology. So we believe we're leading the market in a number of technology areas, which are extremely important to the end consumer.
Great and just going back to that the contract side of it you know is it based on volumes or is it sort of Max just trying to understand sort of what the impact could be there you know understanding it is contractual.
Yes from a we are seeing some longer term contracts are here recently over the last the last year or so you know we've got some 10 year contracts that have come come through fourth which is we haven't seen that you know over the last four or five years, but typically are typically a three to five.
Here deal with what we're finding across both dedicated and supply chain.
Yeah, Hi, thank you.
I'd add to that Allison is that most of the contracts are cost plus or fixed and variable. So if you think about the leverage.
With earnings they do have leverage as you have more volume you you also get more margin.
Got it helpful. Thank you.
Thanks Charles.
Well now take our next question from Todd Fowler with Keybanc capital markets.
Okay, great Thanks, and good morning.
Robert I think historically, there's been somewhat of a relationship between what we see in the for hire truckload market and rental utilization, but I know over the past couple of years, you've been shifting the mix within the rental fleets can you share with US either you know how to think about the rental fleet now versus prior cycle like maybe mix of trucks versus tractors.
And how you would expect rental utilization to progress if we see some softness in the in the truckload market.
And then out of the $4 50 to $5, so kind of over earning that you laid out how much of that do you think is rental versus U B S.
Yeah.
So I'll, let Tom give you a little bit more color, but yes, there has been historically a relationship with.
For higher and certainly our our tractor rental business.
Not seen as tighter relationship with the truck rental business. So that's why we had to look to move more of the fleet towards that truck rental we're not done but as you look at where we've been investing in growth that has been on the truck side. So I'll let.
Tom gave you a little bit more color on that shift to more trucks and where we're at.
Yes, if you think about the capital that we've invested in the units that are yet to come in in rental and even forward looking a bit but generally speaking you'll see the growth of the rental fleet to be almost exclusively trucks.
And not tractors, so tractor business really there to support any of our lease customers in the lease and the lease growth business.
And what we've seen.
Just recently.
In the first quarter is less reliance we track kind of.
The business that we have and the various S. ICD codes across and you can imagine we do business with everybody in rental but.
The reliance on transports is down year over year.
We're seeing more in the food and beverage type industries and of course, the support of E Commerce, which is almost exclusively trucks and we expect that to continue.
As we as we move forward and certainly our capital being invested in rental is to support that growth in E Commerce.
Yeah, Let me, let me just add to that first of all.
To reiterate what Tom said.
Here, we are in April I know theres been some discussion about softening in the spot market, but I can tell you that our.
Our both our tractor and our truck rental utilization. This month is still on pace for another record.
Months, so we are not seeing yet any slowdown there.
It doesn't mean that you won't we won't see some at some point, possibly in the in the tractor side, but we haven't seen it and then the second part of your question about what percentage of the uplift.
Sorry of the over earning if you will is UBS versus rental as John I think it's 80, 80%. The majority of it is UBS John do you want to you got the numbers there.
Yeah, if you think about what we put out there in the waterfall at the beginning of the year. The lift of the $2 is primarily UBS with 80% to 85% coming from UBS.
And then the balance is a rental with some puts and takes in the other components, but it's primarily a UBS rental outperformance.
Yeah, all of that helps and obviously you know Robert there's concerns about you know the contagion in the truckload market and so I think that that context is very helpful for how the rental fleets position this cycle versus the prior cycle.
I'll get back in the queue. Thanks for the time.
Thanks, Tom.
Yeah.
Yeah.
We will now take our next question from Brian <unk>.
With J P. Morgan.
Okay.
Hey, good morning, Thanks for taking the time.
Just wanted to ask a clarification on the auto side. It sounds like you expect some activity to improve in the back half of this year just wanted to see you can add some more detail around that because it also sounds like there's a pretty long runway that youre looking at and then secondarily. If you can just maybe outline some of the expectations, even just of the size of the E Commerce.
And the fulfillment business.
At this point in time, you know, how you see that growing and whether or not that would be.
Accretive or dilutive to the overall SCS margin profile. Thanks.
Dave you want to you want to take that.
Sure well so Brian let me, let me hit the auto side, you know, we're still experiencing a part shortages. It started off as a semiconductor and now it's kind of spread through some other components. So is.
Is that is that kind of solidifies in the back half. We are you know we should get back to full run rates.
So that is an unknown.
On the E Comm side, let me take a minute.
Talk a little bit broader about the acquisition.
The Big thing is that this acquisition brought to US is that now gives us a port to door capability. So the whiplash team great operating team great sales team they exceeded sales expectations in Q1.
But now we can go to customers, whether they're small emerging brands all the way up to blue chip customers.
<unk> Port Drayage services in the North West L. A area, New Jersey, and Savannah, and then again.
Again, the technology stack, we believe is a differentiator as well as the partial optimization capability so exciting.
Exciting.
For Us I think the integration is going.
On track to our expectations and starting to see some cross sell opportunities with our with the base business.
So.
I'll just I'll just add to that a couple of points. One is the auto so the second half we're really looking at.
Hum.
Disruption is still in Q3, I think in general across our customers and then Q4, maybe tailing.
Tailing off a little bit, but really a big driver of the improvement is our price and contract renegotiations that we still continue to feel very positive about.
The other thing the other thing I would add is this e-commerce as Steve mentioned, we're really happy with the operations. We picked up we do think that will become a meaningful part of the supply chain story over the next several years.
And certainly be accretive and I think a big part of the growth.
Alright, Thanks, Robert and then is there anything else you think you need to add to fully flesh out that solution or is it pretty much all in place at this point and just looking to grow.
Yeah, what I would say the technology stack is where the team is focused right. Now you know we always have to stay ahead of the competition. There. So we've got a plan that we'll be investing here in the back half of the year, So that'll kind of come out call. It early 'twenty three.
And then new location, we're going to add in the.
In the E comm space will probably add a little over 1 million square feet. You may have seen the press release earlier. This week, we opened up a new location in Columbus, Ohio.
We've got a new location opening up in L. A.
And then when we talked about earlier this year in the south of Atlanta.
The continued.
Investment across the across the board.
Same thing on the big and bulky side. This year, we've already expanded two locations and added two new locations.
To their portfolio and we've got about five more expansion slash additions are planned for the back half of the year. So space, you've got to get closer to the customer. So you can speed up the delivery to the end consumer.
The other thing in terms of modeling out the grocery com. It is it is really.
A hot area right now and I think if you think about where that business could be in the next several years, we are expecting that business to be $1 billion business.
Whether it's three years or four years, but we do see that the growth rates that we expect that that's a billion dollar business for us.
Yeah.
Okay, great. Thanks, I appreciate all the detail.
Thanks, Brian .
We will now take our next question from Justin long with Stephens.
Thanks.
Wanted to go back to the comments around the four and a half to $5 of over earning from an EPS perspective.
He ran the math and came up with that range. When did you assume for the decline in used pricing and rental demand versus where we are today and then maybe on the 2022 guidance as well I'm curious if you could share the updated.
Estimate for gains on sale for the full year.
Yeah on the on the.
For $4.
$4 50 to $5.
We're assuming gains of $75 million to $100 million.
John I believe that's the number.
More normalized gain number and then rental really going back to more normalized utilization levels. That's really how we how we get to those numbers in terms of the balance of the year I'm not sure we've given guidance on gains for the year. So John I know if there's any other color for back half.
Earnings estimates.
Just then but you could you.
You can look at our raise for for the balance of your forecast of $2 and if you account for the majority of that being UBS.
That gives you an idea of where we're ending up for for gains number we.
We are seeing pricing sequentially and you know get stronger.
And we expect then in the second half or proceeds to start moderating.
From the record levels, where we're enjoying today.
Okay got it thanks for the time.
Okay great.
Well take our next question from Greg.
You bet.
People.
Yes. Thank you good morning, everyone.
Good morning.
Robert I think it's fair to say, you've conveyed them greater confidence in the shape of riders future, earning volatility just thinking about this cycle versus past. If you had to select would you say that's more a function of supply chain solutions growth or do you think the lease price lease pricing changes are driving that more.
Well I'm going to give you the I'm going to give you the easy answer which is both but but I'll tell you look I think the <unk>.
Way to look at it is the earnings power of the company has gone up that is primarily drew.
Driven by Fms, initially and I would say lease and all the maintenance that just leases the maintenance cost initiatives that we've put in place over the last several years that have produced a $100 million in savings lower annual cost. If you will <unk> zero based budgeting program that we put in place several years ago also brought us significant reduction in annual costs.
And then now I would tell you beginning to see the benefits of the supply chain and dedicated growth and that I would tell you that the lifting of the base is maybe more fms the future growth is maybe more supply chain and dedicated that might be that the best way to look at it.
Great. Thank you.
Thank you Barry.
Well take our next question from Scott Group with Wolfe Research.
Hey, Thanks for the follow up so just going back again to this sort of $9 number.
Does that is it.
Include the benefit from continued leasing pricing.
No.
No that's just applying.
That's just applying the four to $4 50 to five to this year's numbers. So next year as we continue to get leased benefit youre going to get an offset to that number which will make the $9 higher as we grow supply chain and dedicated they're going to generate more earnings youre going to get a higher number as we just just catching the tail.
The margin improvement in supply chain and dedicated for next year.
Supply chain dedicated margins are going up significantly between the first and second half of the year next year Youre going to get the benefit of that also is that catches its tail. So all of that I would say is our offsets if you will to that to that.
Takeaway.
When I look at it that way and would move that $9 up as we go into next year and the following year.
Is there a rough ballpark just from just from the lease pricing. If you were to take the whole book and price it to where you think market rates are like how long do you think you're under earning on on lease pricing right now.
Yeah look we have not given that level of detail the level at the level that we have given us maybe force you guys to do a little bit more math, but but we've said that historically, we were getting 60 to 100 basis points spread and we're now targeting 100 to 150 and getting about 150.
At this point spread so that difference in spread is really the ongoing benefit each year as he turned over 50% of the fleet you're going to get that improvement in returns on the units that you are turning over plus the better growth.
And then just last one you said that that that number assumed 75 to 100 million of gains when I. Just look back 16 through 'twenty you guys were seeing losses on sales what is that sort of because of changes in accounting is that something that can happen again or is very unlikely to happen again.
Used really starts to slow at some point.
Yeah, Yeah, that's the big difference right, we've significantly lowered our residual value assumptions.
So we're certainly because we feel we are positioned in a way that it's very unlikely that we would see the need for losses to record losses or any type of additional depreciation. So that's why we're estimating that's if you just think if you just look at pricing were used truck pricing can go.
Even when you get to the trough levels.
We still think we're pretty close or near the trough levels were still pretty close to that $75 million to $100 million. So so that's why we've kind of.
Given that level of.
I have an assumption when we came up with the.
$4 50 to $5.
So I've used prices go back to where they were three years ago, you're still gonna do 75 to 100 million of gains.
If they get it right around there right around I will tell you we have the way that we've.
Set up because there are we talked about in the way we've established our residual values. We've also built in a downturn. So assuming there is a downturn to historically trough levels.
Once that happens once every 20 years.
We would have we would have less than 75 would probably be close to breakeven, but if you go to anything more normalized.
You are in that 75 to 100.
Very helpful. Thank you guys appreciate the time alright, thanks Gail.
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 thanks, everyone for the questions listen don't forget please pre register for the Investor Day, where we're excited to have that session didnt get a chance to see all of your lives and really be able to lay out.
More crisply the future of the company and me and what the reasons that we're so excited about so thank you.
That concludes today's conference. Thank you all for your participation.
Okay.
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