Q4 2022 Ryder System Inc Earnings Call
Okay.
Good morning, and welcome to the Ryder system fourth quarter 2022 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. Kaylene Candela, Vice President Investor Relations for Ryder Muscadel you may begin.
Thank you good morning, and welcome to Ryder's fourth quarter 2022 earnings Conference call.
Like to remind you that during this presentation, you'll hear some forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these expectations.
Ranges in economic business competitive market political and regulatory factors.
Where do you told information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and John <unk>, Executive Vice President and Chief Financial Officer.
Additionally, Tom Stevenson President of Global Fleet management solutions, and Steve sensing President of global supply chain solutions and dedicated transportation are on the call today and available for questions. Following the presentation. At this time I'll turn the call over to Robert Good morning, everyone and thanks for joining us.
I'm extremely pleased with the strong results delivered by the team in the fourth quarter and throughout 2022.
Secular trends favorable market conditions and continued execution on our balanced growth strategy enabled us to deliver record revenue and earnings in 2022.
I'll begin today's call with an overview of our strategic priorities and the significant progress we made during 2022.
John will then take you through our fourth quarter results, which exceeded our expectations again this quarter.
We will also review our capital expenditures cash flow and capital allocation priorities.
I will then introduce our 2023 outlook review, our assumptions and discuss how we positioned the business to deliver on our targets over the cycle.
Let's begin with slide four.
And 2022 we made significant progress on our balanced growth strategy, which allows us to balance top line growth with returns and free cash flow and ultimately increase shareholder value.
Our key strategic priorities are focused on de risking and optimizing our business model.
Enhancing returns and free cash flow over the cycle.
And taking actions to drive long term profitable growth.
As it relates to Derisking and optimizing the model several years ago, we lowered residual value estimates and SMS.
Historically low levels to reduce the reliance on used vehicle proceeds to achieve targeted returns.
In late 2021, we began adjusting our dcs contracts in order to better insulate us from labor cost variability.
At the time driver wages escalated rapidly and by amounts greater than we could quickly recover under our existing contract terms.
Negotiated rate rate increases with our customers and also began to adjust contract terms to facilitate quicker more efficient cost passengers in the future.
This is a multiyear initiative with approximately 40% of gcs revenue under new contract structure.
As of year end.
Another optimizing initiative was the exit of our sub performing Fms business in the U K, we announced this decision in early 2022 and as of year end, we substantially completed the exit of business operations and received approximately $400 million in proceeds from the sale of vehicles and properties.
These proceeds have been redeployed to higher return opportunities.
We also executed an important initiatives to increase returns and free cash flow.
The pricing initiatives in dedicated and supply chain to address higher labor and subcontract that transportation cost improve returns in both segments in 2022.
In Fms, we surpassed our $100 million annual maintenance cost savings target with our multi year initiative as anticipated our.
Our lease pricing initiative remains a strong contributor to higher returns in Fms.
As of year end, 2020% to 60% of our lease portfolio had been priced at higher returns.
And then an additional 20% of the portfolio has already been contracted under the new pricing model with vehicles expected to be in service over the next 12 months or so.
This initiative is expected to be fully implemented by the end of 2025 with an estimated total annual benefit of 125 billion upon completion.
Lease growth, excluding the U K inflected positive in 2022 with an increase of 3500 vehicles.
Accelerating supply chain dedicated growth is a key driver for achieving long term profitable growth.
54% of riders 2022 revenue was from supply chain and dedicated up from 37% in 2015, reflecting secular trends and our initiatives to accelerate growth in these higher return businesses.
Hi, Jen and dedicated also generated strong sales of new long term customer contracts in 2022, which we expect will continue to contribute to profitable growth.
Our strong balance sheet enables us to fund enabled us to fund organic growth as well as strategic supply chain acquisitions and.
In 2022, we executed several targeted acquisitions.
Support our strategy to accelerate growth in our supply chain business.
Whiplash was the largest acquisition in 2022 and significantly grew our April film It network and scalable E Commerce and Omnichannel fulfillment solutions are.
Our acquisition of Baton a tech startup enhance our new product and technology development capabilities.
Our strong balance sheet also enabled us to return over $680 million to shareholders through three share repurchase programs.
Thirdly dividends.
Overall, we demonstrated significant progress on our balanced growth strategy with plenty of opportunity ahead for increased returns cash flow and shareholder value.
Now I'll turn the call over to John to review, our fourth quarter results. Thanks Robert.
Total company results for the fourth quarter on page five.
Operating revenue was $2 4 billion in the fourth quarter up 14% from the prior year, reflecting revenue growth in all segments in the supply chain acquisitions.
Comparable earnings per share from continuing operations were $3 89 in the fourth quarter.
Up from $3 52 in the prior year.
Driven by higher earnings and dedicated rental and supply chain.
Actually offset by lower used vehicle sales.
Return on equity our primary financial metric was 29% for full year 2022, reflecting ongoing truck capacity constraints in the market as well as continued benefits from our initiatives to increase returns.
2022 free cash flow decreased to 921 million from $1 1 billion in the prior year, reflecting higher planned capital expenditures, partially offset by higher used vehicle sales proceeds.
Free cash flow in 2022 includes approximately $400 million from the sale of vehicles and properties in the U K.
Part of the exit of that business.
Yeah.
Turning to <unk> results on page six leap.
Fleet management solutions operating revenue increased 2%, reflecting 8% higher rental revenue driven by higher pricing.
Fleet management operating revenue increased globally, despite a 4% negative impact from the wind down of the UK business.
Rental pricing increased 6%, primarily due to higher rates across all vehicle classes.
Pre tax earnings and free management were $255 million unchanged from the prior year, despite lower gain from $20 million and inflationary cost pressures.
These headwinds were offset by year over year earnings benefit from declining depreciation related to prior residual value estimate changes and higher rental results.
Rental utilization on the power fleet remained strong at 82% on a larger fleet.
Fleet management EBT as a percent of operating revenue was 19, 3% in the fourth quarter and 22% for the full year.
Both well above the segment's long term target of low double digits.
Excluding all used vehicle gains in the quarter fleet management EBT percent was still under segments low double digit target range.
Page seven highlights used vehicle sales results for the quarter.
Used vehicle market conditions remained relatively strong reflecting tight vehicle availability amid moderating freight activity.
Paired with the prior year use tractor proceeds in North America declined 6%.
Whereas used truck proceeds were 4% higher on.
On a sequential basis proceeds for used tractors and trucks, both declined by a lower amount than we anticipated.
Attractive proceeds decreased 2% and truck proceeds decreased 7%.
During the quarter, we sold 6800 used vehicles of which 2000 related to the exit of our U K business.
Excluding the UK sales activity used vehicles sold were down by approximately 300 vehicles versus the prior year and down 200 vehicles sequentially from the third quarter.
Our used vehicle inventory was 4300 vehicles at year end.
Below our target range of 7000 to 9000 vehicles.
Although used vehicle pricing declined it remains well above residual value estimate to use for depreciation purposes.
For your information Slide 22 in the Appendix provides historical sales proceeds as a percent of original cost incurred residual value estimates for both used tractors and trucks.
Turning to supply chain on page eight.
Operating revenue versus the prior year and increased 44%, primarily reflecting the whiplash acquisition and organic revenue growth of 22% drew.
Driven by higher pricing, new business and higher volumes.
All industry verticals generated double digit organic revenue growth for the quarter.
Supply chain, EBT increased 67%, primarily reflecting higher pricing adjustments as well as new business.
These benefits were partially offset by a 20 million asset impairment charge related to the early termination of a customer distribution center.
Supply chain EBT as a percent of operating revenue was 4% in the quarter up from the prior year, but below the segment high single digit target range.
Moving to dedicated on page nine operating revenue increased 10% due to higher pricing and increased volumes.
Dedicated EBT increased to 150%, primarily due to pricing adjustments to address higher labor costs as well as benefits from improved market conditions for professional drivers.
Dedicated EBT as a percent of operating revenue of nine 4% was in line with the segment high single digit target.
Turning to slide 10.
2022 lease capital spending of $1 8 billion was up year over year due to increased lease vehicle replacements for expiring lease contracts.
Our 2023 forecast of $2 4 billion reflect higher lease replacement and growth capital.
We expect the lease fleet to be up.
Between 3000 to 4000 vehicles had euro.
2022 rental capital spending of $541 million decline versus prior year, reflecting lower planned investments.
In 2023 rental capital spending is expected to decline further to $400 million as we're expecting Greg Hill conditions to normalize.
Our average fleet is it tends to be down slightly from 2022, and our ending rental fleet is expected to be down by 4% or <unk> 800 vehicles.
We continue to increase capital spending on trucks versus tractors as trucks continue to benefit from relatively stable demand and pricing trends and the asset class tends to be a little less volatile during a downturn.
Our full year 2023 forecast for gross capital expenditures is 3 billion and primarily reflects higher lease replacement and growth capital versus 2022.
We expect proceeds from the sale of used vehicles from approximately $800 million in 'twenty three.
The low prior year, which includes proceeds related to the UK exit.
Our full year 2023, net capital expenditures are expected to be $2 2 billion.
Turning to slide 11.
The trajectory of our cash flow continues to improve over time, reflecting growth in our contractual supply chain dedicated and lease businesses, which comprise approximately 85% of riders operating revenue.
In 2022 operating cash flow grew to $2 3 billion and we expect that to increase to $2 4 billion in 2023.
Our free cash flow profile has changed significantly since the implementation of our balanced growth strategy.
The negative free cash flow generated in 2019 reflected higher growth objectives for lease at the time.
From 2024.
Lower targeted lease growth under the balanced growth strategy as well as COVID-19 effects and OEM delays resulted in lower capital spending and higher free cash flow.
Proceeds from the exit of the UK, Yes mass business also benefited free cash flow in 2022.
Summary on the right side of this slide illustrates the strong free cash flow generated by the business prior to investing in fleet growth and adjusting for the UK exit proceeds in 2022.
2023, we expect to generate $200 million in free cash flow and prior to investing in growth capital. This number is expected to be approximately 600 million.
Proceeds from the sale of used vehicles are expected to be flat year over year, reflecting higher volumes of units to be sold due to increased replacement activity in 2023 offset by lower pricing.
Our capital allocation priorities continue to support our strategy to drive long term profitable growth.
Our top priority is to continue to invest in organic growth. This includes replacing and growing our choice to lease fleet over time, which draws a large amount of capital each year.
We also plan to continue to invest in technology, including Ryder share our customer facing visibility platform and other digital technologies to drive accelerated growth in supply chain and dedicated.
We will continue to pursue targeted acquisitions, which have been a key contributor here to accelerate growth in that in supply chain Act.
Acquisitions have helped transform our supply chain business, both in terms of expanding capability as well as through balancing our vertical mix.
Our balance sheet remains strong and we have ample capacity to fund organic growth targeted acquisitions as well as return.
Capital to shareholders through share repurchases and dividends.
I'll now turn the call back over to Robert to Sharon's key highlights from full year 2022 results and introduce our 2023 forecast. Thanks, John Slide 12 provides key highlights from our full year 2022 results.
<unk> trends, including accelerated demand for resilient supply chains continue to drive companies to pursue long term transportation and logistics outsourcing solutions.
These secular trends along with favorable market conditions, and our initiatives drove operating revenue up 19%, reflecting higher revenue in all segments and east increased comparable EPS to $16 37 up 71%.
We generated strong Roe of 29%, reflecting favorable market conditions in Fms and continued benefits from our returns initiatives looks.
Looking ahead, we believe our solid execution in 'twenty, 'twenty, one and momentum from our multi year initiatives positioned us well for 2023.
Slide 13 highlights key aspects of our 2023 outlook.
In terms of market assumptions, we expect secular trends that continue to favor transportation and logistics outsourcing.
We expect macroeconomic and freight conditions to soften in 2023 and.
And lowered the demand for used vehicles in rental.
We expect OEM production constraints and delivery delays to continue throughout 2023.
Delaying the revenue and earnings impact from new leases signed.
We expect lease fleet growth in our target range, although dependent on OEM delivery schedules.
Our lead sales backlog remains at approximately 11 months and we're not expecting deliveries until 2024 for most leases.
<unk>.
As of today.
We were encouraged in the fourth quarter by improving market conditions for professional drivers and anticipate incremental improvement in 2023.
Fleet generic costs, including higher interest rates are also expected to continue.
In terms of financial forecast for 2023 operating revenue is expected to grow approximately 4% as strong supply chain and dedicated growth is partially offset by the impact of our UK exit OEM delays and normalizing rental conditions.
Comparable EPS is expected to remain strong and be between 11, five and 12, 5% in 2023, reflecting higher result in supply chain and dedicated and normalizing conditions in used vehicle sales and rental.
ROE is expected to be between 16% and 18%.
In line with our long term target of high teens.
Free cash flow is expected to be around 200 billion down from up from the prior year, primarily due to higher planned investment in lease and prior year proceeds from our UK exit.
Overall, we expect earnings to remain strong in 2023, reflecting our initiatives to increase returns and drive profitable growth through the cycle.
Slide 14 outlines our key segment outlook highlights.
We expect the impact of our UK exit.
OEM delays and normalized rental market conditions to pressure operating revenue growth in Fms.
Fms EBT as a percent of operating revenue is expected to be in the segments low double digit target range, reflecting benefits from our multiyear lease pricing and maintenance cost savings initiatives as well as normalizing conditions in used vehicle sales and rental.
Supply chain operating revenue growth is expected to be in the segments low double digit target range.
Driven by secular trends and our initiatives.
Supply chain EBT percent is expected to approach the low end of the segment high single digit target range as growth and pricing actions are partially offset by amortization of intangibles from recent acquisitions.
In dedicated operating revenue growth in EBT as a percent of operating revenue are expected to be at the target.
Collecting new contract wins and pricing actions.
In addition, we expect to continue to make strategic investments in innovative technologies, and new product development, primarily to accelerate profitable growth in supply chain and dedicated and leverage disruptive trends in transportation and logistics.
Our forecast also assumes execution of the new 2 million share discretionary repurchase program announced this morning overall.
Overall, we expect strong earnings generation in 2023, despite weakening economic conditions.
Slide 15 provides a chart outlining the key changes from 2022 to reach the high end of our 2023 comparable EPS forecast.
The largest EPS headwinds from the reduced gains on used vehicles sold and lower rental results, both reflecting the impact of a slowing macroeconomic and freight environment on these transactional businesses.
Lower gains are expected to reduce EPS by $3.85.
We expect used vehicle pricing to be below prior year and expected to decline sequentially throughout the year.
Used vehicle sales volumes are expected to increase approximately 30%.
Reflecting a higher number of leases, reaching the end of their term.
Inventory levels are also expected to increase but remain below our target range of 7% to 9000 vehicles.
Lower rental utilization on a smaller fleet is expected to reduce EPS by $1 95.
Rental utilization is expected to be in our target range of mid to high seventies, but lower than the 80% plus levels seen in 2022.
Incremental strategic investments are expected to reduce EPS by <unk> 40.
These investments continue to focus to be focused on addressing disruptive technologies, and transportation and logistics and providing a foundation for future revenue and earnings growth.
Non recurrence of prior year earnings from the from our exited Fms business in the U K will reduce earnings per share by <unk> 17.
This decline does not include gains from the sale of U K assets and exit related costs, which were excluded from comparable EPS results in 2022.
Fms contractual which reflects choice lease in select share is expected to contribute 10 cents to EPS, primarily reflecting higher lease pricing.
We expect revenue and earnings growth and lead to continued to be limited in 2023 by ongoing OEM delivery delays.
This share count from share repurchase activity is expected to increase EPS by <unk> 85 cents.
This primarily reflects the impact from 2022 programs.
The largest expected benefit in EPS.
2023 is from profitable growth in supply chain and dedicated.
It is expected to increase EPS by $1 10.
This increase reflects ongoing secular trends as well as our initiatives to accelerate growth and increase returns in these higher return businesses.
This spring the high end of our comparable EPS forecast to $12 five.
With a range of $11 five to $12 five for the year.
Included in our 2023 forecast EPS is approximately one dollar of outsized gains in rental.
Based on our forecast core earnings generated primarily by our contractual lease dedicated and supply chain businesses as well as normalized gains and rental results are estimated to be approximately $11 in 2023.
Turning to page 16, we're forecasting comparable EPS of $1 $11 five to.
The $12 five.
Versus the $16 37 in 2022.
Please note that our full year GAAP EPS forecast includes approximately $3 75 for a cumulative currency translation charge related to the exit of our Fms UK business.
We're also providing a first quarter comparable EPS forecast of $2 75 to $3 versus the prior year of $3 59.
On page 17, looking ahead into 2023 and beyond we expect incremental benefits from key multi year strategic initiatives.
<unk> dedicated we expect ongoing secular trends and our sales and marketing initiatives to drive new opportunities for profitable growth.
Our actions to strengthen dedicated dedicated contracts and recover.
Inflationary cost in both the dedicated and supply chain will contribute to higher returns.
We expect incremental benefits as we price our remaining lease portfolio at higher returns. Upon renewal. We are targeting 2025 to complete this initiative and estimated home cumulative annual benefit will be.
$125 million.
We exceeded our $100 million annual savings target from our multiyear maintenance cost savings initiative in 2022.
And have additional initiatives in the pipeline to drive further efficiencies.
We expect to pursue additional targeted accretive acquisitions in order to expand our capabilities and add supply chain industry verticals.
Our strong balance sheet continues to provide us with capacity to return capital to shareholders through repurchases and dividends.
Turning to slide 18, we believe Ryder is well positioned to increase shareholder value.
We've demonstrated strong execution on our balanced growth strategy, which has meaningfully contributed to our record results in 2022 and provides us with strong operating momentum as we move forward.
We see significant opportunity for profitable growth supported by secular trends and our operational expertise piece.
Our operational expertise and ongoing momentum from multiyear initiatives.
Our strategic initiatives are focused on achieving our long term financial targets, including high teens Roe over the cycle as well as continuing to transform the business. So that we are positioned to outperform prior cycles.
We remain committed to investing in products capabilities and technologies that will deliver value to our customers and ultimately our shareholders.
That concludes our prepared remarks. Please note that we expect to file our 10-K later today.
We had a lot of material to cover today. So please limit yourself to one question each.
Do you have additional questions Youre welcome to get back in the queue and we'll take as many as we can at this time I'll turn it over to the operator.
Yeah.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach the equipment again press star one to ask a question.
And we will begin with our first question.
And our first question comes from Jordan Alegar. Please go ahead.
Yes, hi.
Maybe just wanted to talk about supply chain, a little bit can you talk a little bit about you know.
The inbound.
<unk> you might be getting in the pipeline for that and the slowing economy.
Are you still seeing that pick up.
We are still seeing a pretty robust.
Because of the need for supply chain security Houghton, they dovetail into the whole near shoring concept, which we seem to be hearing more about especially for higher end manufacturing and just in general what sort of verticals do you think youre seeing the most demand and then just finally, maybe just what was the impairment about $20 million.
Is it.
More reflective to add that back and thinking about how it did for the quarter.
Okay.
Yeah. Thanks, Jordan, Let me give you a I'll give you some high level stats and then I'll hand, it over to Steve to give you some more color around where we might be seeing but listen we're seeing certainly.
The secular trends benefit of more people wanting to outsource more companies wanting to outsource supply chain activities continues to be strong. Our pipeline is an example is up 6% year over year and last year, we had a very strong.
Sales year large deals are up 60%. So these are made.
A major multinational corporations that are looking to for help on on supply chain activity and also I would say picking up more of the E. Commerce type business that we've got now with.
With E Com and also with Ryder last mile.
So.
That's what we're seeing as it relates to the impairment that was a.
What I would say is a bit of an anomaly in terms of the types of customers that we contract with.
This was a customer we're doing.
Distribution management for them there.
The credit was <unk> was a little bit softer than what we normally would go go with the equipment was a little bit more specialized so we've taken that impairment to account for the redeployment of that equipment. There is still a little bit of exposure. There is still some exposure going into this year.
But that all depends on how this customer makes it out as far as credit.
But we built that in just you know we have built that into the forecast for the full year.
We gave you so let me hand, it over to Steve to give you a little bit more color around the.
<unk>.
The pipeline and the types of customers that we're seeing.
Thanks, Robert Jordan, Yes, we're again kind of give you a recap of last year another record sales year and supply chain. So that's really two straight years in a row.
Hi, Brian remains.
Very healthy up year over year double digit percentage and I think thats really an effort of our continued.
I have a better marketing campaign, certainly our investment in the sales team.
And really the deep vertical industry expertise of our of our team. So a lot of our customers are expanding services and capabilities I think I've shared with you guys before 70% of our customers.
Come to us for more than one.
Service or capability, so that continues to be very strong.
And then on the near shoring and Onshoring front, we built a great business down in Mexico.
Probably one of the top providers there.
One of the top cross border.
Services out there. So we've got are on the ball there, we're expanding in Mexico, which is feeding into.
In the U S. So all positive signs remain at this point.
Thank you.
Thanks Jordan.
On your question has been answered.
Move yourself from the queue by pressing the star followed by the ticket.
And our next question is going to come from Jeff Hoffman.
Please go ahead.
Thank you very much and congratulations.
Just terrific results.
Could you explain to me please.
More about this cumulative currency translation.
Expense that we'll be seeing in.
23.
Just better understand what its related to do you have any predictability as to when that's going to happen and I'm guessing. Your point is it's noncash and we should look through it but I just want to understand it a little better.
Yes, Jeff John here Youre, absolutely correct. It is a noncash item that we're going to need to under the accounting rules, we're going to need to take the cumulative translation losses that sits today in equity.
Sometime next year, when we fully exit.
The U K.
It will probably be mid year.
Tough to call, whether we're the second or third quarter, but we're expecting mid year next year.
To complete that exercise and then.
All the accounting rules that skewed to do is to take that through earnings.
So there is no impact on equity, it's no not a cash flow related impact either in.
And it represents the cumulative translation losses since we've been operating in the UK to per day.
By the way that's this year not next year. This year 2020. This year yeah. We're in 23 now.
Gotcha Gotcha.
That's my one I'll get back in queue. Thank you.
Thanks, Jeff.
And our next question is going to come from Scott Group with Wolfe Research.
Hey, Thanks, good morning, guys.
Could you just talk about how much are you assuming used prices fall from current levels within the guide and if theres any depreciation headwind or tailwind. This year and then just separately if I look great you've got leasing fleet growth it.
It sounds like maybe it's a little bit more to go on the leasing pricing why arent contractual Fms earnings growing this year.
Okay. Thanks, Scott <unk>.
Couple of comments first of all how much work. We're UBS is dropping we don't we don't like to give that because we don't want to lead the market with where we're going but we certainly are assuming a pretty significant drop from where we ended the year as you would expect in the cycle and where we're coming from so we have certainly taken that into consideration. We do expect more vehicles to be sold though so that's why.
When you look at our overall cash flow, we're kind of expecting about the same proceeds around.
Around depreciation we do have a benefit around lease it's about $40 million, but that's being primarily offset by.
Variable interest expenses.
Portion of our debt that we.
Fun too.
Variable interest and as that has gone up over the year, we've seen an increase in our variable interest, which is which is impacting Fms. So then why we're not seeing more juice on the on the <unk>.
First of all you have to remember the margins on SMS are going to be certainly within our target ranges, even though rental and UBS, we're going to much more normalized levels.
So you are seeing the benefit of all of those changes that we've made around pricing and also beginning to see those changes and also.
On the maintenance cost side.
The issue, we're having as we go into this year is the uncertainty around the deliveries from the Oems we are expecting.
Our fleet to grow three to 4000 vehicles, but it's probably going to be more.
Pushed out towards the tail end of the year based on the allocation that we have today. If we are able to get more allocation sooner you're going to see that growth coming more and will produce more benefit in <unk>.
2023, otherwise that benefit has continued to get pushed now into 2024. So as you start we have to advertise at some point, we're going to get really a multi year period of hitting that target high end of the target range and thats probably coming in in 2024 now assuming that the Oems can get caught up.
That's helpful. I'm, just kind of just understand on the residuals do we just keep them where they are now and we're just we're not going to move them around anymore, which is going to keep them, where they are and hope that that just means we continue to see gains does that plan, yes Scott.
We presented in the back there in the appendix, we put a percent of where we're sitting with residuals, we are not projecting any residual value.
Estimate changes meaningful estimate changes going into next year. So you could expect that to continue into the future.
Okay. Thank you guys.
Thanks Scott.
And our next question comes from Brian <unk> from Jpmorgan. Please go ahead.
Hey, good morning, Thanks for taking the questions.
So just wanted to come back on the impairment it.
It sounds like it's gonna be a little bit more and more than $20 million, but maybe you can put some context around.
How that how that happened you know if it was.
Unexpected it sounded like maybe this is a customer that was a little bit weaker credit than you thought maybe it was an end market impact combined with that maybe.
Maybe some context around it'd be helpful. If you have the frequency with which you see these things happened would also be good to get further context around this.
Yes, I think you hit the key points here number one is just not up this customer's credit profile was below our our I would say our average.
Customer.
It's not a typical warehouse operation because we had more specialized automation in there, which we were really using to not only obviously to serve the customer for us to also use us.
A wave of kind of developing that capability.
We are operating two facilities for this customer this was the impairment on one facility. We still have the other facility that we continue to operate for the customer as I mentioned, we have built that into our forecast for the year, assuming we do have to take some kind of other adjustment there, but other than that it is and it is.
Unusual situation that we don't have.
Very many customers, where we have this amount of <unk>.
Investment, especially on any any type of specialized equipment like this so it gives you a little color I think it is a relatively unique situation for us.
Unfortunately, the customers.
Credit has deteriorated since we signed the deal a couple of years ago.
Okay understood and then just on the.
Back to the outsized gains it sounded like just to clarify there was an additional.
Dollar in 2023, so just wanted to.
Understand that and if you could split it out as you had before between rental and gains and then just maybe a bigger picture question is could you potentially have rental utilization higher now that youre shifting more to trucks versus tractors.
Shouldn't that be a little little stickier as you go down that path, maybe we won't quite see it go back to where it was.
Yes, I guess a couple of things.
Around the breakout of the dollar is right now, it's primarily going to be on the game side, we had $400 million of gains. This year. So we're expecting that to come to come down but again, it's I would say it's just again. This is a forecast. So you got a buck in there primarily of gains but also some some rental rental.
Youre right in that its more trucks now I think now our rental fleet is like 55% trucks and it used to be 47% trucks that we've already seen the the movement there which is a positive in terms of we believe that trucks are less cyclical and certainly less dependent on the freight cycle than than tractors.
But again that remains to be seen and by the way truck utilization is typically a little bit lower than tractors. Because tractors are typically taken out for a longer period of time versus the truck is used more local type deliveries and that can come back and forth. So all that is kind of built into the forecast as the adjustment driven by the the shift.
And more trucks versus tractors as well as the fact that those utilizations might be a little bit lower.
Okay. Thank you all very helpful. I appreciate it Robert.
By the way an important point, there is lower utilization, but still getting a better return so because of the rate youre able to get better returns with lower utilization.
Thank you Brian comes from Allison <unk> from Wells Fargo.
Hi, good morning.
Just wanted to go back to the supply chain services, and then the EBIT margin percentage.
I know the amortization or the client situation the intangibles from the acquisitions as well could you maybe walk through where you kind of at your target at this point, excluding those for 2003 and how.
How far are we along with the pricing actions that are there or not in terms of trying to get there and then any call. It headwinds that youre starting to see just because of the growth that youre getting in that business as well. Thanks.
Yeah, I would tell you without the amortization in 2023, we would expect to be at the target.
Other we've got the we got the lift of the growth and getting margins back improving.
In terms of.
Any any headwinds that we see I would tell you e-commerce.
Growth, we saw a little bit of a I wouldn't say a slowdown in e-commerce, but we saw less of a of an uptick in December than what we would've expected seasonally so youre seeing that.
As you know as we go into <unk> into this year, we maybe have taken a little bit of a cautious view on that let's see how it works out it could be a little bit better depending on how E. Commerce. Because we also have built in there as I mentioned, we have some additional costs associated with potential risk on that additional customers. So again without amortization you'd be at that we'd be at the target and.
Our forecast in addition to that you have the opportunity to even do better with.
These other items that I mentioned of those don't play out as.
In a negative fashion.
Great and then just on that Whiplash acquisition, just the e-commerce and is it.
Performing to plan I know theres been a lot of volatility in that market or is it maybe outperforming just given the growth opportunity there.
Yes, it's definitely performing with plan.
And I would tell you the first half of last year, we did really well, we're now kind of seeing this thing through a cycle. So as we got to December we saw volumes slow down a little bit.
Well actually nitrogen say slow down and not grow as much as we would seasonally expect.
So as we go into this year, we're probably a little cautious on how we're forecasting it we want to make sure that we see this thing perform over the cycle, but we're very excited about the opportunities there that the growth opportunities as more and more customers are looking for help around e-commerce fulfillment and omnichannel.
Very well positioned with that capability.
Great. Thank you.
Thanks. Our next question comes from Todd Fowler Keybanc capital markets. Please go ahead.
Great. Thanks, and good morning, Hey, Robert Hey, John .
Maybe just to get an idea of how youre thinking about the shape of the year. If I look at the first quarter guidance you know, it's really about 25% at the midpoint of our full year guidance and it sounds like there's some moving parts with the timing of lease vehicles coming in and expectations for rental. So just how are you thinking about the cadence of the quarters this year and some of the moving part.
With you know, what we should see for gains throughout the year and rental utilization.
Yeah, I would I would.
Let John give you a little bit more color, but generally we're assuming.
For the transactional parts of the business rental and used vehicles, we're assuming the market conditions continued to deteriorate throughout the year.
Alright, just things slow down throughout the year I mean, there's a lot of talk about a potential shallow recession in the second half and kind of built in that type of a really slow type slowing type of environment.
As we as we go throughout the year.
The offset of that is we're expecting to see continued growth, especially in dedicated and supply chain along with those earnings continuing to recover and then depending on OEM deliveries potentially we could have some some acceleration on the on the lease side right now, we're assuming that doesn't happen until the tail end of the year, which then would mean earnings.
Benefit more into 2024.
Got anything yet.
Yeah, Todd I would just add you do have the impact of UVF results and what we're projecting for proceeds so we are expecting.
Declining proceeds throughout the year, so that will put a little bit of pressure offset some of the growth that we're seeing in other parts of the business and some of the momentum that we're building both from a lease growth perspective dedicated as well as supply chain, which we do expect supply chain in the second half to be better so.
You just got to balance those things out and that's how we're projecting for the year to come about.
Looking at on average we're expecting as we said a more normalized on a on average a normalized environment for used trucks in rental.
So if you think about the discussions we've had over the last several quarters about core earnings and seeing that continuing to grow. This is how we expect it to play out right. We expect the oversight outsized.
Earnings from used vehicles and rental that come down we expect the core earnings to continue to hold and move up as we grow those businesses. So obviously, an important year for us and our strategy as we continue to execute on that.
Yeah, you know Robert that was actually kind of my thought in the question that basically it sounds like by the second half you are kind of in a more normalized range with both UBS and rental and so as we think about the exit rate and the earnings power in the fourth quarter going into 24 at this point yeah. It should be a pretty decent run rate and kind of more of a normally.
<unk> cadence as we exit the year.
I think Thats, a fair statement, yes.
Okay, good and just if I could one last one you know as we think about the the free cash flow profile, you know expecting to do a $200 million of free cash. This year is there a reason to think you know going forward with kind of your plans for <unk>.
More normalized fleet growth.
That you should remain to be free cash positive on an annual basis throughout a cycle is there a reason why that could shift and you'd have a big step up in in <unk>.
Free cash usage.
Yes, I think I think that's that's fair that's the only caveat I'd give you is due to the OEM delivery delays you could have a year ago.
Maybe it's 24 25, if there is a catch up of a bunch of units that need to be in service. There maybe that would put some pressure on free cash flow you could go negative, but youre right I mean.
We look at the model the way it is.
Operating now the way to delivering not only the earnings or free cash flow. You arent you are highly likely to be positive in most years right and you might have a year for an anomaly you'd go could go negative based on the strategy that we have today. This balanced growth strategy. That's what we're that's what we're shooting for.
Got it yeah, and you'd average out the two years. So if there was a push into one year you would have that benefit in the other year. So okay. That's all very helpful. Thanks for the time this morning.
Okay great.
And our next question is going to come from Justin long from Stephens.
Please thanks.
Thanks.
It sounds like you have a good amount of visibility towards the growth in your lease fleet. This year next year, it's essentially locked in the backlog I was curious if you could comment on the visibility you have and in growth for Ses and dedicated this year and then.
On rental anything you can share on the monthly trends that you saw in the fourth quarter and maybe what you've seen in January as well, it's just been a bit surprising to see utilization hold up so well and a great market, it's been fairly weak.
Yeah, Let me, let me hand, it over to Steve to give you the color around supply chain and then I'll give it to come to give you some rental Steve.
Steve.
Yes, Thanks, Robert Justin Yeah, as I said before the pipeline remained very healthy.
We expect a full year to be in the target range for FCS. So that's low double digit breath T S and high single core for dedicated as well so again everything remains positive.
I would also add I guess, it's been about 40% of that business is already contracted right because of the lead times to get the <unk>.
New accounts ramped up so you could say 40% of its already signed.
Rest of it will come as we sell and implement throughout the year.
Tom do you want to give him some color on rental and what we saw in <unk>.
In the fourth quarter, what we're seeing now in January and February .
Yeah sure Robert Thanks.
I think we've seen.
More normal typical seasonal decline.
And rental if you if you look back last year as we went from the fourth quarter into the first quarter.
We actually saw around utilization hold pretty well this year, it's fallen kind of typical seasonality.
And the halls and utilization.
Have been really in line with what we're seeing in the freight market. So if you look at the utilization in the various types of vehicles.
Sleeper classes and the trailer classes for example that tie directly to the freight market those are the ones, where we've seen the decline.
As Robert mentioned, our lease our excuse me our rental fleet is adjusted to more trucks and we have seen the resiliency and the truck classes as we've moved from quarter to quarter.
And that's what we wanted to see and what we were hoping to see and that's what we're seeing as we enter as we enter 2023 with a truck classes continue to perform pretty well.
Utilization perspective.
Got it.
Just.
Just sorry go ahead Robert.
But we're assuming is mid to high seventies in terms of utilization in our forecast coming down from the 80 plus percent that we saw.
Last year or so.
We built more normalization, if you will of demand.
Great and it sounds like you're expecting to be in that mid to high 70% range in the first quarter is that correct.
That's correct.
Got it thanks for the time it.
Probably more the mid Seventy's, because it's the first quarter. So it's usually the weakest.
Makes sense. Thanks.
Thanks, Justin.
Our next question comes from Jeff Kauffman from vertical Research partners. Please go ahead.
Thanks, everybody just a follow up.
And thank you for that guidance on the seasonality and the rental utilization first quarters normally down about 665 points right.
Generally, yes from the fourth quarter.
Okay. Here's my question. Thank you.
So just.
Just looking down the road longer term a lot of changes coming in vehicle technology. I know you guys have been very progressive in terms of looking at new.
New vehicle technologies, we have a new carb regulation coming in California, we have a new EPA regulation in 2027.
Hey, I realize this is a pass through but fleet economics are going to change as we begin. These transitions can you just update US where you are in terms of some new vehicle technology and how do you think.
These new environmental regulations may potentially impact customer demand for rental lease vehicles.
Yeah.
So I guess as a general statement more regulation more complexity.
More uncertainty for customers is typically good for Ryder, because they'll come to people who understand the industry I understand that the vehicles for health and we've seen that over the last I would say 15 to 20 years is as this has.
A lot more regulation around truck technology as it relates to the transition to Evs.
Sure.
Very focused on that we have we have a team of folks who are 100% dedicated to working with the Oems working with new technology providers to understand.
The performance of the technology, and what's ready for Prime time, and and really working to find ways to introduce the technology when it's ready to the market. So our view is that we're seeing probably the most progress on that one light duty type delivery vans they seem to be the ones that are more ready for prime time.
If you will not only up from a technology standpoint, but the price point is getting to one that makes it economically viable for companies to invest in that so we're beginning to work with some of those Oems to introduce their vehicles not only to our rental fleet, but over time also to our lease customers because I think rider plays an important role in inter.
Using these vehicles when they are ready versus part of our rental fleet. So people can try them out and then ultimately over time, helping them transition from diesel to EV for the types of vehicles that will go through that transition when they go through all expect that to take many years, probably decades and writers are really well positioned to help companies.
Navigate through that period so.
Our approach to it has been to stay very focused.
Stay very closely tied into the Oems and the technology providers.
And working with them on pilots and betas and the testing and along with even on some of the AB stuff and when it's ready for prime time be able to bring what we have which is a very large customer base to the to those technologies and and get them.
Begin to get those integrated into the fleets.
That's my question. Thank you.
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, well. Thank you everyone. Thanks for your interest in Ryder and I look forward to seeing all of you as we head out.
To some of the conferences and Roadshows. Thank you have a safe day.
Okay.
That concludes today's conference. Thank you for your participation.
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