Q1 2023 Ryder System Inc Earnings Call
Please standby we're about to begin.
Good morning, and welcome to the Ryder system first quarter 2023 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.
I'll now like to introduce MS. Kaylene Candela, Vice President Investor Relations for Ryder misconduct you may begin.
Thank you good morning, and welcome to Ryder's first quarter 'twenty to 'twenty three earnings conference call I'd.
I'd 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 due to changes in economic business competitive market political and regulatory factors.
More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release earnings conference 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 Hayden 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 pleased with the strong first quarter results delivered by the team.
Quite a weaker freight environment, we're continuing to demonstrate meaningful progress in our balanced growth strategy, which I'll highlight on our call. This morning.
I'll begin today's call by providing you with a strategic update John .
John will then take you through our first quarter results will then discuss our outlook.
To begin on slide four.
Longer term secular trends, including escalating demand for supply chain resiliency.
Increasing near shoring activity.
Ongoing demand for ecommerce fulfillment solutions provide significant opportunity for long term growth.
Regardless of near term freight headwinds we view these long term growth drivers is intact.
We continue to execute on our initiatives to increase returns derisk, our business and drive long term profitable growth.
Executing on these initiatives not only benefits result in the quarter, but all but more importantly positions us to outperform prior cycles.
Our strategic investments remain focused on opportunities for long term profitable growth and are focused primarily on accelerating growth in our high return supply chain and dedicated businesses.
We generated an ROE of 27% for the trailing 12 month period, which is well above our high teens target, reflecting elevated market conditions in Fms as well as benefits from our initiatives.
These initiatives include pricing and cost recovery actions, which benefited returns in all segments.
We're also executing on our enhanced asset management strategy, which we shared during our Investor day.
This strategy is focusing on is focused on positioning the business to generate higher earnings in each phase of the cycle.
Our strong balance sheet and solid investment grade credit rating provides us with ample capacity to pursue targeted acquisitions and investments as well as return capital to shareholders.
Our full year 2023 free cash flow forecast remains unchanged at $200 million.
We continue to make meaningful 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 Derisking, our business model, improving returns and free cash flow over the cycle and positioning the business for long term profitable growth.
As it relates to Derisking and optimizing the model several years ago, we lowered the residual value estimates.
Used in for lease pricing to historically low levels.
This action reduced reduces our reliance on used vehicle proceeds to achieve target returns and improves the return profile of our lease portfolio.
We've also exited underperforming businesses and geographies as we continue to optimize our model.
Last year, we substantially completed the exit of our Fms business in the U K and redeploy the proceeds to higher return opportunities.
Also discontinued our lease insurance product line in 2021.
In late 2021, we began adjusting our dedicated contracts in order to better insulate us from labor cost variability.
<unk> rate increases with our customers, which are benefiting current results and also began to adjust contract terms upon renewal to facilitate quicker more efficient cost pass through in the future.
This is a multiyear initiative with approximately half of GTS revenue under the new contract structure.
We also executed an important initiatives to increase returns and free cash flow.
Our lease pricing initiative continues to be a key contributor to higher returns enough to mess with incremental benefits expected to expected as the remaining 35% of the portfolio is priced at higher returns.
This initiative is expected to be fully implemented by 2025 with an estimated total annual benefit of $125 million.
Pricing actions in dedicated and supply chain to address higher labor and other costs are benefiting returns in both segments were also exercising enhanced capital allocation discipline by targeting moderate growth in our capital intensive lease business and investing rental growth capital in trucks.
Due to more favorable trends in this asset class relative to trackers.
Salary and supply chain and dedicated growth is a key driver to 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 high return businesses.
Supply chain and dedicated also generated strong sales of new <unk>.
Long term customer contracts in 2022, which we expect will continue to contribute to profitable growth.
Our strong balance sheet has enabled us to fund organic growth as well as strategic acquisitions.
M&A and investment.
Investments focused on expanding our capabilities continue to be a key part of our strategy to accelerate growth in our high return supply chain and dedicated businesses.
Overall, we continue to demonstrate significant progress on our balanced growth strategy with plenty of opportunity ahead for increased returns cash flow and shareholder value.
Turning to page six our key secular trends favoring logistics outsourcing.
As escalating demand for supply chain resiliency.
Near shoring and Mexico is a strategy that supply chain decision makers are increasingly pursuing to reduce the risk and increase the resiliency of their supply chains.
Market data shows meaningful increases in cross border activity between Mexico, and the U S as well as increased investments in near shoring.
Number of truck border crossings has increased more than 20% per year since 2020, and approximately 40% of new industrial space in Mexico was attributed to near shoring activity in 2022.
As a leading provider of logistics solutions in North America Ryder, Mexico is well positioned to meet the increased demand.
With 30 years of operating experience Ryder, Mexico. Currently manages about 250000 border crossings annually between the U S and Mexico and also manages more than 40 distribution centers.
Company has a long presence in key entry reports as well as the Golden Triangle, which encompasses Mexico City Monterrey and Guadalajara.
A key differentiator for Ryder, Mexico into marketplaces is its ability to offer a full range of supply chain services through highly integrated distribution and transportation operations in Mexico, The U S and Canada.
Brighter Mexico also benefits from long standing relationships with local carriers customs brokers as well as U S parent companies.
Terry technology leveraged in country provides visibility and security to all shipments.
Brighter Mexico has the proper credentials and distinctions to perform secure and efficient border movements and support export activity for Ford based manufacturers.
Ryder, Mexico has over 120 customers, which are primarily U S based fortune 500 companies.
We continue to see increases in our sales pipeline for Ryder, Mexico with approximately 20% influenced by near shoring.
Current pipeline activity related to near shoring is largely from the automotive and industrial verticals.
With its ability to leverage demonstrated operational expertise customer relationships and near shoring trends. We're excited about the long term growth opportunities available to Ryder Mexico.
I'll turn the call over to John to review, our first quarter performance.
Thanks, Robert total company results for the first quarter on page seven.
Operating revenue was $2 3 billion in the first quarter up 6% from the prior year, primarily reflecting revenue growth in SCS.
Comparable earnings per share from continuing operations were $2 81 in the first quarter.
Down from $3 59 in the prior year, reflecting normalizing conditions in used vehicle sales and rental and.
And a supply chain that asset impairment charge.
Partially offset by lower share count and higher earnings in Dts.
Return on equity our primary financial metric is 27% and remains well above our high teens target due to elevated market conditions and UBS and rental.
Free cash flow for the first quarter was generally in line with prior year as increased capital expenditures were largely offset by higher proceeds from the sale operating property and equipment.
<unk> about $40 million of proceeds from the sale of our headquarters building.
Okay.
Turning to page eight.
Before discussing segment results I'd like to highlight a change we've made to our segment EBT metric.
Beginning this quarter, we redefined our segment <unk>.
Metric to exclude amortization of customer intangible assets.
In addition to other items that were already excluded.
We're excluding this expense from our primary measure of segment performance, because we did not consider intangible amortization expense a driver of underlying segment performance.
Just 32 and 33 in the appendix provide recap segment results for the years 2020 through 2022, reflecting this change.
The change did not have a material impact to segment results or performance trends.
Turning to Fms results.
Lead management solutions operating revenue decreased 2% at 4% operate operating revenue in North America.
At 4% higher operating revenue in North America from increased select hearing choice lease.
More than offset by 6% negative impact from the U K.
Pre tax earnings in fleet management, we're a $182 million down from the prior year, primarily due to lower results.
Used vehicle sales and rental as anticipated.
Lower used vehicle pricing was partially offset by higher sales volume.
Rental utilization on the power fleet was seasonally strong at 75%, representing our second highest level of first quarter utilization.
Well below our record levels in the prior year paid <unk>, 2%.
Lower utilization on a larger fleet was partially offset by a 3% increase in power fleet pricing.
Fms EBT as a percent of operating revenue remained strong at 14, 4% in the first quarter.
And 19, 1% for the trailing 12 month period.
Both about the segment's long term target of low double digits.
Page nine highlights used vehicle sales results in North America for the quarter.
Consistent with our expectations market conditions for used vehicle sales continue to normalize from a low debated levels in the prior year.
The environment continues to benefit from ongoing challenges with vehicle availability.
Compared with prior year used tractor proceeds declined 35% reflective of weaker freight conditions.
While used truck proceeds declined 16%.
On a sequential basis proceeds for tractors decreased 10% in line with our expectations.
And proceeds for trucks decreased 7%.
Other than our expectations.
During the quarter, we sold 5100 used vehicles up sequentially and versus prior year.
This reflects higher lease replacement and rental de fleeting activity.
Used vehicle inventory increased to 5100 vehicles at quarter end and remain at the lower end of our historic levels.
Although used vehicle pricing decline proceeds remain well above residual value estimates used for depreciation purposes slide 20 in the appendix provides historical sales proceeds as a percent of original cost and current residual value estimates for used tractors and trucks per year information.
Turning to supply chain on page 10.
Operating revenue increased 19% with strong organic revenue growth in all industry verticals, reflecting new business higher volumes and increased pricing.
Beginning this quarter, we introduced the omni channel retail vertical to our SCS revenue presentation.
Provide better visibility to our revenue mix following recent acquisitions and organic growth.
This new vertical includes retail e-commerce fulfillment big and bulky delivery by Ryder last mile and high Tech.
Slides 30, and 31 in the appendix provide a recast revenue presentation for the prior three year period.
SCS EBT decreased 60%.
Reflecting a 30 million asset impairment charge related to a customer bankruptcy.
Some of you may be aware SCS provided or supply chain provide distribution management services at two warehouse locations for bed Bath, <unk> beyond which filed for bankruptcy. This week.
In the fourth quarter of 2022, we took an impairment charge for the specialized sortation and compare equipment in the California warehouse, which bed bath and beyond terminated early.
The impairment charge this quarter is primarily for the appointment and the remaining Pennsylvania warehouse.
As we mentioned on our last call. This customer credit profile is not typical of our supply chain business as approximately 80% of the revenue.
Comes from our single customer operations is with investment grade companies.
In addition, most have limited special equipment and Beth.
Supply chain results were also impacted by weaker trends in the Omnichannel retail vertical which were partially offset by earnings from revenue growth primarily in the automotive world.
Slide chain EBT as a percent of operating revenue was one 9% in the quarter.
Down from the prior year and below the segment high single digit target range.
Reported EBIT excludes the amortization of customer intangibles from acquisitions as previously noted.
Moving to dedicated on page 11.
Operating revenue increased 9%, reflecting pricing and increased volumes.
Dedicated EBT increased 45%, primarily due to revenue growth as well as improved hiring conditions for professional drivers.
Began to see improvement in the number of open positions and tied to fill for our professional drivers in the second half of last year.
And are pleased to see these trends continue.
Dedicated EBT as a percent of operating revenue of 9% was in line with the segment high single digit target.
During the quarter contract sales activity slowed in Dts consistent with a softer freight environment.
Customers and prospects have been taking longer to make decisions and our pipeline has declined.
As far as industry sector scope, the industrial sector appears to be a relatively stronger footing.
Negative trends more pronounced in sectors such as retail.
Given this environment, we expect deep dedicated contract sales activity to moderate for the remainder of the year and now expect dedicated revenue growth to be below our high single digit target range.
Dedicated remains on track however to achieve as high single digit target for segment pre tax earnings.
Turning to slide 12.
First quarter lease capital spending of 579 million, what's up from planned increases in lease vehicle replacement activity due to expiring lease contracts.
For the first quarter rental capital spending of $177 million was generally in line with prior year, but we continue to expect rental capital spending to be down for the full year, reflecting a normalizing rental environment.
We're continuing to shift our vehicle mix and rental toward trucks, where we see stronger demand trends have historically been more resilient than those for tractors.
By year end 2023, we expect that trucks will be approximately 58% of the North America rental fleet.
Up from 49% in 2018.
Our full year 2023 capital expenditure forecast is unchanged.
Our 2023 forecast for lease capital $2 4 billion reflect higher lease replacement and growth capital versus prior year.
We now expect the ending lease fleet to be up 5000 to 6000 vehicles up from the prior forecast of 3% to 4000 vehicles.
It's additional lease fleet growth is coming from redeployed rental vehicles. So we will not require additional capital expenditures this year.
And rental our average fleet is anticipated to be down slightly from 2022.
Our ending rental fleet is now expected to be down approximately 8% or 3500 vehicles more than initially planned reflecting higher rental redeployment activity.
Our full year 2023 forecast for gross capital expenditures remains at $3 billion.
We continue to expect proceeds from the sale of used vehicles of approximately $800 million in 2023.
Low prior year, which included $400 million of proceeds.
Later to the UK.
Our full year 2023, net capital expenditures are expected to be $2 2 billion.
Turning to slide 13, our forecast for operating cash flow and free cash flow is unchanged.
As shown.
The trajectory of our cash flow continues to improve over time, reflecting growth in our contractual supply chain dedicated at least businesses, which comprise approximately 85% of riders operating revenue.
Our free cash flow profile has changed significantly since the implementation of our balanced growth strategy.
2020 forward.
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 SMS business also benefited free cash flow in 2022.
Summary on the right side of the slide illustrates the strong free cash flow generated by the business prior to investing in fleet growth.
In 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.
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.
We will continue to pursue targeted acquisitions, which had been a key contributor contributor to accelerate growth in that yet.
Our acquisitions have helped transform our supply chain business, both in terms of expanding capability as well as rebalancing our vertical mix.
Our balance sheet with leverage of 211% at March 31 provides the ample capacity to fund organic growth.
Targeted acquisitions as well as return capital to shareholders through share repurchases and dividends.
This capacity supported by solid investment credit ratings concludes.
Inclusive of our recent upgrade from S&P to Triple B plus.
Finally, we have limited exposure from rising interest rates as our lease pricing model incorporates four forecast the medium term borrowing rate.
Additionally, the aggregate repricing LIFO, our lease contracts is matched with the aggregate repricing life of our debt portfolio.
I'll turn the call back over to Robert to discuss our enhanced asset management playbook Andy outlook. Thanks, John .
Slide 14 provides key highlights from our enhanced asset management playbook, which is focused on optimizing returns over the cycle.
Our contractual lease dedicated and supply chain businesses have proven to be more stable over the cycle than our transactional used vehicle sales and rental businesses.
Key actions to mitigate the impact from weakening used vehicle sales and rental demand include our ability to redeploy underutilized rental vehicles to fulfill lease dedicated and supply chain contracts.
The solid growth, we are seeing in dedicated and supply chain transportation services, along with long OEM lead times is providing us with even more redeployment opportunities than prior cycles.
Can you used vehicle sales, we're leveraging our expanded retail sales network capacity and investments in our digital sales transformation.
Since 2019, we've increased our retail sales capacity by about 50% by adding physical locations and increasing our insight sales team focused on capturing the digital sales opportunity.
<unk> retail sales volumes benefits result, as wholesale proceeds have historically been at a 30% discount to retail proceeds.
We're continuing to maintain low levels of used vehicle inventory relative to historical levels as discussed earlier.
We're also extending lease contracts for vehicles with remaining life.
Which defer the need for replacement capital and appeals to lease customers that may prefer the lower cost shorter term commitment of a lease extension compared to leasing new equipment.
Although earnings will be impacted by the freight cycle.
<unk> on our enhanced asset management playbook positions Ryder for higher earnings in each phase of the cycle.
Turning to page 15, we are raising the low end of our full year 2023 comparable EPS forecast from 11, five to 12 O five to $11 30 to 12 O five versus 16 37 in the prior in the prior year.
Increase reflects modestly higher than expected used vehicle sales trends. Please.
Please note that our second quarter and full year 2023 GAAP EPS.
<unk> forecast includes approximately $3 75.
For a cumulative currency translation charge related to the exit of our Fms U K business.
We're also providing a second quarter comparable EPS forecast of $2 80 to 305 versus a prior year of $4 43.
Our 2023 ROE forecast is unchanged at 16% to 18% in line with our long term high teens target.
We continue to expect strong but reduced earnings in 2023 as weak freight conditions impact to used vehicle sales and rental.
We expect our contractual lease dedicated and supply chain businesses to continue to show improvement based on our growth and return initiatives.
Turning to page 16, we believe Ryder is well positioned to increase shareholder value.
We see significant opportunity for profitable growth supported by secular trends are.
Our operational expertise and ongoing momentum from our multi year initiatives.
We've made structural changes to our business model and continue to demonstrate strong execution on our balanced growth strategy, which we believe positions us to achieve our long term targets increased business model resiliency and outperformed prior cycles.
We remain committed to investing in products capabilities and technologies that will deliver value to our customers and our shareholders.
That concludes our prepared remarks. Please note that we expect to file our 10-Q later today.
We had a lot of material to cover today. So please limit yourself to one question. Each if you have additional questions Youre welcome to get back in the queue and we will take as many as we can at this time I'll turn it over to the operator.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure your mute function is turned off.
Allowing us to reach our equipment.
Again, it is star one if you would like to ask a question, we'll pause just for a moment everyone has an opportunity to signal for questions.
And we'll go ahead and take our first question from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks. Good morning, just wanted to clarify one thing real quick the 40 to 45 cents from the bankruptcy.
You kept that headwind in the first quarter earnings and it's reflected in the full year guidance or youre not excluding that right.
That's correct.
Let me clarify that so.
The asset impairment, which was <unk> 44 cents was not included in our Q1 guidance.
So it was included in our full year, but certainly wasn't it wasn't included in our we had contemplated in our full year wasn't included in our Q1 guidance. So if you exclude that that 44 cents, we would've reported more like a $3 25, so well above.
The core business came in well above the guidance that we gave.
But you were including it in the full year guidance. So you knew.
This bankruptcy was happening and you knew who is going to be in your guide.
We knew it was a possibility so when we came up with our full year guidance over the year, we expect at some point in the year something like that could happen. So it was included in the full year was certainly not expected in the first quarter.
I didn't realize you guys through bankruptcy experts okay.
And Ah.
Just separately just the rental.
Trends can you just talk about utilization through the quarter, how it trended throughout the quarter and sort of what you're expecting for Q2 and rental.
Sure.
Let me, let me hand that over to Tom to give you the.
Information on rental.
Yes. When you saw you saw us come off some of our highest peaks and utilization.
When we came into Q1 sequentially we saw.
Barely a fairly big drop from the.
Hi season through through Christmas.
And we finished the quarter here.
In the mid <unk> in terms of utilization, which.
We would say is a kind of very normal drop in utilization from Q4 to Q1.
And kind of right in line with our with our expectations as we look to.
Q2.
We're expecting utilization to be in that.
Mid seventy's to upper 70 utilization.
Jon kind of mentioned it as well, but we are expecting to the fleet you saw some of that in Q1 and as we go throughout the year, we do expect that the lease fleet to come down.
We'll do that with a mix of our servicing of end of life in units and then redeploying into our lease fleet as well.
Okay. Thank you guys helpful. Appreciate it.
Thanks Scott.
If you find that your question has been answered you may remove yourself from the queue by pressing the star key followed by the digit tier.
And we'll go ahead and move on to our next question from <unk>.
Jordan <unk> with Goldman Sachs. Please go ahead.
Yes, hi.
Question I know there is the impairment that impacted supply chain margins sort of add that back and actually look.
Yeah battery in line and I guess I'm thinking I mean, presumably we should look at it with a back in there.
Yeah, how do we think about.
I know, there's a lot of top line opportunities near shoring, how do we think about supply chain margin development I know you had.
Done a lot with cost recovery et cetera.
When can we think.
Think about that moving north from there.
Adjusted levels, we saw in the first quarter.
Yes, that's a good question Jordan.
As we stated our target for supply chain is high single digit.
Earnings before taxes as a percent of operating revenue.
So we remain committed to that as we get into this the rest of the year. Our expectation is to see supply chain move really towards that goal and into that goal through the balance of the year.
So we feel good about that.
Softness that we have seen over the last quarter is really more around our Ryder last mile to the delivery of the big and bulky has slowed down as you've probably heard other others I've mentioned that in some of the e-commerce, especially as we're trying to grow that business, we are adding facilities and then.
Where can you get those.
Filled up so the target for the balance of the year, though is to get back into that.
High single digit.
<unk> as a percent of operating revenue.
Okay.
I know you had mentioned that.
I missed this on your presentation I know that you said the pipeline for dedicated Dts might be coming down but.
Has the pipeline on supply chain as the activity is.
As buoyant as maybe it was the last couple of years or is that Sir David as well.
Near term, yes, let me hand that over to Steve sensing to give you a little color on that.
Yes, Thanks, Robert Jordan ill hit on a couple of points here supply chain pipeline is actually up 25% year over year.
Still seeing very strong demand from a sales perspective.
I will tell you it is slowing a little bit in automotive.
As the truckload pricing is coming down but every other vertical is very strong and then on the dedicated call.
Matt we did pivot our ever better campaign this year to focus on our transportation solutions that was launched in Q1. So.
Will take some time for that to kind of flow through into the pipeline, but we just.
Kind of redirected our campaign.
Great. Thank you.
Thanks George.
And we'll go ahead and take our next question from Jeff Kauffman with vertical Research partners. Please go ahead.
Thank you very much.
I'm going to sneak a question and a half in here if I can.
The first one is just clarifying I just wanted to make sure I understand what's going on below the line here.
Very clear about the bed Bath <unk> beyond bankruptcy, but I wanted to ask you more about the $31 million add back thats kind of in other items affecting comparability on the Fms UK exit if I was to take a similar approach that this is an oddity of that would that have negatively affected the reported.
Earnings before taxes, just in the Fms Division and then Youre, adding that back in the comparability below the line.
So Jeff let me give some clarity here.
Items below the line are tied to the exit of our U K operations and right.
Credits as you rightfully called out those we expect will.
Really not continue into the future. So we've taken them out of our our results from a comparable perspective.
So those are onetime events related to the U K and not tied to ongoing operations.
Alright, but to understand where that goes so that would have negatively affected the reported Fms EBT and is being added back below the line in the next quarter, we've got kind of a different Fms UK related item and thats, the $375 million negative impact on.
The release that you've identified is that the right way to think about that.
It's not so let me let me give you clarity so all related UK activity.
These one time items last year, we reported all the gains from the exit of that business, both the property gains as well as the vehicle gain we reported that outside of the segment profitability for SMS those were.
In 2022.
This is an additional gain in 2023 related to the U K.
Isn't it.
There are some claims recovery listed in there as well some minor gains from vehicle activity that continues in 2023.
Those numbers for the U K have been excluded from both 2022 and 2023 results from the segment performance in.
In addition to that we do expect in Q2.
Take through earnings.
Equity impact from cumulative translation adjustments from the U K.
It will have no impact on equity.
Noncash items and will be excluded from the segment results as well. So what you have in the segment results for the math is the ongoing performance of the business.
And the profitability there is reflective of the North America business that will continue to perform.
Alright, that's very helpful clarity and then just the follow up so the half question to that if I step back at 10000 feet and just listen to everything you're saying it sounds like the normalization occurring in Fms is not so much out of line with what you are looking for the only real change in the <unk>.
Outlook is to the negative may be dedicated grows a little bit slower on the revenue line and to the positive.
Youre seeing a better vehicle sales so that's raising the lower end of the guidance range, but net net what youre seeing is largely in line with what you were expecting am I wrong in that am I missing something.
Is that a fair satellite on it. This was this was kind of a this was an in line quarter in terms of our expectation, where we saw a little bit better than expected was around the trends around used truck sales not trackers, but the truck side is doing a little better and Thats why we raised the bottom end dedicated came in a little bit better also but as we mentioned.
We're expecting a little bit more softness on the sales side towards the second half of the year. So so yeah generally in line with what we had expected 60 days ago other than used vehicle sales came in a little bit better.
Okay. Thanks, that's all my questions congratulations.
Thanks, Joe.
Our next question comes from Allison <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
Let me go back to the supply chain services.
Mentioned, 80% of that customer base is investment grade, but that near 20%.
Didn't really clarify any color along that and I know that back in the Amazon you mean, its release and but any incremental controls that you're putting in place when you're onboarding. Some of these smaller account okay.
Yeah, I think just to clarify what we said was it 80% of our of our single customer operation. So that's where it's kind of an operation dedicated to one customer not the multi client because they are the the risk I would say spread across many customers. So those where it's a single customer yes, 80% of those opera.
<unk> are the revenue from those operations are with investment grade companies.
It's important to also say that the majority of those.
We have limited specialized equipment in them.
There are limited, especially its impact by.
Investment grade and the majority of those are also they're also redeployed to other operations more easily. So this was a bit of a unique situation in the credit risk of the customer that we took on in the specialized equipment nature of the facilities now why did we do it I think it's key the key point. There was this was a high velocity.
<unk> retail operation with automation that we felt was a good opportunity to to really learn.
Our.
Our analysis of their risk at the time that we signed it there we're in a very different.
Our credit profile and they ended up today.
But we.
We made the investment at that time, assuming we were going to be able to run it.
Unfortunately, hasnt worked out that way. So this equipment will all be redeployed. What we've taken is the write down that's required in order to get that that equipment moved to another location and redeployed.
And then just any incremental controls that you're putting as you're onboarding.
Customers at this point, just given where we are.
Yeah, it's really around the investments that we make at any specialized equipment clearly.
The lesson here is really not to do that.
With any customer Theres not investment grade is generally the approach we're going to take really the approach. We've taken also in the future. This was a bit of an anomaly.
Great. Thanks for the color.
Okay. Thank you.
Our next question will come from Brian Nelson back with J P. Morgan. Please go ahead.
Hey, good morning, just wanted to come back to the <unk> pipeline real quick it sounded like perhaps there was maybe a change in how you were going to market or what you were targeting that might have caused some of the slow down. So maybe if you could just clarify that a bit for me.
What was really the underlying driver or are people actually putting projects off on top of some of the changes.
The biggest impacts of that deceleration.
Yeah, Brian I think it's pretty simple, it's basically as a result of the spot rate for trucking comes down.
Got we've got some.
Prospects, who are or even customers, who are saying you know what given.
How low the spot rates are I'm going to take a chance and go with truck load and spot rates as opposed to going with a dedicated operation that that's basically it.
The dedicated business that's on the margin if you will that could go either truckload or be dedicated.
That you now have fewer opportunities on those until until spot rates recover. So it's not unexpected. This is what happens as we go through the freight cycle. So I'd expect that to continue to be soft maybe for the next couple of quarters and then as spot rates begin to recover we will start to see.
Demand for dedicated and the pipeline picked back up again.
Understood.
I guess deceleration in some of the back half of the year, perhaps related to this but was that considered.
And the guidance beforehand or is that sort of an incremental update that you've put into the.
The full number today.
Yeah, No that's right. It was it was really it was considered.
We considered some of it in the initial forecast.
A slight.
Additional headwind, but not a whole lot.
Most of those sales don't really impact until until the next year. So there's still a lot of there's still a lot of earnings can be played here for the balance of the year and there's a good chance also that that sales could pick up at the back half of the year spot rates start to come back up so.
Okay. Thank you very much.
Thank you Brian .
We will take our next question from Chris <unk> with Stifel. Please go ahead.
Hey, good morning.
Robert you talked through the.
The near shoring topic can you just talk about how youre assessing the U S Mexico business in your guidance.
Do you think that can be a meaningful earnings contributor either in 2023 or 2024 or do you think it's still pretty early innings in thinking about the near shoring effect.
Yeah look I think like you mentioned on the in the script. We we we've been in Mexico for 30 years, we have very very strong operations in Mexico. What we've seen is a pickup in the pipeline and the supply chain pipeline of more near shoring in Mexico related opera pipe.
Operations is more especially in the automotive and industrial as more companies are doing are looking to increase near shoring. So we're really.
We're really excited about the opportunity to see in that business continue to grow. Its currently that business is about $275 million of revenue within supply chain.
And a profitable business for us.
I would say better than average profitability.
Coming out of that operation. So we see it as a really good opportunity for taking advantage of this secular trend in overtime.
Becoming a bigger part of supply chain.
Thank you Robert.
Alright. Thanks.
Our next question comes from Justin Long with Stephens. Please go ahead.
Thanks, I had a bigger picture question, but before I get to that I'd, just had a quick clarification as well going back to the fourth quarter. I think there was a $20 million impairment and SCS was that related to the same bankruptcy impairment that you took in the first quarter or is it.
That a separate issue.
Yes. It was the same customer Justin it was too we were running two warehouses for this customer for bed Bath and beyond.
And the.
The one in California was the impairment that we took in the fourth quarter.
And that was because the customer had canceled us in that location.
This one is for the one in Pennsylvania, which was the remaining facility that we're running for them that now based on their bankruptcy unlikely liquidation.
We've taken the write down two to redeploy that equipment.
Got it that's helpful and then circling back to my bigger picture question, we're hearing a more cautious tone from a lot of the other transportation companies.
As we think about the trends in the first quarter and quarter to date here in April but your 2023 EPS guidance actually came up a little bit at the low end of the range. So I'm curious Robert just from a high level can you explain why a weaker than expected.
Market year to date isn't flowing through to your financial performance and particularly in the used market where expectations moved a little bit higher.
Yes, that's a great question, because I think it really has to do with where we started right. I think we were we took a more cautious view.
For the year at the beginning than maybe others did we expected used truck pricing to be down the entire year, where some were expecting a recovery in the second happened in the fourth quarter.
What I said.
Used vehicle sales and rental so I think it was just the starting point that we haven't seen it the results have not been below our expectations.
In the first quarter, whereas I think they were below the expectations that were set by others. So I think that's the difference is just our starting point on our expectations at the beginning of the year were lower than maybe what others were.
Got it that makes sense thanks for the time.
Thanks, Justin.
Yeah.
At this time I would like to turn the call back over to Mr. Robert Sanchez for closing remarks.
Okay, well. Thank you all thanks for being on the call your interest in the company and look forward to seeing you soon have a safe day.
With that that does conclude today's call. Thank you for your participation you may now disconnect.
Okay.
Okay.
Yes.
Okay.
Yes.
[music].
Yeah.
Yes.
Yeah.
[music].
Yeah.
[music].
Yeah.
[music].
Okay.
[music].
Uh huh.
Okay.
Okay.
Okay.
Yeah.
Okay.
Yeah.
Okay.
Okay.
Yes.
Yes.
[music].
Yes.
[music].
Yes.
Uh huh.
[music].
Yeah.
Okay.
Yes.
[music].
Yes.
Yes.
Yeah.
Uh huh.
[music].