Ryder System [R] Conference call transcript for 2022 q4
2023-02-15 15:44:03
Fiscal: 2022 q4
Company Representatives: Robert Sanchez - Chairman, Chief Executive Officer John Diez - Executive Vice President and Chief Financial Officer Tom Haven - President of Global Fleet Management Solutions Steve Sensing - President of Global Supply Chain Solutions and Dedicated Transportation Calene Candela - Vice President, Investor Relations
Operator: 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 Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin.
Calene Candela: Thank you. Good morning and welcome to Ryder's fourth quarter 2022 earnings conference call. 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 economics, business, competitive, market, political and regulatory factors. For a detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and 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 Diez, Executive Vice President and Chief Financial Officer. Additionally, Tom Haven, 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, Iâll turn the call over to Robert.
Robert Sanchez: 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'll 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. In 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 derisking 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 relate to derisking and optimizing the model, several years ago we lowered residual value estimates in FMS to historically low levels to reduce the reliance on used vehicle proceeds to achieve targeted returns. In late 2021 we began adjusting our DTS 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. We negotiated rate increases with our customers and also began to adjust contract terms to facilitate quicker, more efficient cost pass-throughs in the future. This is a multiyear initiative with approximately 40% of DTS revenue under new contract structure as of year-end. Another optimizing initiative was the exit of our sub-performing FMS business in the UK. 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 important initiatives to increase returns and free cash flow. The pricing initiatives in dedicated and supply chain to address higher labor and subcontracted transportation costs, improve returns in both segments in 2022. In FMS we surpassed our $100 million annual maintenance cost savings targets with our multiyear initiative as anticipated. Our lease pricing initiative remains a strong contributor to higher returns in FMS. As of year-end 2022, 60% of our lease portfolio had been priced at higher returns. 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 million upon completion. Lease growth in the UK inflicted positive in 2022 with an increase of 1,300 vehicles. Accelerating Supply Chain and Dedicated growth is a key driver for achieving long term profitable growth. 54% of Ryderâs 2022 revenue was from Supply Chain and Dedicated, up from 37% in 2015, reflecting secular trends in our initiatives to accelerate growth in these higher return businesses. Supply Chain 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 - enables us to fund organic growth as well as strategic supply chain acquisitions. In 2022 we executed several targeted acquisitions that support our strategy to accelerate growth in our supply chain business. Whiplash was the largest acquisition in 2022 and significantly grew our e-fulfillment network and scalable e-commerce and omni-channel fulfillment solutions. Our acquisition of Baton, a tech startup, enhanced 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 and through quarterly dividends. Overall, we demonstrated significant progress on our balance growth strategy with plenty of opportunity ahead for increased returns, cash flow and shareholder value. I'll now turn the call over to John to review our fourth quarter results.
John Diez : Thanks, Robert. Total company results for the fourth quarter are 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 and supply chain acquisition. 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, partially 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 contained benefits from our initiatives to increase returns. 2022 free cash flows decreased to $921 million from $1.1 billion in the prior year, reflecting higher planned capital expenditures, partially offset by higher used vehicle sales process. Free cash flow in 2022 includes approximately $400 million from the sale of vehicles and properties in the UK, as part of the exit of that business. Turning to FMS results on page six, fleet management solutions operating revenue increased to 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 in fleet 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 benefits from declining depreciation related to prior residual value estimate changes and higher rental results. Rental utilization on the power fleet remains strong at 82% on a larger fleet. Fleet management EBT as a percent of operating revenue was 19.3% in the fourth quarter and 20.2% for the full year, both well above the segments long term target of low double digits. Excluding all used vehicle gains in the quarter, fleet management EBT percent was still in the segment's low double digit target range. Page seven highlights used vehicle sales results for the quarter. Used vehicle market conditions remain relatively strong, reflecting tight vehicle availability amid moderating freight activity. Compared with the prior year, used tractor proceeds in North America declined 6%, whereas used truck proceeds were 4% higher. On a sequential basis, proceeds for used tractors and trucks, both declined by a lower amount than we anticipated. In fact, the proceeds decrease 2% and truck proceeds decrease 7%. During the quarter we sold 6,800 used vehicles from which 2,000 related to the exit of our UK 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 4,300 vehicles at year-end, below our target range of 7,000 to 9,000 vehicles. Although used vehicle pricing declined, it remains well above residual value estimates used 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 increased 44%, primarily reflecting the Whiplash acquisition and organic revenue growth of 22%, 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's 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 150%, primarily due to pricing adjustments to address unusually high labor costs, as well as benefits from improved market conditions for professional drivers. Dedicated EBT as a percent of operating revenue of 9.4% was in line with the segment's 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 reflects higher lease replacement and growth capital. We expect the lease fleet to be up, 3,000 to 4,000 vehicles at year-end. 2022 rental capital spending of $541 million declined versus prior year, reflecting more planned investments. In 2023 rental capital spending is expected to decline further to $400 million as we're expecting greater conditions to normalize. Our average fleet is anticipated to be down slightly from 2022, and our ending rental fleet is expected to be down by 4% or 1,600 vehicles. We continued 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 of approximately $800 million in â23. 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 Ryderâs operating revenue. In 2022, our operating cash flow grew to $2.3 billion, and we expected to increase the $2.4 billion in 2023. Our free capital 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 effects and OEM delays resulted in lower capital spending and higher free cash flow. Proceeds from the exit of the UK FMS 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 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 ChoiceLease fleet over time, which draws in a large amount of capital each year. We also plan to continue to invest in technologies, including RyderShare, our customer facing visibility platform and other digital technologies to drive accelerating growth in Supply Chain and Dedicated. Weâll continue to pursue targeted acquisitions, which have been a key contributor to our accelerate growth and supply chain. Acquisitions have helped transform our supply chain business, both in terms of expanding capabilities, 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 share his key highlights from full year 2022 results and introduce our 2023 forecast.
Robert Sanchez : Thanks, John. Slide 12 provides key highlights from our full year 2022 results. Secular 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 in our initiatives drove operating revenue up 19%, reflecting higher revenue in all segments and 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. Looking ahead, we believe our solid execution in 2021 and momentum from our multiyear initiatives positioned us well for 2023. Slide 13, highlights key aspects of our 2023 outlook. In terms of market assumptions, we expect secular trends to continue to favor transportation and logistics outsourcing. We expect macroeconomic and freight conditions to soften in 2023, and lower the demand for used vehicles in rental. We expect OEM production constraints and delivery delay to continue throughout 2023, delaying the revenue and earnings impact from new leases signed. We expect lease regrowth in our target range, although dependent on OEM delivery schedules. Our lease sales backlog remains at approximately 11 months, and we're not expecting deliveries until 2024 for most leases signed as of today. We were encouraged in the fourth quarter by improving market conditions for professional drivers and anticipate incremental improvement in 2023. Inflationary 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 $11.05 and $12.05 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 million, down 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 segment's 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 segment's low double digit target range, driven by secular trends in our initiatives. Supply chain EBT percent is expected to approach the low end of the segmentâs high single digit target range, as growth and pricing actions are partially offset by amortization of intangibles from recent acquisitions and dedicated operating revenue growth in EBT as a percent of operating revenue are expected to be at the target, reflecting 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, 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 are 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 expect it 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 7,000 to 9,000 vehicles. Lower rental utilization on the smaller fleet is expected to reduce EPS by $1.95. Rental utilization is expected to be in our target range of mid to high 70âs, but lower than the 80% plus levels seen in 2022. Incremental strategic investments are expected to reduce EPS by $0.40. These investments continue to be focused on addressing disruptive technologies in transportation and logistics, and providing a foundation for future revenue and earnings growth. Non-recurrence of prior year earnings from our exited FMS business in the UK will reduce earnings per share by $0.17. This decline does not include gains from the sale of UK assets and exit related costs, which were excluded from comparable EPS results in 2022. FMS contractual, which reflects ChoiceLease and SelectCare is expected to contribute $0.10 to EPS, primarily reflecting higher lease prices. We expect revenue and earnings growth and lease to continue to be limited in 2023 by ongoing OEM delivery delays. Due share count from share repurchase activity is expected to increase EPS by $0.85. This primarily reflects the impact from 2022 progress. The largest expected benefit in EPS in 2023 is from profitable growth in supply chain and dedicated. They are 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. The spring, the high end of our comparable EPS forecast to $12.05, with a range of $11.05 to $12.05 for the year. Included in our 2023 forecast EPS is approximately $1 of outsized gains and 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 $11.05 to $12.05 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 multiyear strategic initiatives. Supply chain and dedicated, we expect ongoing secular trends in our sales and marketing initiatives to drive new opportunities for profitable growth. Our actions to strengthen dedicated contracts and recover inflationary costs in both 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 cumulative annual benefits 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. It 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 â 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. If you have additional questions, you're welcome to get back in the queue, and we'll take as many as we can. At this time Iâll turn it over to the operator.
Operator: Thank you. And our first question comes from Jordan Alliger. Please go ahead.
Jordan Alliger: Yeah hi! Maybe I just want to talk about supply chain a little bit. Can you talk a little bit about you know the inbound proposals you might be getting, you know the pipeline for that in the slowing economy. You know are you still seeing the pickup. Are you still seeing it pretty robust, because it meets the supply chain security. How it may dovetail into the whole near sharing 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 are seeing the most demand? And then just finally, maybe just what was the impairment about, the $20 million. And is it more reflective to add that back, thinking about how it did for the quarter. Thanks.
Robert Sanchez: Yes, thanks Jordan. Let me give you â 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 it. 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 as 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 major multinational corporations that are looking for help on supply chain activity, and also I would say picking up more of the e-commerce type business that we've got now with e-comm and also with Ryder Last Mile. So that's what we're seeing. As it relates to the impairment, that was a â 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. Their credit was a little bit softer than what we normally would 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's still a little bit of exposure. There's still some exposure going into this year, and that all depends on how this customer makes out as far as credit. But we built that in â just so you know, we have built that into the forecast for the full year that we gave you. So let me hand it over to Steve to give you a little bit more color around the pipeline and the types of customers that we're seeing.
Steve Sensing: Thanks, Robert. Jordan yeah, we're again â you know kind of give you a recap of last year, another record sales year in supply chain, so that's really two straight years in a row. Pipeline remains very healthy up year-over-year, double digit percentage. Now I think that's really an effort of our continued, ever better marketing campaign, certainly our investment in the sales team and really the deep vertical industry expertise 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. Certainly one of the top cross border service out there. So we've got our eye on the ball there. We're expanding in Mexico, which is feeding into the U.S. So all positive signs remain at this point.
Jordan Alliger: Thank you.
Robert Sanchez: Thanks Jordan.
Operator: And our next question is going to come from Jeff Kauffman. Please go ahead.
Jeff Kauffman : Thank you very much, and congratulations, just terrific results. Could you explain to me please a little more about this cumulative currency translation expense that we'll be seeing in â23. Just to better understand what it's related to. Do you have any predictability as to when that's going to happen, and I'm guessing your point is its non-cash and we should look through it, but I just want to understand it a little better.
A - John Diez: Yeah Jeff, John here. You're absolutely correct. It is a non-cash item that we're going to need to â under the accounting rules we're going to need to take the cumulative translation losses that sit today in equity. Sometime next year when we fully exit out of the UK, it will probably be midyear. Itâs tough to call whether it will be second or third quarter, but we're expecting midyear next year to complete that exercise, and then all the accounting rules ask you to do is to take that through earnings. So there is no impact on equity. It's not a cash flow related impact either and it represents the cumulative translation losses since we've been operating in the UK to today.
Robert Sanchez: Yeah, by the way that's this year, not next year.
John Diez: This year, 2022 this year.
Jeff Kauffman : This year? Yeah, we're in â23 now. Got you, got you. That's my one. I'll get back in queue, thank you.
A - Robert Sanchez: Thanks, Jeff.
Operator: And our next question is going to come from Scott Group with Wolfe Research.
Scott Group: Hey, thanks. Good morning, guys. Can you just talk about how much are you assuming used prices fall from current levels within the guide, and if there's any depreciation headwind or tailwind this year? And then just separately, if I look right, you've got leasing free growth. IT sounds like maybe just a little bit more to go on the leasing pricing. Why aren't contractual FMS earnings growing this year?
Robert Sanchez: Okay, thanks Scott. A couple of comments. First of all, how much were UBSâs driving? We don't like to give that, because we don't want to leave 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 on the cash flow, we're kind of expecting about the same proceeds. Around depreciation, we do have a benefit around lease, itâs about $40 million. But that's been primarily offset by variable interest expenses. You know we â there's a portion of our debt that we fund through variable interest, and as that's gone up over the year, we've seen an increase in our variable interest, which is impacting FMS. So then why we're not seeing more juice on the â firstly, you have to remember, the margins on FMS are going to be certainly within our target ranges, even though rental and UVS are going to much more normalized levels. So you are seeing the benefit of all those changes that we made around pricing and 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 3,000 or 4,000 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 come in more and it'll produce more benefit in 2023. Otherwise that benefit is continuing to get pushed now into 2024. So as you start, we have to â at some point we're going to get really a multiyear period of hitting that target, high end of the target range, and that's probably coming in in 2024, now assuming that the OEMs can get caught up.
Scott Group: That's helpful, and just can I just understand on the residuals, do we just keep them where they are now and we're not going to move them around anymore. We're just going to keep them where they are and hope that, you know that just means we continue to see gains. Is that the plan?
John Diez: Yeah Scott, we presented in the back there in the appendix. We presented 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.
Scott Group: Okay, thank you guys.
Robert Sanchez: Thanks, Scott.
Operator: And our next question comes from Brian Ossenbeck from J.P. Morgan, Please go ahead.
Brian Ossenbeck: Hey! Good morning. thanks for taking the questions. Just wanted to come back on the impairment. It sounds like it's going to be a little bit more than $20 million, but maybe you can put some context around how that happened? You know if it was unexpected, it sounded like maybe this was a customer that was a little bit weaker credit than you thought. So maybe thereâs an end market impact combined with that. So maybe some context around that will be helpful, and if you â you know the frequency with which you see these things happened would also be good to get further context around this. Thanks.
Robert Sanchez: Yes, I think you hit the key points here. Just, number one is, this is not a â this customers credit profile was below 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 as a way 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's an unusual situation that we don't have very many customers where we have this amount of investment, especially on any type of specialized equipment like this. So, it gives you a little color. I think it is a relatively unique situation for us that unfortunately the customerâs credit has deteriorated since we signed the deal a couple of years ago.
Brian Ossenbeck: Okay, understood. And then just on the, back to the outsized gains, it sounded like just to clarify, there's an additional dollar in 2023. So I 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, couldnât you potentially have rent utilization higher, now that you're shifting more to trucks versus tractors. Shouldn't that be a little stickier as you go down that path, so maybe we won't quite see it go back to where it was?
Robert Sanchez: Yes, I guess a couple of things. Around the breakout of the dollar, it is â right now, it's primarily going to be on the gain side. We had $400 million of gains this year. So we're expecting that to come down. But again, I would say it's just â again, this is a forecast. So you got a buck in there primarily of gains, but also some rental. Rental, you're right and that it's more trucks now. I think now our rental fleet is like 55% trucks, and it used to be 47% trucks. So, we've already seen 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 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 is the adjustment driven by the shift in more trucks versus tractors, as well as the fact that those utilizations might be a little bit lower.
Brian Ossenbeck: Okay, thank you. Very helpful. I appreciate it Robert.
Robert Sanchez: By the way, the important point there is lower utilization, but still getting a better return. So because of the rates you are able to get better returns with lower utilization. Thank you Brian.
Operator: And our next question comes from Allison Poliniak from Wells Fargo.
Allison Poliniak: Hi! Good morning. Just want to go back to supply chain services on the EBIT margin percentage. I know the amortization or the client situation, the intangibles from the acquisitions as well. Could you maybe walk through â are you kind of at that target at this point, excluding those for '23? How far are we along with the pricing actions that are there, you know if we're not in terms of trying to get there? Any growth headwinds that you're starting to see just because of the outsized growth that you're getting in that business as well? Thanks.
Robert Sanchez: Yes. I would tell you, without the amortization in 2023, we would expect to be at the target. Other, we've got the lift of the growth and getting margins back, improving. In terms of any headwinds that we see, I would tell you e-commerce growth. We saw a little bit of a â I wouldn't say a slowdown in e-commerce, but we saw less of an uptick in December than what we would have expected seasonally, so you're seeing that. As we go 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 goes. 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, we'd be at the target in our forecast. In addition to that, you have the opportunity to even do better with these other items that I mentioned, if those don't play out in a negative fashion.
Allison Poliniak: Great! And then just on that Whiplash acquisition, just the e-commerce, is it performing to plan? I know there's been a lot of volatility in that market or is it maybe outperforming just given the growth opportunity there? Any thoughts?
Robert Sanchez: Yes. It's generally performing with plan. 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 or actually nice since they slowdown, not grow as much as we would seasonally expect. So as we go into this year, we're probably a little cautious in 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. The growth opportunities as more and more customers are looking for help around e-commerce fulfillment and omni-channel. We're very well positioned with that capability.
Allison Poliniak: Great! Thank you.
Robert Sanchez: Thanks Allison.
Operator: And our next question comes from Todd Fowler at KeyBanc Capital Markets. Please go ahead.
Todd Fowler: Great! Thanks and good morning. Hey Robert! Hey John! Maybe just to get an idea of how you're 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 the full year guidance and it sounds like that 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 parts with what we should see for gains throughout the year and rental utilization?
Robert Sanchez: Yes, 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 continue to deteriorate throughout the year, right? Things slow down throughout the year. I mean there's a lot of talk about a potential shallow recession in the second half and we kind of built in that type of a really slowing type of environment 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 acceleration on the lease side. Right now, we're assuming that doesn't happen until the tail end of the year, which then would be earnings benefit more into 2024. John, anything?
John Diez: Yes Todd, I would just add, we do have the impact of UVS 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 the year to come about.
Robert Sanchez: I mean if you look at it on average, we're expecting as we said, a normalized - on average, a normalized environment for used trucks and rental. So, if you think about the discussions we've had over the last several quarters about core earnings and seeing that continue to grow, this is it, this is how we expect it to play out, right. We expect the outsized earnings from used vehicles and rental to 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.
Todd Fowler: Yes. You know Robert, that was actually kind of my thought in the question that basically, it sounds like by the second half you're kind of in a more normalized range with both UVS 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, it should be a pretty decent run rate and kind of more of a normalized cadence as we exit the year.
Robert Sanchez: I think that's a fair statement, yes.
Todd Fowler: Okay good. And just if I could, one last one. As we think about the free cash flow profile, you know expecting to do $200 million of free cash this year, is there a reason to think going forward with kind of your plans for 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 free cash usage?
Robert Sanchez: Yes, I think that's fair. The only caveat I'd give you is due to the OEM delivery delays, you could have a year, maybe itâs '24 or '25, but there's a catch-up of a bunch of units that need to be in service. That would put some pressure on free cash flow, you could go negative. But you're right. I mean as we look at the model, the way it's operating now, the way it's delivering, not only the earnings and free cash flow, you are highly likely to be positive in most years, right. And you might have a year for an anomaly that youâd go â it could go negative. Based on the strategy I think we have today, this balanced growth strategy, that's what we're shooting for.
Todd Fowler: Got it, yes. You need to average out the two years. So if there was a push into one year, you'd have that benefit in the other year. So okay, that's all very helpful. Thanks for the time this morning. Yep, thanks.
Robert Sanchez: Okay. Thank you, Todd.
Operator: And our next question is going to come from Justin Long from Stephens. Please go ahead.
Justin Long: Thanks. It sounds like you have a good amount of visibility towards the growth in your lease fleet this year. You know the next year is essentially locked in the backlog. I was curious if you could comment on the visibility you have in growth for SCS 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 in a freight market that's been fairly weak.
Robert Sanchez: Yes. Let me hand it over first to Steve to give you the color around supply chain, and then I'll give it to Tom to give you some rental. Steve?
Steve Sensing: Yes. Thanks Robert. Justin here. As I said before, the pipeline remains very healthy. You know we expect full year to be in the target range for SCS. So that's low double digit for SCS and high single for Dedicated as well. So again, everything remains positive.
Robert Sanchez: I would also add, I guess that about 40% of that business is already contracted, right? Because of the lead times to get the new accounts ramped up, so you could say 40% of its already signed. The rest it will come as we sell and implement throughout the year. Tom, do you want to give us some color on rental and what we saw in the fourth quarter, what we're seeing now in January and February?
Tom Haven : Yes, sure Robert, thanks. I think we've seen a more normal typical seasonal decline in rental. If you look back last year as we went from the fourth quarter into the first quarter, we actually saw rental utilization hold pretty well. This year, it's fallen kind of typical to seasonality and the falls in 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, the sleeper classes and the trailer classes, for example, that tied directly to the freight market. Those are the ones where we've seen the decline. And as Robert mentioned, our lease - excuse me, our rental fleet has adjusted to more trucks, and we have seen the resiliency in the truck classes as we 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 2023, where the truck classes continue to perform pretty well from a utilization perspective.
Justin Long: Got it. Thank you. Sorry, go ahead Robert.
Robert Sanchez: What weâre assuming it's mid to high 70% in terms of utilization in our forecast coming down from the 80% plus that we saw last year. So, we've built more normalization if you will, of demand.
Justin Long: Great! And it sounds like you're expecting to be in that mid to high 70% range in the first quarter. Is that correct?
Robert Sanchez: That's correct.
Justin Long: Got it. Thanks for the time.
Robert Sanchez: Probably more the mid-70%s because it's the first quarter, so it's usually the weakest.
Justin Long: Makes sense. Thanks.
Robert Sanchez: Thanks Justin.
Operator: Our next question comes from Jeff Kauffman from Vertical Research Partners. Please go ahead.
Jeff Kauffman : Thanks everybody. Just a follow-up, and thank you for that guidance on the seasonality and the rental utilization. The first quarter is normally down about 6, 6.5 points, right?
John Diez : Generally yes, from the fourth quarter.
Jeff Kauffman : Okay, here is my question, thank you. So 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 vehicle technologies. We have a new CARB regulation coming in California; we have a new EPA regulation in 2027. 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?
Robert Sanchez: So I guess as a general statement, you know more regulation, more complexity, more uncertainty for customers is typically good for Ryder, because they'll come to people who understand the industry or understand the vehicles for help. And we've seen that over the last, I would say 15, 20 years as there has been a lot more regulation around truck technology. As it relates to the transition to EVs, I think we're very focused on that. We have a team of folks who are a 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 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, more on light-duty type delivery vans, they seem to be the ones that are more ready for prime time if you will, not only from a technology standpoint, but the price point is getting to one that makes it economically viable for companies to invest in it. 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 Ryder plays an important role in introducing these vehicles when they're ready, first as 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 them, we expect that to take many years, probably decades, and Ryderâs really well positioned to help companies navigate through that period. So you know 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 â even on some of the AV stuff. And when it's ready for prime time, be able to bring what we have, which is a very large customer base to those technologies and get them - begin to get those integrated into the fleets.
Jeff Kauffman : Thatâs my question. Thank you.
Operator: At this time, there are no additional questions. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.
Robert Sanchez : 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!
Operator: That concludes today's conference. Thank you for your participation.
