萊德系統 (R) 2021 Q4 法說會逐字稿

Good morning, and welcome to the Ryder System Fourth Quarter 2021 Earnings Release Conference Call. (Operator Instructions) Today's call is being recorded. If you have any objections, please disconnect at this time.

I would now like to introduce Mr. Bob Brunn, Senior Vice President, Investor Relations, Corporate Strategy and New Product Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's Fourth Quarter 2021 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 economic, business, competitive, market, political and regulatory factors. More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and 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 Havens, 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.

With that, I'll turn it over to Robert.

Good morning, everyone, and thanks for joining us. I'm very proud of the results that we generated in 2021, and I'm excited to share the significant progress we've made as well as the opportunities ahead of us.

We'll -- I'll begin the call by providing you with a strategic update. John will then take you through our strong fourth quarter results, which exceeded our expectations again this quarter. We'll then shift our focus to our outlook, including the increases that we've made to our long-term ROE and FMS return targets. We'll also review our 2022 forecast.

Let's begin on Slide 4. We recently completed 2 acquisitions, consistent with our capital allocation strategy to drive growth in supply chain.

On January 1, 2022, we completed the acquisition of Whiplash, which is expected to add approximately $480 million to 2022 supply chain total revenue. This acquisition expands our e-fulfillment network with scalable e-commerce and omnichannel fulfillment solutions, supported by proven operating and technology platforms.

On November 1, 2021, we completed the acquisition of Midwest Warehouse & Distribution System, which is expected to add approximately $135 million in supply chain total annual revenue and will expand our offering in multi-client warehousing. Both acquisitions are expected to be accretive to 2022 earnings.

Unprecedented challenges impacting labor, supply chain and truck production are providing us with additional growth opportunities because they help drive companies to make long-term outsourcing decisions.

In 2021, we had record new contract wins in supply chain and dedicated, which we expect will contribute to long-term profitable growth. FMS is also benefiting as companies are looking to source truck capacity in this extremely tight market.

We generated record ROE of 21% in 2021, reflecting strong demand in pricing in used vehicle sales and rental as well as benefits from our multiyear lease pricing and maintenance cost savings initiatives. We continue to implement price increases in supply chain and dedicated to address labor and supply chain challenges, and customers have generally been amenable to these adjustments.

2021 free cash flow was strong at $1.1 billion. Higher capital expenditures were partially offset by $400 million in capital spending that was deferred due to OEM delivery delays. Free cash flow also reflects higher used vehicle sales proceeds. Strong operating results and cash flow generation further strengthened our balance sheet, resulting in leverage being below target.

Based on our outlook and consistent with our capital allocation strategy, we intend to enter into a new $300 million accelerated share repurchase program. After completing this program, we still expect to have capacity for acquisitions and the existing share repurchase programs.

I'll turn the call over to John now to cover our fourth quarter results.

Thanks, Robert. Total company results for the fourth quarter on Page 5. Operating revenue of $2.1 billion in the fourth quarter increased 14% from the prior year, reflecting revenue growth in all 3 business segments. Comparable earnings per share from continuing operations was $3.52 in the fourth quarter as compared to $0.83 in the prior year. Higher earnings reflect improved performance in FMS from higher used vehicle sales, rental and lease results as well as a declining depreciation expense impact related to prior residual value estimate changes.

Return on equity, our primary financial metric, reached a record 20.9% for 2021, reflecting improved FMS results. 2021 free cash flow was strong at $1.1 billion, although down from the prior year, when capital expenditures were unusually low due to COVID.

Turning to FMS results on Page 6. Fleet Management Solutions operating revenue increased 9%, reflecting 35% higher rental revenue, driven by strong demand and higher pricing. Rental pricing increased 10% primarily due to higher rates across all vehicle classes. FMS realized pretax earnings of $255 million, up by $195 million from the prior year. $123 million of this improvement is from higher gains on used vehicles sold and a lower depreciation expense impact related to prior residual value estimate changes.

Improved rental and lease results also significantly contributed to increased FMS earnings. Rental utilization on the power fleet was a record 85% in the quarter and above prior year of 79%. Results also benefited from ongoing momentum from lease pricing initiatives, partially offset by 2% smaller average active leased fleet. We expect to see incremental benefits going forward from this initiative as lease continues to be repriced -- leases continue to be repriced upon renewal. FMS EBT as a percentage of operating revenue was 19.6% in the fourth quarter and 13.4% for the full year, surpassing the segment's long-term target of high single digits.

Page 7 highlights global used vehicle sales results for the quarter. Used vehicle market conditions remained robust due to strong freight activity and truck production constraints creating tight supply. Higher sales proceeds reflect significantly improved market pricing. Globally, year-over-year proceeds approximately doubled for both tractors and trucks. Sequentially, tractor proceeds were up 19% and truck proceeds were up 14% versus the third quarter 2021.

During the quarter, we sold 5,400 used vehicles, down 23% versus the prior year due to lower inventory levels. Sales were up 10% sequentially and included a large retail transaction. Used vehicle inventory ended at -- with 2,500 vehicles, below our target range of 7,000 to 9,000 vehicles. Average used vehicle pricing is well above residual value estimates used for depreciation purposes. As such, we're comfortable with our residual value estimates.

Turning to Supply Chain on Page 8. Operating revenue versus the prior year increased 21% due to new business, higher volumes and the Midwest acquisition. Growth was partially offset by the impact of supply chain disruptions on automotive production activity. SCS EBT as a percent of operating revenue of 3.5% was below target. This reflects lower automotive earnings, higher strategic investments and medical costs, partially offset by positive earnings from new business. We anticipate SCS EBT percent to improve in 2022 due to growth, automotive pricing and volume recovery.

Moving to Dedicated on Page 9. Operating revenue increased 26% due to new business, higher volumes and increased pricing. DTS EBT as a percent of operating revenue was below target at 4%. This reflects increased labor and insurance costs, partially offset by positive earnings from new business. We're confident that new sales activity and pricing adjustments will improve DTS EBT percent in 2022.

Now I'll turn the call back over to Robert to discuss our outlook.

Slide 10 highlights key aspects of our 2022 outlook. In terms of market assumptions, we expect robust outsourcing trends to continue, supported by increased awareness and focus on supply chain resiliency. We expect the trucking environment to remain tight in 2022 with some moderation in the second half. Labor and supply chain disruptions are expected to continue through at least the first half of the year. We're expecting to recover costs from market labor shortages and wage increases through contract pricing adjustments in dedicated and our supply chain automotive business.

In terms of our financial forecast for 2022, operating revenue is expected to grow approximately 10%. Comparable EPS is forecast to be between $11 and $12, up 15% to 25% over the prior year. ROE is expected to remain near record levels, somewhere between 20% and 22%. Free cash flow is expected to be between $200 million and $300 million, as we are forecasting lease growth of around 4,000 vehicles by year-end, which is on the high end of our typical expected lease growth range.

Slide 11 highlights the key assumptions in our forecast. FMS operating revenue growth is expected to be in the low single digits as OEM delivery delays will constrain lease revenue growth. FMS EBT as a percent of operating revenue is expected to be above the segment's low double-digit target range, reflecting strong used vehicle sales and rental results and the benefits from multiyear lease pricing and maintenance initiatives. We expect the used vehicle sales and rental environment to remain strong in 2022, slowly moderating in the second half. FMS EBT percent, excluding gains, is expected to be low double digits in 2022, demonstrating the earnings power of the base business.

Operating revenue growth in supply chain is expected to be above 30%, driven by acquisitions and record new contract wins in 2021. EBT percent is expected to improve throughout 2022, reflecting a recovery in automotive and reach high single digits in the second half.

Operating revenue growth in dedicated is expected to be low double digits, above the segment's high single-digit target range and driven by record new contract wins in 2021. EBT as a percent of operating revenue is expected to improve throughout 2022, reflecting price increases and reach high single digits in the second half.

In addition, we expect to continue to make strategic investments in innovative technology and new product development primarily to accelerate profitable growth in our supply chain and dedicated business. Our forecast also assumes execution of the $300 million accelerated share repurchase program in the first half of the year.

Slide 12 provides a chart outlining the changes from 2021 to reach the high end of our 2022 comparable EPS forecast. The largest contributor to EPS growth is supply chain and dedicated results, which are expected to generate $1.35 in incremental EPS. These results reflect acquisitions and growth as well as recovery of costs related to the labor shortages in dedicated and auto recovery in supply chain.

The net impact from depreciation change in used vehicle sales results is expected to contribute $0.65 in EPS growth. A decline in depreciation expense impact from prior residual value estimate changes is expected to more than offset a modest decline in gains on used vehicles sold. Although benefits from a declining depreciation expense impact are expected to continue beyond 2022, these benefits are not expected to be as meaningful going forward.

FMS contractual, which reflects ChoiceLease and SelectCare, is expected to contribute $0.40 of EPS, primarily reflecting higher lease pricing.

Rental is expected to provide $0.40 of EPS growth due to higher demand and pricing on a larger average fleet. These benefits are expected to be partially offset by lower utilization. Both FMS contractual and rental results also reflect benefits from the multiyear maintenance cost savings initiative.

The net benefit from a reduced share count related to the new accelerated share repurchase program, partially offset by a higher tax rate, is expected to add $0.25 to EPS.

The earnings decline related to the intended exit of our U.K. business, which we will cover in a few minutes; and higher overheads, are expected to reduce EPS by $0.30. This decline does not include any expected gain from the sale of U.K. assets and the exit-related costs in the U.K., which would be excluded from comparable EPS results.

Increased strategic investments in innovative technology and new product development are expected to reduce EPS by $0.33. This brings the high end of our comparable EPS forecast to $12 with a range of $11 to $12 for the year.

I'll turn the call back over to John to discuss capital expenditures, cash flow and ROE.

Thanks, Robert. Turning to Slide 13. 2021 lease capital spending of $1.2 billion was up year-over-year due to increased lease sales activity, partially offset by a $400 million impact from OEM delivery delays. Our 2022 forecast of $2.1 billion reflects higher lease replacement and growth capital. In North America, we expect the average ChoiceLease fleet size to be unchanged year-over-year. The year-end fleet is expected to be up approximately 4,000 vehicles as vehicles are delivered later in the year, which will provide the incremental earnings growth for 2023.

2021 rental capital spending of $651 million increased significantly year-over-year, reflecting a higher planned rental investment in a tight market environment and after a period of significant downsizing during COVID. In 2022, rental spending is expected to decline to $500 million, with our average fleet expected to grow by 9%. In addition, we are increasing our capital spending on trucks versus tractors as trucks continue to benefit from strong demand and pricing trends, supported by e-commerce growth, and also tend to be less volatile during a downturn. Our full year '22 forecast for gross capital expenditures is $2.7 billion to $2.8 billion.

Turning to Slide 14. 2021 free cash flow was $1.1 billion and includes a cash flow benefit of $400 million from OEM delays and record proceeds from used vehicles sold. 2022 free cash flow is forecast at $200 million to $300 million, down from 2021, reflecting higher lease capital expenditures.

Balance sheet leverage is expected to remain below our target range in 2022. 2022 ROE is expected to be between 20% and 22%, reflecting the benefits from continued strength in FMS and a recovery of SCS and DTS returns in the second half of 2022.

I'll turn the call back over to Robert to provide our EPS forecast for the first quarter and full year '22, and also discuss our long-term targets and the actions we're taking to achieve them over the cycle.

Thanks, John. Turning to Page 15. We're forecasting comparable EPS of $11 to $12 versus $9.58 in 2021. We're also providing a first quarter comparable EPS forecast of $2.20 to $2.35 versus the prior year of $1.09. Our January results provide us with confidence in our outlook and demonstrate the continuing momentum in FMS market conditions and benefits from initiatives to increase returns.

Turning to Slide 16. In late 2019, we shared several multiyear initiatives intended to better position the business to achieve our long-term targets over the cycle and create value for shareholders. These initiatives are focused on elevating the return profile of the business through accelerated growth in our higher-return supply chain and dedicated businesses and moderate growth and improved returns in our FMS business, while generating higher free cash flow. These actions have already contributed meaningfully to higher returns and we expect incremental benefits going forward.

In supply chain, we're very excited about the expanded capacity and growth resulting from both organic and M&A activity. From an M&A perspective, we recently closed our largest supply chain deal with Whiplash, which takes us further into the high-growth e-commerce area. Organically, 2021 was a record sales year for Supply Chain and Dedicated.

In addition, we continue to invest in innovative technology solutions, such as RyderShare, our real-time fleet freight visibility and collaboration tool which has been a key differentiator in winning many of these new contracts. We were excited to announce early this week that RyderShare visibility has now been extended into the warehouse. Ryder is now the only 3PL offering a technology platform with real-time visibility, collaboration and exception management across the end-to-end supply chain.

In FMS, the team has done an excellent job of leveraging favorable pricing trends in used vehicle sales and rental, resulting in outperformance in both these areas. In addition, our lease pricing initiatives have resulted in improved portfolio returns and revenue on new lease vehicles increasing year-over-year by mid-single digits in 2021. With approximately 40% of the lease portfolio now repriced with both higher-return spreads and lower residual assumptions, we expect additional benefits going forward as the remaining 60% of the leases are renewed and repriced with these terms.

Our multiyear maintenance cost savings initiative delivered a greater-than-expected $40 million in incremental annual benefits during 2021. With program to-date savings reaching $90 million, we now expect to exceed our initial $100 million savings target.

As part of our strategy to improve FMS returns, we intend to exit the lower-return FMS business in the U.K. over the next 12 to 18 months, subject to consultation, obligations under U.K. law. Our 2022 free cash flow forecast does not reflect the potential exit of our U.K. business, which, if we complete, we expect would benefit cash flow over an estimated 18-month period.

We have also taken actions to mitigate the impact of cyclical downturns on earnings. Vehicle residual value estimates for the entire fleet are near historically low levels. In addition, last year, we incorporated the impact of a potential downturn into our residual value assumptions, resulting in a modest reduction in residual value estimates for certain tractors. Used vehicle pricing will continue to fluctuate based on market conditions, which will impact the gains that we realize.

However, by maintaining residuals at these low levels, our goal is to realize used vehicle gains in the vast majority of the time with a reduced probability of losses or need for additional depreciation. We're also continuing to shift our revenue mix towards supply chain and dedicated by accelerating growth in these higher-return businesses that are less susceptible than FMS to cyclical downturns.

Finally, we're maintaining balance sheet flexibility through moderate lease growth. This enables us to invest in higher-return opportunities that include organic growth, targeted acquisitions and investments as well as returning capital to shareholders. Based on the results from actions to increase returns, our planned initiatives and our outlook, we are raising our long-term ROE target over the cycle.

Slide 16 highlights our primary long-term financial target, ROE and key components to driving returns higher. We're increasing our long-term average ROE target over the [cycle] from 15% to a range of upper teens, primarily to reflect higher expected returns in FMS. This means that in a favorable rental and used vehicle market like we are in today, we should be in the low 20s. And in a down rental and UVS market, we should be in the mid-20s -- in the mid-teens.

We also increased our target for FMS EBT as a percent of operating revenue from high single digits to low double digits, reflecting the benefits from our lease pricing and maintenance cost initiatives as well as getting past the depreciation impact related to prior residual value estimate changes. Long-term operating revenue growth targets are unchanged and EBT percent targets for supply chain and dedicated remain at high single digits. Our leverage target also remains at 250% to 300%.

That concludes our prepared remarks this morning. Before we go to questions, I'd like to announce that we're planning an Investor Day for June 3 to be held in New York City, subject to health conditions, so please mark your calendars. More details will be forthcoming regarding the event and required pre-registration. Also, please note that we expect to file our 10-K tomorrow.

(Operator Instructions) At this time, I'll turn it back over to the operator.

(Operator Instructions) We'll now take our first question from Stephanie Moore with Truist.

Congrats on a great quarter. I wanted to touch on the FMS segment. Really fantastic work repricing and working on the returns of the leases within that segment. If you could talk a little bit about the customer acceptance of these price increases.

And really, if the customer profile, whether it's size or industry has changed over the last several years as you kind of focus more so on returns and pricing.

And kind of how we should think about repricing and the success of repricing of that incremental 60% in the years ahead.

Yes. I'll just make a couple of comments and hand it over to Tom. Look, I think we've been -- we've certainly been encouraged by what we've seen with the acceptance of pricing. As you think about what drove our increase was really the lower residual expectation going forward, which is not a unique Ryder challenge. I think anybody who owns their own trucks going to have the same issue; and then the ongoing volatility that we would expect, which increases the risk. So what we're finding is the market is recognizing that and certainly amenable to putting that in the rate. So we feel confident in our ability, I guess, to continue to see that.

But Tom, you can give a little more color also around the segments also that we are targeting now.

Yes, I'd probably just make one more comment, too. As we -- if you go back a few years, the market also realized the struggles of maintenance costs on some of the new engine technologies. So -- and they understood some of those cost increases that were incurred in their business which made it a little bit more, as Robert mentioned, kind of understood what was going on with the pricing of the leasing.

In terms of the customer base, look, we sell to a broad range of customers. And we've been working on this for about 3 years now. And there's been a slight change in the mix of business from some of the transports, would be the industry that has declined slightly in our lease portfolio. And then some of the other industries have picked that up.

I think -- just 1 other point on the lease book. Like we mentioned in the call notes, there's about 40% of the book has already been sold at the new pricing. And we're selling now almost a year out based on the OEM supply disruptions and delays of delivery. So we've already priced another almost a year's worth of leases at the new pricing at this point. So we feel really good about the -- when the deliveries show up over the next 12 months, that we'll be in a really good place with the lease book going forward.

Great. And just a quick follow-up on that comment. So would you say there's been a kind of an effort to target maybe some higher-growth potential customers, whether that's in consumer or other avenues, that could have maybe a steadier-growth profile or a higher-growth profile in the past? Just wanted to follow up on that.

Yes, I mean, I think the one I'd point out would be e-commerce would be the area. I know we've mentioned it certainly with the supply chain teams and what they're doing. But we're also focusing in that segment as well in FMS.

(Operator Instructions) We'll now take our next question from Jordan Alliger with Goldman Sachs.

Obviously, dedicated and supply chain are a big part of the earnings step up in 2022. So I'm wondering if you could provide a little bit more color around the drivers that are going to take that EBT margin -- the biggest factors that you expect to take those EBT margins back up to sort of the targeted range over the back half of the year.

Yes, Jordan, listen, 2 big areas. One is growth. So all the new business, we had a record new contract wins this year. So as those come in, we're certainly expecting a lift in earnings from that. And then the second piece is really around recovery of -- in our pricing of the wage increases and that we -- that has been in the market along with the recovery of supply chain disruption in automotive.

But let me -- I'll hand it over to Steve so he can give you a little bit more color.

Yes. Thanks, Robert. Jordan, the -- I'll break it into the 2 buckets, 2 divisions. In dedicated, we are seeing record new sales. Pipeline remains strong. I'll tell you, the new business that's coming in is at our target returns. The team has really gone through our book of business and had discussions with many different customers. So if you think about half of our business, there was minimal impact to the increase in the driver wages last year and turnover. So the team really focused on the remaining 50%.

I'll say 25% of that balance has been discussed with our customers, inked in the new rate structure, and we're in the process of filling those seats. The remaining balance is -- half of that is in discussion. And the other half has been agreed to, and it's a matter of getting it inked up and drivers in the seat. So we're off to a good position and expect to see those returns come back in Q2.

On the SCS side, about half of our business is cost-plus, so those are kind of easy discussions or easier discussions. The remaining balance, we're down to just a few customers within the automotive and tech verticals, and we expect to have those closed up in Q2. So I think we're in a good spot there. And as Robert said, it's really about the automotive semiconductor shortage and how that rebounds in the second half.

We'll now take our next question from Allison Poliniak with Wells Fargo.

Just want to follow up on Jordan's question a little bit more with SCS. Should we be thinking -- I know you just mentioned sort of more of a second half there, but is there going to be more of a linear cadence as some of those get repriced?

Then any mix benefit that you're getting from some of the newer contracts that you're bringing in there?

Yes. Well, I would tell you, in terms of a linear cadence, I'd say on the dedicated side, you're going to see some of that more linear in the first half. On the supply chain side, there's a significant couple of contracts that we're looking to renew or really reprice here beginning in the second quarter. And we should begin to see the benefits then, and then really kick in, in the fourth quarter.

So Steve, I don't know if you wanted to add something else to that.

Yes. Just the only thing I'd add, too, with the acquisitions that we brought on that Robert talked about earlier, automotive is -- will be a smaller but still significant, about 30% of our business. But certainly, the CPG and retail world is now about half of our portfolio. So we like that diversity as well.

Our next question will come from Todd Fowler with KeyBanc Capital Markets.

Robert, on the updated financial targets, it really looks like the move on to get to the higher ROIE is driven by ticking up your expectations for FMS operating margins. Can you give us an idea of how you're thinking about what kind of a normalized level of gains would be within FMS? I don't know if you want to talk about it from like an absolute dollar basis or as a percent of revenue. But just trying to get a sense within the guidance targets, how gains play into that.

And then just as a follow-up to that, if you could share, it sounds like you're expecting gains to come down in '22. If you can give us an idea of what you're embedding for units sold and pricing, I think that would be helpful.

Yes. I would tell you on the -- in terms of more normalized gains, obviously, we came off this year, where we're at about $270 million of gains. We're expecting '22 to be modestly down from that, primarily as a result of the residual values that have come up. We expect pricing to be slightly up.

But in terms of what more normalized gains, I think, is what everybody is trying to figure out. The $270 million, if you think about normalized gains, that -- we think normalized gains could be somewhere around $75 million to $100 million. So that we think -- based on where we have residuals today, we think that can be a more normalized view.

So when you take that and you also assume rental. Rental could come down, too. We think in a more normalized environment, earnings could be down $2.50 to $3 a share. That's probably a good range. If you said I'm going to do away with all the extraordinary gains that I'm seeing and all the extraordinary rental that we're seeing.

So that still puts you, I would tell you, in a really much higher return environment than we've seen historically. And that's really a reflection of all the important work that's been done around lease pricing, around maintenance cost. What we envision also, the continued move towards supply chain and dedicated, where you will have higher returns as we get our pricing back. So all those things put together really are what's giving us confidence in the base business, that the base business itself is going to improve. And over the cycle, we'll be at a higher return than what we've seen in the past.

Robert, that was great. And that was -- I really appreciate the granularity there, and we've kind of come up with some similar numbers. Just one follow-up to that. Would we have to adjust anything for -- do you still have some elevated depreciation right now? Would that be one thing that would net against the numbers that you just gave for gains and rental?

Yes -- no. Going forward, look, this year, we're still going to have some -- a little bit of a depreciation, I would call, headwind. But as you go into next year, it really starts to become much less of an issue, very -- a much smaller number. So I don't think we'd be talking about that anymore.

I think going forward, that's one of the things that gave us confidence, too, is we've had a few years here of really outsized depreciation. And we're really getting now to the point where, as we go into next year, certainly, we're not going to see that same level of outsized depreciation. More normalized, therefore giving us opportunity for better earnings.

We'll now take our next question from Jeff Kauffman with Vertical Research Partners.

I'd like to see a normalized EBITDA multiple on those normalized earnings as well. So thinking about growth, you talked about 30% growth of operating revenue in the dedicated business because of new contract signings. How much do you need to increase the fleet on average to support that?

Jeff, 30% was on the supply chain...

Supply chain. Okay.

Right. And that's because of the -- a good chunk of the acquisition. We also had new contract signings. Probably without the acquisitions, we're probably looking at about 10% growth in supply chain.

Okay. Got you. And then low double-digit revenue growth is what you were looking for in DTS. So net-net between that and the rental and the lease you're bringing in, is it 6,000 or closer to 7,000 or 7,500 vehicles in 2022?

We'll bring it in 4,000 -- or we're expecting 4,000 in lease. Now those are going to come in, in the back end of the year, so we're not -- really, the benefit of the earnings of that will be in 2023. In rental, I'm not sure we gave the number in rental. John and...

You said 9% average growth, yes. So figure, on 40,000 vehicles-ish, that's 3,000 to 4,000 vehicles, right?

No, no, no. Because that includes pricing increases, too.

Okay. I got you. And then just one -- go ahead, ahead.

No, I think you got it right. The 9% was kind of all in, it wasn't reflected over the fleet. But we gave you the -- for CapEx, you've got an idea there, our CapEx for 2022 for rental being in that $500 million range.

Okay. So I can play with those numbers. And then one last follow-up, if I can. A lot of businesses that have reported fourth quarter and given a 1Q outlook are talking about the impact of Omicron and how it caused greater absenteeism and it affected customer use and a lot of that. And I think was probably greater than a lot of us anticipated in January and the early part of February. Can you talk about how Omicron did or did not affect your operations? And how that may or may not have affected your 1Q outlook?

Yes. I would tell you, Jeff, that we do see some of the same impacts that you're talking about in terms of absenteeism, we saw go up, which impacted our -- really, all of our businesses to a certain extent. But I think that what's different at Ryder is that we also are getting the offset of really still continued extremely strong demand on the FMS side for rental and UVS that were really helping that.

But we are -- the Omicron thing, I think, was more of a -- it's kind of getting behind us now. I think we are seeing those absentee rates come down. And really, the challenge that we have really has been around driver and warehouse worker recruiting. We're continuing to work through that. That's a lot of the pricing changes we're making with our customers.

But also that's still -- that issue is ongoing. And we continue to -- our teams continue to work to do that. We've added a lot of new resources to recruiting. We, I think, tripled the recruiting staff that we have in order to be able to bring in all of the drivers and warehouse workers that we need. We like the progress we're making, but there's still a lot of work to be done there.

Well, congratulations on a rock star year, and we'll see you in June.

Thank you, Jeff.

We will now take a question from Bert Subin with Stifel.

Congratulations on the quarter. You guys highlighted your maintenance initiatives being ahead of schedule, which was, I guess, maybe surprising just given what we're seeing on the inflation side of things. Can you talk about why that is? And then perhaps, what your expectations are for inflation just across the different segments of your business.

Sure. I'll tell you, and I'll let Tom give you some more details on that. But really, our maintenance initiatives are really more around process improvement now than really changing the process in our shops. So we've really just seen that providing more benefit than we expected originally, and we're also moving quicker.

So Tom, you can give them a little more color on that.

Yes. Maybe just try to directly address the question of CPI. I think that was more of your question. But just remember that we have CPI increases with our customers each year as well that offset any maintenance cost increase. So we're seeing those 2 net out. So you're really just talking about your underlying maintenance cost benefits, exclusive of CPI because CPI is kind of handled, if you will.

So we're continuing to see improvements in our productivity gains as we continue to roll out. So there's process improvements, as Robert mentioned, that we're going to continue to work on through next year. Plus, we have a couple of other engine and exhaust system and parts opportunities that the teams are going after next year as well to deliver even more benefit.

So that makes sense on the maintenance side. But maybe just in the context of the different parts of your business, obviously, inflation seems like it's impacting labor in dedicated and supply chain. Do you see any impact from inflation just in the FMS leasing side of things? Or are you saying that you're able to pass on some of those costs in your contracts?

Yes, I think it's what Tom just addressed is we have, in our contracts, in our lease contracts, there is a CPI clause that is tied to CPI, and there's a rate increase associated with whatever happens with CPI. So we are covered there.

In addition to that, even some of the units that we're signing today that maybe don't come in for another 7 or 8 or 10 months, any additional surcharges or increases also get passed through and included in the rate going forward. So we're pretty well covered, I would say, on the inflation side in FMS.

We'll take our next question from Brian Ossenbeck with JPMorgan.

Just wanted to go back to SCS and DTS just to make sure I understood the mismatch or the delay in terms of passing through some of the costs. I understand, I think, what Steve was saying about some of the contracts just weren't structured as such. So was that really the primary issue where you're seeing pushback? Did you try to maybe accelerate some of these cost pass-throughs? I just want to make sure I understood what the real reason was so we can kind of calibrate for that as we look into the next year.

Steve, do you want to take that?

Yes. I think, Brian, from a structural standpoint, think about our businesses that -- or our contracts is like typically a 3- to 5-year contract. On the dedicated side, there is a CPI clause, but it's typically capped kind of at a historical average, let's say, around 3%. What we saw in the middle of the year was a huge spike in wages. In many markets, it was easily 10% increase. And in some accounts and markets, it was as high as 30% to 40%, believe it or not. So what we've had to do is proactively go to all customers regardless of when that contract opens up for those discussions and really negotiate that rate increase.

On the supply chain side, kind of the same process. But as I said before, half of your business there is cost-plus, so those are easier discussions. And we're down to just a handful on the supply chain side. Did I answer your question?

Yes. So it sounds like similar to FMS and lease market is a lot stronger, you're able to take advantage of that. Maybe go through some of the negotiations to get them, I guess, to be able to not have similar challenges in the future. Do you think that affects growth at all? In turn -- are people willing to pay up for these new costs and pass-throughs?

No. Everything that we sold in the back half of last year in both dedicated and supply chain had new contract language, which opened those discussions up more frequently throughout the year. So we have not seen it slow down. Excited about the pipeline. It remains at historical levels, good quality deals, good sized deals in there. So we're off and running on the sales side here in the first part of the year.

Yes. Brian, I think you'd see that these are really market cost increases that we're seeing. So it's not a Ryder-unique issue. So I think customers are certainly seeing that.

And I would -- I guess I would just add to what Steve said about our contracts, is we've got a good chunk of them that are more of a cost-plus or cost pass through. But for those that were not, we were really -- some of those were really written to handle normal wage increases, call it, 3%, 4%. But these spikes that Steve talked were not contemplated.

The important thing is, going forward now, we are including those in the -- and not only in the new agreements, but as it comes time for renewal, we are working those in so that, in the future, we don't run into the same issue.

Got it. And then, Robert, a follow-up is you can maybe talk more about the strategy and the initial, I guess, performance for Whiplash and Midwest. Both still pretty early, but you're taking some pretty big steps to expand into that area. Maybe -- and we'll certainly hear more at the Investor Day, but maybe you can just give initial impressions of the deal, what you're trying to accomplish here strategically. And to the extent that you have any technology integration here that's going to help kind of accelerate some of these platforms that are already in pretty strong, growing segments.

Yes. Look, I think, Brian, key to our strategy was to really accelerate the growth in our supply chain and dedicated businesses. Over time, those have been better-return businesses and really high-growth areas. So within supply chain, obviously, e-fulfillment, e-commerce is a really important, fast-growing part of that. We're very excited about both these acquisitions.

Whiplash really giving us a significant boost in our e-commerce fulfillment initiative. Now we become a meaningful player in that space. Not only do they bring operational expertise doing e-commerce fulfillment, but also technology. So we are very excited about that opportunity. So far, so good. Integration has gone well. It really is becoming our e-fulfillment platform.

And around Midwest, again, it was really a shot in the arm in our CPG space, also adding multi-client warehousing, which is a product that we didn't have a lot of presence here in the U.S. But the team does a great job in that area, the Midwest team. So we're excited about also bringing them into the fold.

So again, these are both investments that are consistent with our capital allocation strategy and really giving us a boost in supply chain and dedicated. If you think about the revenue mix for the company, historically, has been about 60% FMS, 40% supply chain and dedicated. These 2 acquisitions and are now getting us much more to a 50-50, which ultimately is the way we expect the business to move more towards.

So I think overall, good for the market, good for the opportunities for our company and for Ryder and good for the shareholders.

We'll now take our next question from Justin Long with Stephens.

Robert, I think you said earlier on the used truck pricing environment, you expected it to be up slightly for the full year. But it sounds like first half and second half assumptions are different. So I was wondering if you could give us some color on how you expect used truck pricing to progress as we move throughout the year, and maybe what that kind of exit rate looks like versus where we are today.

And I guess, similarly, as we think about the quarterly cadence of gains on sale. Is there any color you can give us there on what's baked into the guidance?

Yes. We're -- in the guidance, by the way, it's still very hard to tell when things are going to begin to soften because there's such a shortage of new trucks in the market. OEM production continues to be constrained, OEM truck production. So that is really, I think, driving a significant boost for used truck prices. We think that's going to continue at least through the middle of the year. As we get into the second half of the year, we expect it to begin to moderate some as some more new trucks are put into the market, and maybe a bit of a slowdown on the freight market side.

So our assumption is continued strength in used vehicle pricing really in the first half, and then coming down slowly in the second half, maybe exiting the year down, year-over-year, maybe 5% to 10%. But again, that's still really early in the year and that could change as we get closer. It could end up being better and -- but we think right now, where we're at, it's probably the best guess.

We'll now take a follow-up from Stephanie Moore with Truist.

Just as a follow-up. Robert, could you talk on the technology opportunities? I know you've mentioned the success you're seeing with RyderShare. But if you could discuss maybe other tech investments like SmartHop, COOP? And really any other new areas you would look to explore on the technology front for the future.

Yes. Stephanie, that's a great question. Clearly, technology is becoming a really important component to our offering, especially on the supply chain side. So we expect to continue to make investments in RyderShare. RyderShare has been a real home run for us, allowed us to win new business. The customers that are using it, we're getting great feedback from them, giving them that visibility.

Now we're expanding the visibility, not only on the trucks, but also in the warehouse. So giving that end-to-end visibility, allowing customers to make smarter decisions, that is important. I think we're going to continue to invest in that type of technology, probably linking it more into the operational execution components over time. So that's on the supply chain side. I think you're going to continue to see that.

On the COOP side, you mentioned COOP. We didn't talk about it on the call today, but we're -- our plan this year is to really roll out COOP more broadly and nationally. We're seeing some nice gains in that part of the business, where more customers are getting comfortable with lending their equipment and renting their equipment to others in the peer-to-peer sharing. Along with we're also seeing investors who are willing to buy trucks, used trucks and put them on COOP to use them. Kind of you see on the auto side, happens with some of the companies that are doing something similar on the auto side. So we're very encouraged by what we're seeing so far. And we expect by the end of this year to really have a much better idea of the long-term opportunity for COOP.

So yes, I would expect us to continue to make those types of investments. And I think over time, technology will continue to be and become a bigger and bigger part of our story.

We'll now take our last question from Allison Poliniak with Wells Fargo.

I just wanted to go back to SCS and the potential inorganic opportunities. You made certainly some nice acquisitions that broadened and strengthening exposure in certain verticals. How would you view -- I mean, is it more organic sort of focus that you're looking at? Or are there still some inorganic opportunities out there that you're looking at to maybe fill some holes or broaden other exposures? Any thoughts?

Yes. Yes. I think the engine for growth is organic. But clearly, we still see opportunities to pick up new capabilities like we did with Whiplash. We think there's some other potential areas that we would look to, to look for capabilities. We've talked historically about health care, adding that vertical potentially. Returns is another area that we would look at. We've got some capability there, but maybe bolster that. And then in some areas even, if it makes sense, do some tuck-ins.

Steve, I don't know if I missed anything there.

No, I think you're right on. We're always looking at our strategy and trying to stay ahead of the game. I'd say within Ryder last mile and e-comm, we're going to continue to add our footprint, expand our footprint into new geographies. So it's key for us to continue to get closer and closer to the end consumer.

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. Great. Well, listen, thank you for the questions. Thanks for the interest. As I said at the beginning, really proud of the results that we delivered and just as excited about what lies ahead for us now in 2022 and beyond. So thank you all for your interest.

And that concludes today's conference. We thank you all for your patience and your participation.