萊德系統 (R) 2022 Q4 法說會逐字稿

Good morning, and welcome to the Ryder System Fourth Quarter 2022 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 Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin.

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 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.

At this time, I'll turn the call over to Robert.

Good morning, everyone, and thanks for joining us. I'm extremely pleased with the strong results delivered by the team in the fourth quarter and throughout 2022.

Secular trends, favorable market conditions and continued execution on our balanced growth strategy enabled us to deliver record revenue and earnings in 2022. I'll begin today's call with an overview of our strategic priorities and the significant progress we made during 2022. John will then take you through our fourth quarter results, which exceeded our expectations again this quarter. We will also review our capital expenditures, cash flow and capital allocation priorities.

I'll then introduce our 2023 outlook, review our assumptions and discuss how we've positioned the business to deliver on our targets over the cycle.

Let's begin with Slide 4. 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 relates 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 U.K. We announced this decision in early 2022. And as of year-end, we substantially completed the exit of business operations and received approximately $400 million in proceeds from the sale of vehicles and properties. These proceeds have been redeployed to higher return opportunities. We also executed 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, improved returns in both segments in 2022. In FMS, we surpassed our $100 million annual maintenance cost savings target 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, (inaudible) inflected 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 Ryder's 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 -- enabled 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 omnichannel fulfillment solutions.

Our acquisition of Baton, a tech start-up enhanced our new product and technology development capabilities. Our strong balance sheet also enabled us to return over $680 million to shareholders through 3 share repurchase programs and through quarterly dividends.

Overall, we demonstrated significant progress on our balanced 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.

Thanks, Robert. Total company results for the fourth quarter on Page 5. Operating revenue was $2.4 billion in the fourth quarter, up 14% from the prior year, reflecting revenue growth in all segments and the supply chain acquisitions. Comparable earnings per share from continuing operations were $3.89 in the fourth quarter, up from $3.52 in the prior year, driven by higher earnings in 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 continued benefits from our initiatives to increase returns. 2022 free cash flow decreased to $921 million from $1.1 billion in the prior year, reflecting higher planned capital expenditures, partially offset by higher used vehicle sales proceeds. Free cash flow in 2022 includes approximately $400 million from the sale of vehicles and properties in the U.K. as part of the exit of that business.

Turning to FMS results on Page 6. 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 U.K. business.

Rental pricing increased 6%, primarily due to higher rates across all vehicle classes. Pretax earnings and fleet management were $255 million, unchanged from the prior year despite lower gains from $20 million and inflationary cost pressures. These headwinds were offset by a year-over-year earnings benefit from declining depreciation related to prior residual value estimate changes and higher rental results.

Rental utilization on the power fleet remained strong at 82% on a larger fleet. Fleet Management EBT as a percent of operating revenue was 19.3% in the fourth quarter and 20.2% for the full year, both well above the segment's long-term target of low double digits. Excluding all used vehicle gains in the quarter, Fleet Management EBT percent was still in the segment's low double-digit target range.

Page 7 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.

Tractor proceeds decreased 2% and truck proceeds decreased 7%. During the quarter, we sold 6,800 used vehicles, of which 2,000 related to the exit of our U.K. business. Excluding the U.K. 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, incur residual value estimates for both used tractors and trucks.

Turning to supply chain on Page 8. 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 now on Page 9. Operating revenue increased 10% due to higher pricing and increased volumes. Dedicated EBT increased 150%, primarily due to pricing adjustments to address higher labor costs as well as benefits from improved market conditions for professional drivers. Dedicated EBT as a percent of operating revenue of 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 leased vehicle replacements for expiring lease contracts. Our 2023 forecast of $2.4 billion reflect higher lease replacement and growth capital. We expect the lease fleet to be up between 3,000 to 4,000 vehicles at year-end.

2022 rental capital spending of $541 million declined versus prior year, reflecting lower planned investments. In 2023, rental capital spending is expected to decline further to $400 million as we're expecting [rental] 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 continue to increase capital spending on trucks versus tractors as trucks continue to benefit from relatively stable demand and pricing trends and the asset class tends to be a little less volatile during a down turn.

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 '23, below prior year, which includes proceeds related to the U.K. 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 comprised approximately 85% of Ryder's operating revenue.

In 2022, operating cash flow grew to $2.3 billion, and we expect it to increase to $2.4 billion in 2023. Our free cash flow profile has changed significantly since the implementation of our balanced growth strategy. The negative free cash flow generated in 2019 reflected higher growth objectives for lease at the time. From 2020 forward, 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 U.K. 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 U.K. 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 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 accelerated growth in supply chain and dedicated. We'll continue to pursue targeted acquisitions, which have been a key contributor to accelerate growth in supply chain.

Acquisitions have helped transform our supply chain business, both in terms of expanding capability as well as rebalancing 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 key highlights from full year 2022 results and introduce our 2023 forecast.

Thanks, John. Slide 12 provides key highlights from our full year 2022 results. 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 and rental. We expect OEM production constraints and delivery delays to continue throughout 2023, delaying the revenue and earnings impact from new leases signed. We expect lease fleet growth in our target range, although dependent on OEM delivery schedules.

Our 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 U.K. 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 results 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 and lease and prior year proceeds from our U.K. 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 U.K. 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 and our initiatives. Supply chain EBT percent is expected to approach the low end of the segment's high single-digit target range as growth in pricing actions are partially offset by amortization of intangibles from recent acquisitions.

In dedicated, operating revenue growth in EBT as a percent of operating revenue are expected to be at the target, 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 a smaller fleet is expected to reduce EPS by $1.95. Rental utilization is expected to be in our target range of mid- to high 70s, but lower than the 80% plus level seen in 2022.

Incremental strategic investments are expected to reduce EPS by $0.40. These investments continue to focus -- to be focused on addressing disruptive technology and transportation and logistics and providing a foundation for future revenue and earnings growth. Nonrecurrence of prior year earnings from the -- from our exited FMS business in the U.K. will reduce earnings per share by $0.17. This decline does not include gains from the sale of U.K. assets and exit-related costs, which were excluded from comparable EPS results in 2022.

FMS contractual which reflects ChoiceLease and SelectCare, is expected to contribute $0.10 to EPS, primarily reflecting higher lease price. 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 programs. The largest expected benefit in EPS in 2023 is from profitable growth in supply chain and dedicated, which is expected to increase EPS by $1.10. This increase reflects ongoing secular trends as well as our initiatives to accelerate growth and increase returns in these higher-return businesses.

This brings 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 in rental. Based on our forecast, core earnings generated primarily by our contractual lease, dedicated and supply chain businesses as well as normalized gains and rental results are estimated to be approximately $11 in 2023.

Turning to Page 16. We're forecasting comparable EPS of $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 U.K. 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 and our sales and marketing initiatives to drive new opportunities for profitable growth. Our actions to strengthen dedicated contracts and recover inflationary costs in both the dedicated and supply chain will contribute to higher returns.

We expect incremental benefits as we price our remaining lease portfolio at higher returns upon renewal. We are targeting 2025 to complete this initiative and estimate a cumulative annual benefit will be $125 million. We exceeded our $100 million annual savings target from our multiyear maintenance cost savings initiative in 2022, and have additional initiatives in the pipeline to drive further efficiencies. We expect to pursue additional targeted accretive acquisitions in order to expand our capabilities and add supply chain industry verticals. Our strong balance sheet continues to provide us with capacity to return capital to shareholders through repurchases and dividends.

Turning to Slide 18. We believe Ryder is well positioned to increase shareholder value. We've demonstrated strong execution on our balanced growth strategy, which has meaningfully contributed to our record results in 2022 and provides us with strong operating momentum as we move forward. We see significant opportunity for profitable growth supported by secular trends and our operational expertise, 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 have a lot of material to cover today, so please limit yourself to 1 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, I'll turn it over to the operator.

(Operator Instructions)

And our first question comes from Jordan Alliger.

Maybe I just want to talk about supply chain a little bit. Can you talk a little bit about the inbound proposals you might be getting, the pipeline for that in a slowing economy, are you still seeing the pickup? Are you still seeing a pretty robust because of need for supply chain security, how it may dovetail into the whole near-shoring concept, which we seem to be hearing more about, especially for higher-end manufacturing, and just in general, what sort of verticals do you think you're 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?

Yes. Thanks, Jordan. Let me give you -- I'll give you some high-level stats and then I'll hand it over to Steve to give you some more color around where we might be seeing. But listen, we're seeing certainly, the secular trends benefit of more people wanting to outsource -- more companies wanting to outsource, supply chain activities continues to be strong. Our pipeline, 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 to -- 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-com and also with Ryder Last mile. So that's what we're seeing as it relates to the impairment that was a -- what I would say is a bit of an anomaly in terms of the types of customers that we contract with.

This was a customer we're doing distribution management for them. 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. But -- and that all depends on how this customer makes out as far as credit. But we've built that in, just 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.

Thanks, Robert. Jordan, yes, we're again kind of give you a recap of last year, another record sales year in supply chain. So that's really 2 straight years in a row. Pipeline remains very healthy, up year-over-year, double-digit percentage. And I think that's really an effort of our continued -- have a 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 1 service or capability. So that continues to be very strong. And then on the nearshoring 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 services 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.

(Operator Instructions)

And our next question is going to come from Jeff Kauffman.

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 '23, just 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 it's noncash and we should look through it, but I just want to understand it a little better.

Yes, Jeff, John here. You're absolutely correct. It is a noncash item that we're going to need to -- under the accounting rules, we're going to need to take the cumulative translation losses that sit today in equity sometime next year when we fully exit out of the U.K., it will probably be midyear -- tough to call whether it 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's 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 U.K. exit today.

By the way, that's this year, not next year.

This year 2023, yes.

This year, yes, we're in '23 now. Got you. Got you.

And our next question is going to come from Scott Group with Wolfe Research.

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 fleet growth. It sounds like maybe a little bit more to go on the leasing pricing. Why aren't contractual FMS earnings growing this year?

Okay. Thanks, Scott. Couple of comments. First of all, how much were -- UVS is dropping. We don't like to give that because we don't want to lead the market with where we're going, but we certainly are assuming a pretty significant drop from where we ended the year, as you would expect in the cycle and where we're coming from. So we've 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, it's about $40 million, but that's been primarily offset by variable interest expense. As you know, we -- as a portion of our debt that we fund to 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 -- first all, 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 will produce more benefit in 2023. Otherwise, that benefit is continuing to get pushed now into 2024.

So as you start -- we have to hit the -- 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 2024. Now assuming the OEMs can get caught up.

That's helpful. And just -- can I just understand on the residuals, do we just keep them where they are now and we're just -- we're not going to move them around anymore. We're just going to keep where they are and hope that, that just means we continue to see gains. Is that the plan?

Yes, Scott, we're -- 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.

And our next question comes from Brian Ossenbeck from JPMorgan.

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? If it was unexpected, it sounded like maybe this is a customer that was a little bit weaker credit than you thought maybe it was an end market impact combined with that. So maybe some context around that would be helpful. And if you -- either frequency with which you see these things happened -- would also be good to get further context around this.

Yes. I think you hit the key points here. Number one is just not a -- this customer's 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 2 facilities for this customer. This was the impairment of 1 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 customer's credit has deteriorated since we signed the deal a couple of years ago.

Okay. Understood. And then just on the back to the outsized gains. It sounded like just to clarify, there's an additional dollar in 2023. So just wanted to understand that. And if you could split it out as you had before between rental and gains. And then -- just maybe a bigger picture question is, can you potentially have rental 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 go back to where it was?

Yes, I guess a couple of things. Around the breakout of the dollar, it is -- 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, it's -- I would say it's just -- again, this is a forecast. So you got a buck in there primarily of gains but also some rental. Rental, you're right in 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, we -- 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.

Very helpful. Appreciate it, Robert...

By the way, an important point there is lower utilization, but still getting a better return. So because of the rates you're able to get better returns with lower utilization.

And our next question comes from Allison Poliniak from Wells Fargo.

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? Are you kind of at your target at this point, excluding those for '23? How far are we along with the pricing actions that are there, 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?

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 -- 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, you'd be -- 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.

Great. And then just on the Whiplash acquisition, just the e-commerce. Is it -- performing the 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.

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 I shouldn't say 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 omnichannel, we're very well positioned with that capability.

And our next question comes from Todd Fowler at KeyBanc Capital Markets.

Robert, 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, 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 leased 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?

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? Just things slow down throughout the year. I mean there's a lot of talk about a potential shallow recession in the second half. And we kind of built in that type of a really low type -- 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 mean earnings benefit more into 2024. John, anything.

Yes, Todd, I would just add, you 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.

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 over -- 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.

Yes. 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.

I think that's a fair statement, yes.

Okay. Good. And just if I could, one last one. As we think about the free cash flow profile, 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.

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 it's '24 or '25, if there's a catch-up of a bunch of units that need to be in service, there may be -- 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 the free cash flow, you are highly likely to be positive in most years, right? And you might have a year for an anomaly, it could go negative. Based on the strategy that we have today, this balanced growth strategy, that's what we're shooting for.

Got it. Yes. And you average out the 2 years. So if there was a push into 1 year, you'd have that benefit in the other year. So okay, that's all very helpful.

And our next question is going to come from Justin Long from Stephens.

It sounds like you have a good amount of visibility towards the growth in your lease fleet this year, 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.

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. I go to Steve?

Yes. Thanks, Robert. Justin. Yes, as I said before, the pipeline remains very healthy. 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.

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 him some color on rental and what we saw in the fourth quarter, what we're seeing now in January and February?

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 vehicle, 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 move 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.

Got it. And may -- sorry, go ahead, Robert.

Just to remind -- what we're assuming it's mid- to high 70s in terms of utilization in our forecast coming down from the 80-plus percent that we saw last year. So we've built more normalization, if you will, of demand.

Great. And it sounds like you're expecting to be in that mid- to high 70% range in the first quarter. Is that correct?

That's correct. Probably more the mid-70s because it's the first quarter. So it's usually the weakest.

Our next question comes from Jeff Kauffman from Vertical Research Partners.

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?

Generally, yes, from the fourth quarter.

Okay. Here's my question. 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?

So I guess as a general statement, more regulation, more complexity, more uncertainty for customers is typically good for Ryder because they'll come to people who understand the industry 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, one, 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 that.

So we're beginning to work with some of those OEMs to introduce their vehicles not only to our rental fleet, but over time also to our lease customers. Because I think Ryder plays an important role in introducing these vehicles when they're ready versus part of our rental fleet so people can try them out. And then ultimately, over time, helping them transition from diesel to EV for the types of vehicles that will go through that transition when they go through them, expect that to take many years, probably decades.

And Ryder is really well positioned to help companies navigate through that period. So our approach to it has been to stay very focused, stay very closely tied into the OEMs and the technology providers and working with them on pilots and betas and the testing and along with -- even on some of the 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.

At this time, there are no additional questions. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.

Okay. Well, thank you, everyone. Thanks for your interest in Ryder and I look forward to seeing all of you as we head out to some of the conferences and roadshows. Thank you. Have a safe day.

That concludes today's conference. Thank you for your participation.