Ryder System Inc (R) Q4 2021 Earnings Call Transcript

Good morning, and welcome to Ryder System's Fourth Quarter 2021 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Mr. 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 Transportations 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. 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 returns targets. We'll also review our 2022 forecast. Let's begin on Slide four. We recently completed two 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 are on Page five. Operating revenue of $2.1 billion in the fourth quarter increased 14% from the prior year, reflecting revenue growth in all three 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 reflected 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 six, 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 pre-tax 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 a 2% smaller average active lease fleet. We expect to see incremental benefits going forward from this initiative as 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 seven highlights global used vehicle sales results for the quarter. Used vehicle market conditions remain 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 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 eight. Operating revenue versus the prior year increased 21% due to new business, higher volumes in 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 nine. 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 multi-year 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 declining 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 the 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 multi-year 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 UK 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 UK assets and the exit-related costs in the UK, 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.

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 $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 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 flows 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 this 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 multi-year 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 freight visibility and collaboration tool, which has been a key differentiator in winning many of these new contracts. We were excited to announce earlier 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 leased 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 re-priced with these terms. Our multi-year maintenance cost savings initiative delivered a greater than expected $40 million in incremental annual benefit 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 UK over the next 12 to 18 months subject to consultation, obligations under UK law. Our 2022 free cash flow forecast does not reflect the potential exit of our UK 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, and 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 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's 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 used vehicle sales market, we should be 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 the 3rd 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 free registration. Also, please note that we expect to file the 10-K tomorrow. We had a lot of material to cover today, so please limit yourself to one question each. If you have additional questions, you're welcome to get back in the queue and we'll take as many as we can.

Thank you. We'll now take our first question from Stephanie Moore with Truist.

Hi. Good afternoon, and congrats on a great quarter.

Hi. Thanks, Stephanie.

I wanted to discuss the FMS segment, where there has been impressive progress in repricing and improving lease returns. Could you share your thoughts on how customers have responded to these price increases? Additionally, has the profile of your customers, in terms of size or industry, shifted over the past few years as you focus more on returns and pricing? Finally, how should we evaluate the success of repricing that additional 60% in the coming years? Thank you.

I want to make a few comments before passing it to Tom. We have been encouraged by the acceptance of our pricing changes. The increase we experienced was primarily due to a lower expectation of residual values moving forward, which is a challenge not just for us but for anyone operating their own trucks. Additionally, the ongoing market volatility contributes to greater risk. We are seeing that the market acknowledges this and is open to including these factors in the rates. We are confident that this trend will continue. Tom, please provide more details about the segments we are currently focusing on.

I would like to add one more point. If you look back a few years, the market acknowledged the challenges related to maintenance costs of some new engine technologies and understood the cost increases that came with it. This created a context for the pricing of leasing, as Robert pointed out. Regarding our customer base, we serve a diverse range of clients. We've been focused on this for about three years, and we've noticed a slight shift in our business mix. Some transportation sectors have seen a slight decline in our lease portfolio, while other industries have compensated for that. Additionally, as mentioned in the call notes, around 40% of our lease book has already been priced at the new rates, and we are now pricing leases nearly a year in advance due to OEM supply disruptions and delivery delays. We feel optimistic that as deliveries come in over the next 12 months, we will be well-positioned with our lease portfolio moving forward.

Great. And just a quick follow-up on that comment. So would you say there has been 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 higher growth profile in the past? Just wanted to follow up on that.

Yeah, 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, our teams and what they're doing, but we're also focusing in that segment as well in FMS.

Great. Thank you so much.

Thank you, Stephanie.

We'll now take our next question from Jordan Alliger with Goldman Sachs.

Good morning. Dedicated and Supply Chain have significantly contributed to the earnings improvement in 2022. Could you elaborate on the main factors that will help increase EBT margins back to the targeted range in the latter half of the year? Thank you.

We have two main areas to focus on. First is growth, where we've achieved a record number of new contract wins this year. As these contracts come in, we anticipate an increase in earnings. The second area involves recovering the costs related to wage increases in the market, along with addressing the supply chain disruptions in the automotive sector. Now, I'll pass it over to Steve for further details.

Thank you, Robert. Jordan, I'll divide this into two areas. In Dedicated, we are experiencing record new sales and a strong pipeline. The incoming new business aligns with our target returns. The team has thoroughly reviewed our business and engaged with various customers. About half of our business was minimally affected by last year’s wage increases and turnover. The team is now concentrating on the remaining half. I would say that 25% of this has been discussed with our customers under the new rate structure, and we are working on filling those positions. For the remaining amount, half is under discussions, while the other half has been agreed upon, and it's just about finalizing the contracts and placing drivers. We're in a good position and anticipate seeing those returns in the second quarter. On the SCS side, around half of our business operates on a cost-plus basis, making conversations smoother. The remaining portion involves only a few customers in the automotive and tech sectors, and we expect to finalize those in the second quarter. Overall, I think we’re well-positioned, and as Robert mentioned, it fundamentally relates to the recovery from the automotive semiconductor shortage in the latter half of the year.

Great. Thank you so much.

Thanks, Jordan.

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

Hi, good morning. I want to follow up on Jordan's question regarding SCS. Should we anticipate a more linear progression as some of those contracts get repriced? Also, are there any benefits from the newer contracts you are bringing in? Thanks.

Yeah. 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 are 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.

I would like to add that the acquisitions we discussed earlier will result in automotive comprising about 30% of our business. While that is smaller, it is still significant, and the CPG and retail sectors now make up about half of our portfolio. We appreciate that diversity.

Great. Thank you.

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

Hey. Great. Thanks and good morning. Robert on the updated financial targets, it really looks like the move on to get to the higher ROI is driven by taking 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 embedding for units sold in pricing? I think that would be helpful. Thanks.

I can tell you that in terms of more normalized gains, we had approximately $270 million in gains this year, and we expect that to be modestly lower in 2022 due to rising residual values. While we anticipate slight increases in pricing, the normalized gains that everyone is trying to identify could fall between $75 million and $100 million. Based on our current residuals, that seems like a reasonable estimate. Additionally, if we consider a scenario where rental rates might decline, we project earnings could range between $2.50 and $3 per share, assuming we exclude extraordinary gains and rental income. This would still position us in a significantly improved return environment compared to historical averages, reflecting the progress made in lease pricing and maintenance costs. We also expect continued advancements in Supply Chain and Dedicated services, which should lead to higher returns as we regain our pricing power. 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 I really appreciate the detailed information you provided. We've arrived at similar numbers. Just one follow-up to that: will we need to make any adjustments for the elevated depreciation you mentioned? Would that impact the figures you just provided for gains and rental?

Going forward, we still expect to experience some depreciation this year, but it will become much less of a concern next year, resulting in a significantly smaller figure. I don't anticipate this being a topic of discussion anymore. One reason we feel confident is that we've had several years of significant depreciation, and now we are reaching a point where we won't see that same level next year. Instead, we expect a more normalized amount, which will provide us with an opportunity for improved earnings.

Okay, got it. Very helpful. Thank you.

Thank you, Todd.

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

Hey, everyone. Thank you. Nice 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. You are right. And that's because the good chunk is the acquisition. We also had new contract signings. And 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 expect to bring in 4,000 in lease towards the end of the year, and the earnings from that will be realized in 2023. I'm not certain if we provided the rental number.

You said 9% average growth, yeah. 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.

No, I think you got it right. The 9% was kind of all in. It wasn't reflective of revenue fleet, but we gave you the information for CapEx, so you have an idea there. Our CapEx for 2022 for rental will be in the $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 it 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 can tell you that we are observing some of the same effects related to absenteeism, which has increased and impacted all of our businesses to some degree. However, what's different at Ryder is that we are still experiencing very strong demand in our FMS segment for rental and UVS, which is helping us. The Omicron variant seems to be fading, and we are seeing absentee rates decrease. The main challenge we are facing is recruiting drivers and warehouse workers. We are actively addressing this, which includes implementing pricing changes with our customers. This issue persists, and our teams are diligently working to resolve it. We have significantly expanded our recruiting efforts, tripling our recruiting staff to bring in the necessary drivers and warehouse workers. We are pleased with the progress, but there is still much work ahead.

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

Thank you, Jeff.

We'll now take a question from Bert Subin with Stifel.

Hey. Good morning and congratulations on the quarter.

Thanks, Bert.

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 let Tom provide additional details on that, but currently our maintenance initiatives focus more on process improvement and modifying how we operate in our shops. We're finding that these changes are delivering greater benefits than we initially anticipated, and we're also progressing at a faster pace.

Maybe just trying 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 two 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 rollout. 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 impacting labor and 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 of your contract?

Yeah, 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 then there is a rate increase associated with whatever happens to CPI. So we aren't covered there. In addition to that even some of the units that we're signing today that maybe don't come in for another seven or eight or 10 months any additional surcharges or increases also get pass through and included in the rate going forward. So we're pretty well covered. I would say on the inflation side in FMS.

Thanks, Robert.

Thank you, Bert.

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

Hey. Good morning. Thanks for taking the question. 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. If such, was that really the primary issue where you're seeing push back? 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, you want to take that?

Yeah. I think, Brian, from a structural standpoint, think about our businesses or contracts is like typically three to five year contracts. 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 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?

It seems that, similar to FMS and lease, the market is much stronger, allowing you to capitalize on that. You might go through some negotiations to avoid similar challenges in the future. Do you think that impacts growth at all? Are people willing to accept 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, the key point is that these are market cost increases that we are experiencing, which is not unique to Ryder. Customers are definitely noticing this. I would also add to what Steve mentioned about our contracts: a significant portion of them are based on cost-plus or cost pass-through arrangements, but for those that are not, many were designed to accommodate normal wage increases of around 3% to 4%. However, the spikes that Steve referred to were not anticipated. The crucial aspect moving forward is that we are incorporating these considerations into not only the new contracts but also during renewal discussions, ensuring that we do not encounter the same issues in the future.

Got it. And then Robert, a follow-up. Just 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 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, do 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? Thanks.

Yeah, 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 is really giving us a significant boost in our e-commerce fulfillment initiative. Now we've 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. 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, it has been about 60% FMS, 40% Supply Chain and Dedicated. These two acquisitions are gaining 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.

All right. Thank you, Robert.

Thank you, Brian.

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

Thanks. Robert, I think you said earlier on that 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, in our guidance, it's still quite difficult to determine when we might see a decline, given the significant shortage of new trucks available in the market. The production of OEM trucks remains limited, which is significantly pushing up the prices of used trucks. We anticipate this trend will persist at least until the middle of the year. However, as we move into the second half of the year, we expect prices to start moderating as more new trucks enter the market and possibly a slowdown in the freight market. So, our assumption is continued strength in used vehicle pricing really in the first half. And then coming down slowly into 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 but we think right now where we're at is probably the best guess.

Okay, that's helpful. I appreciate the time.

Okay. Thank you, Justin.

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

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

Sure, Stephanie, that's an excellent question. Clearly, technology is becoming a key part of what we offer, particularly in the Supply Chain area. We plan to keep investing in RyderShare, which has been a significant success for us. It has helped us secure new business, and we've received positive feedback from customers using it, appreciating the visibility it provides. We are also enhancing visibility not just for trucks but in the warehouse as well, offering end-to-end visibility that enables customers to make more informed decisions, which is essential. We intend to keep investing in this type of technology, likely integrating it further into our operational execution over time. So, you can expect to see more of this on the Supply Chain front. On the COOP side, we plan to roll out COOP more broadly and nationally this year. We're seeing nice gains in that part of the business as more customers become comfortable with lending and renting their equipment through peer-to-peer sharing. Additionally, we're noticing investors willing to buy used trucks to put on COOP, similar to what some companies are doing in the auto sector. We're very encouraged by these developments and expect to have a clearer understanding of the long-term opportunity for COOP by the end of this year. I anticipate that we will continue to make investments in that area, and technology will increasingly play a significant role in our future.

Great. Thank you.

Thank you, Stephanie.

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

Hi, everyone. I wanted to discuss SCS and potential inorganic opportunities. We have made some good acquisitions that have enhanced our presence in certain areas. How do you see it? Are you focusing more on organic growth, or are there still inorganic opportunities available to address gaps or expand into new areas? I would appreciate your thoughts.

I believe that our growth will primarily come from organic efforts, but we still see chances to acquire new capabilities like we did with Whiplash. There are additional areas we may consider for expansion. We've previously discussed the potential for entering the healthcare sector. Returns is another area we might explore further; we already have some capabilities there and could enhance them. Additionally, in certain situations, it might make sense to consider small acquisitions. Steve, is there anything I might have overlooked?

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-com, 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.

Perfect. Thank you.

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

Okay, great. Well, listen, thank you for the questions. Thanks for the interest. As I said at the beginning, I'm 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. Thank you all for your patience and your participation.