Ryder System Inc (R) Q1 2022 Earnings Call Transcript

Good morning, and welcome to the Ryder System First Quarter 2022 Earnings Release Conference Call. 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 and Corporate Strategy for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's first 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. This time, I'll turn the call over to Robert.

Good morning, everyone, and thanks for joining us. I'm very pleased with our performance this quarter, and I'm excited to share the significant progress that we're making on our strategy to create long-term shareholder value through increased returns in Fleet Management and accelerating growth in our higher return Supply Chain and Dedicated businesses. I'll begin the call by providing you with a strategic update. John will then take you through our first quarter results, which exceeded our expectations again this quarter. We'll then discuss our outlook. Let's start on Slide 4. I'm pleased to share that our two recent supply chain acquisitions, Whiplash and Midwest Warehouse & Distribution System, are both performing well and in line with expectations. These acquisitions support our strategy to accelerate growth in our asset-light supply chain business. Whiplash significantly grows our e-fulfillment network with scalable e-commerce and omnichannel fulfillment solutions, and Midwest expands our multi-client warehousing offering. We expect both acquisitions to be accretive to 2022 earnings. Sales activity across all segments remains strong, following record new contract wins in Supply Chain and Dedicated in 2021 and again in the first quarter of this year. Challenges impacting labor, supply chains, and truck production continue to provide us with additional growth opportunities because they focus company's leadership on the importance of transportation and supply chains and drive companies to make long-term outsourcing decisions. FMS is also benefiting as companies look to source truck capacity in this extremely tight market. We generated record ROE of 25% for the trailing 12-month period, reflecting strong demand in pricing in our used vehicle sales and rental, as well as benefits from our multi-year lease pricing and maintenance cost savings initiatives. ROE also improved from a declining depreciation expense from prior residual value estimate changes. We increased our full year 2022 ROE forecast to 23% to 25% from our prior forecast of 20% to 22%, reflecting the strong market environment in FMS. We're on track to return to our high single-digit target in EBT as a percent of operating revenue in Supply Chain and Dedicated in the second half of the year, reflecting pricing adjustments to recover higher labor costs as well as growth. We're executing our previously announced $300 million accelerated share repurchase program, which we expect to complete no later than October. Our balance sheet remains strong and provides capacity for additional acquisitions and share repurchase activity. We increased our full year 2022 free cash flow forecast to $550 million to $650 million, primarily to reflect $300 million in expected proceeds from U.K. asset sales related to our previously announced exit from our U.K. FMS business. Slide 5 provides an overview of the investments we're making to drive accelerated growth in Supply Chain and Dedicated, a key element of our strategy to generate higher returns. Developing new and enhanced capabilities in e-commerce fulfillment, last-mile delivery, and freight brokerage provides opportunities to leverage profitable growth areas in the market and cross-sell services. Innovative technology enables us to deliver value-added logistics solutions that are in high demand. In previous quarters, I highlighted our Ryder Last Mile and RyderShare offerings. This quarter, I'll discuss our e-commerce fulfillment offering, which was significantly enhanced by our recent acquisition of Whiplash. Sales and marketing are key to our brand awareness and ensuring customers are aware of the full array of supply chain capabilities. Our Ever Better campaign and increased digital marketing presence have driven a significant increase in qualified sales leads. We're also expanding our sales force and investing in their capabilities to drive additional growth opportunities. We expect to continue pursuing M&A opportunities with a focus on adding new capabilities, geographies, and/or industry verticals. These opportunities are an important way to accelerate growth, especially in Supply Chain and Dedicated, and we have a strong track record of success in this area. RyderVentures, our corporate venture capital fund aims to invest $50 million over five years through direct investment in start-ups. Our investments here advance strategic relationships to support the development of new products that benefit our customers and solidify our position as an industry leader. We've made investments in numerous exciting areas such as autonomous vehicle technology, e-commerce micro-fulfillment and digital driver staffing, and are working with these startups to address important customer needs. Slide 6 provides a closer look at Ryder's e-commerce fulfillment offering, recently branded RYDERECOMMERCE by Whiplash. Through this offering, we have combined the best-in-class e-commerce fulfillment platform with industry-leading logistics expertise to bring significant value to our customers. The combined solutions portfolio provides seamless direct-to-consumer, retail and warehouse fulfillment nationwide with the ability to deliver to 100% of the U.S. population within two days and 60% within one day. Our proven technology platform facilitates customer onboarding and easily integrates with customer e-commerce sales platforms. Additional customer benefits include streamlined orders and inventory management as well as optimized carrier selection. The platform also has the flexibility to scale to meet the needs of small- to medium-sized businesses as well as large enterprise brands. The ability to seamlessly scale with growth addresses a key pain point of emerging brands looking for a partner who can support them over time. Utilizing robotics and automation enhancements drives increased productivity, lower costs, improved safety and retention, and enables seamless scaling within the same footprint. We're excited about the value RYDERECOMMERCE by Whiplash brings to the market, and we expect this offering will be a key contributor to accelerated growth in supply chain. I'll turn the call over to John now to cover the first quarter results.

Thanks, Robert. Total company results for the first quarter on Page 7. Operating revenue of $2.2 billion in the first quarter increased 22% from the prior year, reflecting revenue growth in all three business segments. Comparable earnings per share from continuing operations were $3.59 in the first quarter, up from $1.09 in the prior year. Higher earnings primarily reflect improved FMS performance in used vehicle sales, rental, and lease, as well as declining depreciation impact from prior residual value estimate changes. Earnings also increased from improved performance in Dedicated. Return on equity, our primary financial metric, reached a record 25.4% for the trailing 12-month period, reflecting improved FMS results. First quarter free cash flow declined to $108 million from $241 million in the prior year, reflecting higher planned capital expenditures partially offset by higher used vehicle sales proceeds. Turning to FMS results on Page 8. Fleet Management Solutions operating revenue increased 10%, reflecting 40% higher rental revenue driven by strong demand and higher pricing. Rental pricing increased 8%, primarily due to higher rates across all vehicle classes. FMS realized pretax earnings of $248 million, up by $185 million from the prior year. $115 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 performance also significantly contributed to increased FMS earnings. Rental utilization on the power fleet was a record 82% in the quarter and above the prior year of 73%. Results also benefited from ongoing momentum from lease pricing initiatives, which provided a 4% increase in revenue per average active vehicle this quarter, partially offset by 2% smaller average active lease fleet. We expect to see incremental benefits going forward as we reprice leases at higher rates upon renewal over approximately the next three years. FMS EBT as a percent of operating revenue was 19.4% in the first quarter and 16.8% for the trailing 12 months, above the segment's long-term target of low double digits. Page 9 highlights used vehicle sales results for the quarter. Used vehicle market conditions remain robust due to good freight activity and tight supply conditions reflecting continued OEM production constraints. Higher sales proceeds reflect significantly increased market pricing. In North America, year-over-year proceeds more than doubled for both tractors and trucks. Sequentially, North America tractor proceeds were up 29% and truck proceeds were up 16% versus the fourth quarter 2021. During the quarter, we sold 4,300 used vehicles, down 35% versus the prior year due to lower inventory levels. Sales were down 20% sequentially from the fourth quarter, which included a large retail transaction. Used vehicle inventory was 3,200 vehicles at quarter end, below our target range of 7,000 to 9,000 vehicles. Average used vehicle pricing is well above our residual value estimates used for depreciation purposes. We believe our residual value estimates are appropriate based on market conditions and our outlook. Turning to supply chain on Page 10. Operating revenue versus the prior year increased 47% due to acquisitions and strong revenue growth in all industry verticals, reflecting new business and higher volumes. Operating revenue, excluding acquisitions, was up 21%. SCS EBT increased 4%, reflecting revenue growth from new business partially offset by lower automotive earnings due to supply chain disruptions and labor challenges. SCS EBT as a percent of operating revenue of 4.6% was below target. We continue to expect that SCS EBT percent will return to the high single-digit target levels in the second half of 2022, reflecting growth from record sales as well as pricing improvements and volume recovery in the auto sector. Moving to Dedicated on Page 11. Operating revenue increased 25% due to new business and increased pricing. DTS EBT increased 56%, primarily due to revenue growth, improved performance, and higher gains on the sale of vehicles used in DTS. These benefits were partially offset by increased labor costs. Dedicated EBT as a percent of operating revenue was just below target at 6.8%. We continue to expect that Dedicated EBT percentages will return to high single-digit target levels in the second half, reflecting the new sales activity and pricing adjustments. Turning to Slide 12. First quarter lease capital spending of $422 million was up year-over-year due to increased lease replacements. First quarter rental capital spending of $180 million increased modestly year-over-year, reflecting higher investment in light- and medium-duty truck classes, which are structurally more in demand. Our full year 2022 CapEx forecast is unchanged from prior forecast provided on our earnings call back in February. Our lease CapEx forecast of $2 billion to $2.1 billion reflects higher lease replacement and growth capital versus 2021. In North America, we expect the average ChoiceLease fleet to be unchanged year-over-year. However, the year-end fleet is expected to be up approximately 4,000 vehicles, as vehicles are delivered later in the year. Given this timing with the lease fleet growing late in 2022, we expect this will primarily benefit earnings in 2023. Our rental CapEx forecast remains unchanged at $500 million and is below the prior year with our average fleet expected to grow by 10%. As we discussed on our prior call, in 2022, we are investing more capital on trucks versus tractors, as trucks continue to benefit from strong demand and pricing trends supported by e-commerce growth. Additionally, light- and medium-duty trucks historically have been a less volatile asset class during the downturn. Our full year 2022 forecast for gross capital expenditures remains at $2.7 billion to $2.8 billion. We expect proceeds from the sale of used vehicles of approximately $1.1 billion. This number now includes approximately $300 million in proceeds related to the exit of our U.K. FMS business and higher proceeds from the sale of used vehicles. Full year net capital expenditures are expected to be between $1.6 billion and $1.7 billion. Turning to Slide 13. As mentioned earlier, we've increased our 2022 forecast for free cash flow and ROE. Our 2022 free cash flow forecast of $550 million to $650 million includes $300 million in expected proceeds this year from the sale of U.K. assets, as we wind down those operations. Balance sheet leverage is 256% at the end of the first quarter and is at the low end of our 250% to 300% target range. We expect leverage to be below our target range for the balance of the year, providing capacity for additional acquisitions or share repurchases. 2022 return on equity is expected to be between 23% and 25%, reflecting strength in FMS and recovery of SCS and DTS returns to target levels in the second half of the year. I'll turn the call back now over to Robert to provide our EPS forecast for the second quarter and full year 2022.

Thanks, John. Turning to Page 14. We're raising our full year comparable EPS forecast to $13 to $14, up from the prior forecast of $11 to $12 and above our prior year of $9.58. We're also providing a second quarter comparable EPS forecast of $3.50 to $3.75, above the prior year of $2.40. Used vehicle sales and rental are the key drivers of our increased full year forecast. We continue to expect the very strong market conditions in used vehicle sales and rental to moderate in the second half of the year with slower freight growth, partially offset by ongoing vehicle production constraints. Record new contract wins in 2021 and again in the first quarter of 2022 in Supply Chain and Dedicated combined, as well as our recent Supply Chain acquisitions, are benefiting 2022 revenue growth. We continue to expect Supply Chain and Dedicated margins to return to their high single-digit target range for EBT as a percent of operating revenue in the second half of the year, reflecting price increases to address higher labor costs. Overall, we're pleased with the trends that favor outsourcing and results of our efforts in sales, marketing and new product development. We're confident in the actions that we're taking to increase returns and position us well to achieve our return targets over the cycle. That concludes our prepared remarks this morning. Before we go to questions, I'd like to remind you that we're hosting an Investor Day on June 3 to be held in New York City. So please be sure to preregister as required if you'd like to attend in person. Also, please note that we expect to file our 10-Q this afternoon. 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 questions as we can. At this time, I'll turn it over to the operator.

And we'll now take our first question from Jordan Alliger with Goldman Sachs.

Curious, I know you mentioned pricing adjustments would be critical driver for getting the Supply Chain and the Dedicated margins to the high single-digit percent in the back half. I mean does this sort of suggest that those pricing adjustments are kind of locked in and just waiting to deploy? Or how do you think about that and as we hopefully move to that level?

Yes, Jordan, I'll let Steve give you more color on that. But a lot of them are locked in. It's a matter of deploying and also the timing. But Steve, why don't you give them an update?

Yes, Jordan. As Robert mentioned, we are fundamentally changing the structure of our contracts. We communicated this to you late last year. Currently, we are working on a process on the SCS side and expect to close a couple of accounts in Q2. On the Dedicated side, we still need to negotiate about 15% of the business. As John and Robert indicated, we anticipate this will improve in the second half.

We'll now take our next question from Scott Group with Wolfe Research.

Can you provide more details on the $2 increase in earnings guidance for the year? Can you break down how much of that is from used, how much is from rental, and how much comes from other sources? Additionally, Robert, looking at the first quarter, the 19% FMS pretax margins seem unsustainable. Negative margins in '19 and '20 clearly aren't acceptable either. I'm a bit uncertain about what we should consider as the appropriate normalized margin or range of margins for this business moving forward.

Yes. To address your first question about the increase, the majority of the $2 increase for the year is primarily due to strong performance in used vehicles and rentals. Both segments had an exceptionally robust first quarter, and we are still seeing that strength in April without any signs of a slowdown. However, in our original and current forecasts, we are anticipating some moderation in the second half of the year. It is challenging to predict exactly when that will happen as it is a complex cycle. Regarding earnings, we previously mentioned that we expected to overperform with rental and used vehicle sales contributing around $2.50 to $3. Now, with the additional $2, we're looking at earnings of approximately $4.50 to $5, which would bring us close to $9 when compared to 2022 earnings. However, we do not expect this to occur in 2022. Looking ahead to 2023 and 2024, we will need to account for growth in our base business in areas like leasing and earnings from our Supply Chain and Dedicated businesses, which should help increase that $9 over time. Regarding margins, we have set a target for Fleet Management Solutions to achieve low double-digit margins as a sustainable long-term goal, and we are currently exceeding that due to the performance of rentals and used vehicle sales.

We will now take our next question from Stephanie Moore with Truist.

I want to start with your FMS leasing business, where pricing gains remain strong. As you mentioned, there will be upcoming renewals. However, has the lack of truck availability affected near-term volumes? Looking ahead, do you foresee an opportunity where, while you will maintain good pricing on renewals, there will also be increased vehicle availability that could lead to volume gains? Would you benefit from both elements?

Yes, Stephanie, that's a great question because we are seeing benefits in pricing, but we're also having some limitations on growth because of the timing of OEM delivery. So let me hand it over to Tom, who can give you more color on that.

Yes, thank you, Robert. Stephanie, I believe I mentioned this in the previous call, but we are somewhat limited by the number of slots available to us. As a result, most of our sales in the first quarter were focused on our existing customer base, which may restrict our short-term growth. As John pointed out, we anticipate that our lease fleet will increase by about 4,000 units year-over-year by the end of the year, which should continue into 2023. We also observed an increase in the lease fleet in Q1 compared to Q4, marking the first time we've seen this happen. Therefore, we should expect to see some growth in the lease fleet, particularly in North America, as we progress. Additionally, as supply begins to improve and we see more lease deliveries from the OEMs, we expect to capture our share of that growth as well.

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

Well, congratulations, first of all. I mean, fantastic results, great to see. So I want to turn back the clock to 2018. The economy was booming and starting to slow down. Ryder was adding the fleet; some people questioned whether it was too aggressive or not. And then '19 and '20, the bottom falls off. I don't know if that's happening this time. But just the idea that I think people are anxious about how the world is going to slow, how quickly, we don't know those answers. How do we avoid overgrowing this time around? And kind of what's being done a little differently in the planning? Or how are you approaching this as we go into this very uncertain time later this year and next year?

Jeff, that's a great question. There are a lot of differences compared to 2018. We are in a much stronger environment now, especially regarding rental and UVS, even more so than in 2018. As we've come out of this period, we have certainly expanded our rental fleet, but we've also been cautious not to overextend that growth. We're managing the situation carefully to ensure we can redeploy equipment as we anticipate that rental demand may slow down at some point. There are a few key differences worth noting. First, the lower residual values on our books now are significant. We've reduced residual values to much lower levels since the beginning of 2019, which has mitigated the earnings risk for the company. Additionally, we've increased the spread on our leases, resulting in better earnings for the company. We've effectively raised the baseline for earnings, so even if there's a slowdown, we might see some impact from reduced rental margins or gains, but overall, the earnings of the company are in a much stronger position than they were in 2018. That's the most important difference. Beyond that, Tom has a strategy to manage the fluctuations in rental demand, and while we've discussed it externally, Tom, feel free to share more details on how you're handling the rental fleet throughout the cycle.

Yes, I'm being very considerate about the lease fleet and the duration of the leases we're currently offering, especially with an eye on when we anticipate a downturn or pressure on used truck pricing. This strategy will help us minimize the number of units flowing through during that period. Additionally, from a rental standpoint, we can always redeploy equipment and shift vehicles to lease applications. One aspect that might differ in this cycle is the growth we're witnessing in Supply Chain and Dedicated, allowing us to redirect rental assets to support their expansion without needing to invest in new equipment. This strategy is beneficial as we're experiencing robust growth in that area. Moreover, we have thousands of customers needing vehicles, and there's always some level of replacement within the lease fleet. We can facilitate these replacements with our existing equipment rather than purchasing new vehicles. We plan to implement these strategies as we navigate through any potential downturn, and we are confident in our ability to adjust the fleet rapidly when necessary.

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

I would like to discuss something related to the previous question. SCS, you have shown strong organic growth. Can you provide insight on the pipeline of opportunities? Is it slowing down, or are we expecting continued expansion? Additionally, with concerns about a recession, how should we view the performance of that business across different cycles? What are your thoughts on this?

Yes. I want to highlight that SCS had a record sales year last year and achieved another record in the first quarter of this year. The pipeline remains very strong as companies are concentrating on improving their supply chains, which aligns perfectly with our capabilities. Additionally, I want to point out that our Supply Chain, Dedicated, and lease segments all operate on multi-year contracts, making them less susceptible to economic fluctuations. While the supply chain has faced challenges recently due to the automotive sector, there is significant pent-up demand in that area, which should lead to improvements over the coming years as more vehicles need to be produced. This situation will definitely benefit our business. We are also working to address the ongoing labor challenges facing drivers. Steve, would you like to provide more insights on the supply chain?

Yes, Robert, thank you. Allison, the pipeline remains very strong. As Robert mentioned, we achieved another record quarter in Q1. We plan to relaunch our Ever Better campaign on TV in late summer this year, which has generated significant traction over the past couple of years and contributed greatly to the pipeline. It's important to note the pent-up demand in the automotive sector, and we expect that to rebound significantly in the latter half of the year. Our ongoing investment in brokerage, as highlighted in Slide 5, provides a strong entry point for us alongside our technology investments. RyderShare sets us apart in the market and has positively affected both SCS and DTS. Additionally, we are continuously investing in our e-commerce platform and RyderView 2.0, our key last-mile customer-facing technology. We believe we are leading the market in several technology areas that are crucial for the end consumer.

Great. And just going back to the contract side of it. Is it based on volumes? Or is it sort of mix? Just trying to understand sort of what the impact could be there, understanding it is contractual for you.

Yes. We have been seeing some longer-term contracts recently, including several 10-year agreements, which is a change from what we have typically experienced over the past four or five years. Generally, we have been signing contracts that range from 3 to 5 years across both Dedicated and Supply Chain.

Yes, and the other thing I'd add to that, Allison, is that most of the contracts are cost plus or a fixed and variable. So if you think about the leverage with earnings, they do have leverage as you have more volume, you also get more margin.

We'll now take our next question from Todd Fowler with KeyBanc Capital Markets.

Robert, I think historically, there's been somewhat of a relationship between what we see in the for-hire truckload markets and rental utilization. But I know over the past couple of years, you've been shifting the mix within the rental fleet. Can you share with us either how to think about the rental fleet now versus prior cycle like, maybe mix of trucks versus tractors? And how you would expect rental utilization to progress if we see some softness in the truckload market? And then out of the $4.50 to $5 of kind of over-earning that you laid out, how much of that do you think is rental versus UVS?

So I'll let Tom give you a little bit more color. But yes, there has been historically a relationship with for-hire and certainly our tractor rental business. We have not seen as tight a relationship with the truck rental business, so that's why we have looked to move more of the fleet towards that truck rental. We're not done. But as you look at where we've been investing in growth, it has been on the truck side. So I'll let Tom give you a little bit more color on that shift to more trucks and where we're at.

Yes. When considering the capital we've invested in upcoming units for rental, you will notice that the growth of our rental fleet will mainly consist of trucks rather than tractors. The tractor business primarily supports our lease customers amid our lease growth. Recently, in the first quarter, we've observed a decreasing reliance on transport compared to the previous year. We're witnessing more activity in the food and beverage sectors and, notably, in e-commerce, which predominantly involves trucks. We anticipate this trend will persist as we progress, and our capital investment in rental is aimed at bolstering that e-commerce growth.

Let me just add to that. First of all, to reiterate what Tom said, here we are in April; I know there's been some discussion about softening in the spot market. But I can tell you that both our tractor and our truck rental utilization this month is still on pace for another record month. So we are not seeing any slowdown there yet. It doesn't mean that we won't see some at some point, possibly with tractors, but we haven't seen it. Regarding your second question about what percentage of the over-earning is UVS compared to rental, I think it's 80%, with the majority being UVS. John, do you want to share the numbers?

Yes. If you think about what we put out there in the waterfall at the beginning of the year, the lift of the $2 is primarily UVS with 80% to 85% coming from UVS. And then the balance is rental with some puts and takes in the other components, but it's primarily a UVS rental outperformance.

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

Just wanted to ask a clarification on the auto side. It sounds like you expect some activity to improve in the back half of this year. I just wanted to see if you can add some more detail around that because it also sounds like there's a pretty long runway that you're looking at. And then secondarily, if you can just maybe outline some of the expectations or even just the size of the e-commerce and e-fulfillment business at this point in time, how you see that growing and whether or not that would be accretive or dilutive to the overall SCS margin profile?

Steve, do you want to take that?

Yes, sure. So Brian, regarding the automotive side, we are still facing parts shortages. It began with semiconductors, and now it has affected some other components. As this situation stabilizes in the latter half of the year, we anticipate returning to full production levels. This is not unexpected. On the e-commerce side, I’d like to provide some broader insights about the acquisition. This acquisition has enabled us to offer a port-to-door capability. The Whiplash team has performed excellently, surpassing sales expectations in the first quarter. Now, we can serve customers ranging from small, emerging brands to major blue-chip companies, providing port drayage services in various regions including the Northwest, Los Angeles, New Jersey, and Savannah. Additionally, we believe our technology stack and parcel optimization capabilities set us apart. We find this development very exciting. The integration is progressing according to our expectations, and we are beginning to see some cross-selling opportunities within our existing business.

I'll add a couple of points. First, regarding the auto sector, we anticipate continued disruption in the third quarter, with some easing in the fourth quarter. A significant factor contributing to our improvement is our positive price and contract renegotiations. Additionally, as Steve mentioned, we are pleased with the operations we've acquired in e-commerce, which we believe will play a substantial role in our supply chain narrative in the coming years and should contribute positively to our growth.

I wanted to go back to the comments around the $4.50 to $5 of over-earning from an EPS perspective. As you ran the math and came up with that range, what did you assume for the decline in used pricing and rental demand versus where we are today? And then maybe on the 2022 guidance as well. Curious if you could share the updated estimate for gains on sale for the full year.

Yes. On the $4.50 to $5, we're assuming gains of $75 million to $100 million. John, I believe that's the number as a more normalized gain number. And then rental, really going back to more normalized utilization levels. That's really how we get to those numbers. In terms of the balance of the year, I'm not sure we've given guidance on gains for the year. So John, I don't know if there's any other color for back half earnings estimates.

No, Justin, but you can look at our raise for the balance of your forecast of $2. And if you account for the majority of that being UVS, that gives you an idea of where we're ending up for gains number. We are seeing pricing sequentially and get stronger. And we expect then in the second half for proceeds to start moderating from the record levels we're enjoying today.

Robert, I think it's fair to say you've conveyed greater confidence in the shape of Ryder's future earnings volatility, just thinking about this cycle versus past. If you had to select, would you say that's more a function of Supply Chain Solutions growth? Or do you think the lease pricing changes are driving that more?

Well, I'll give you a straightforward answer: it's both. The earnings potential of the company has increased, primarily due to FMS at first. Additionally, our initiatives regarding lease and maintenance costs over the past few years have resulted in $100 million in savings and lower annual costs. Our zero-based budgeting program, implemented a few years ago, also contributed significantly to reducing annual expenses. Now, you're starting to see the benefits from the growth in Supply Chain and Dedicated services. Overall, while the base improvement is mainly due to FMS, future growth is likely to be more influenced by Supply Chain and Dedicated services. That might be the best way to understand the situation.

We'll take our next question from Scott Group with Wolfe Research.

So just going back again to this sort of $9 number, does that include the benefit from continued leasing pricing?

No, that's just applying the $4.50 to $5 to this year's number. So next year, as we continue to get lease benefits, there will be an offset to that number, which will increase the $9. As we grow Supply Chain and Dedicated, they will generate more earnings, leading to a higher number. We're just starting to see the margin improvement in Supply Chain and Dedicated for next year, and those margins are set to increase significantly between the first and second half of the year. Next year, you will also benefit from that as it catches up. All these factors can be seen as offsets to that reduction and would raise the $9 as we move into next year and the following year.

Is there a rough ballpark just from the lease pricing, if you were to take the whole book and price it to where you think market rates are, like how much do you think you're under-earning on lease pricing right now?

We haven't provided that level of detail. However, we've mentioned that historically, we were achieving spreads of 60 to 100 basis points. Currently, we're aiming for spreads of 100 to 150 and are achieving around 150 basis points. This difference in spread reflects the ongoing benefits each year. As we refresh 50% of the fleet, we expect to see improvements in returns from those units as well as enhanced growth.

You mentioned that the number assumes gains between $75 million to $100 million. However, when I review the period from 2016 to 2020, you were experiencing losses on sales. Is this related to changes in accounting practices, and could it potentially happen again? Or is it highly unlikely to occur if growth really starts to slow down at some point?

Yes, Scott, that's the key difference. We've significantly reduced our assumptions for residual values. We believe we are well-positioned to avoid recording losses or any additional depreciation. When considering pricing trends for used trucks, even at the lowest points, we estimate that we are still close to that $75 million to $100 million range. This is why we've established that assumption as we projected the $4.50 to $5.

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. Thank you. Thanks, everyone, for the questions. Listen, don't forget, please preregister for the Investor Day. We're excited to have that session and get a chance to see all of you live and really be able to lay out more crisply the future of the company and what the reasons that we're so excited about it. So thank you.

That concludes today's conference. We thank you all for your participation.