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spk02: If you have any objections, please disconnect at this time. I would now like to introduce Ms. Kayleen Candela, Vice President, Investor Relations for Rider. Ms. Candela, you may begin.
spk00: Thank you. Good morning and welcome to Rider's fourth quarter 2023 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 RIDER's filings with the Securities and Exchange Commission, which are available on RIDER's website. Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer, and John Diaz, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, President of Fleet Management Solutions, and Steve Sensing, President of Supply Chain Solutions and Dedicated Transportation Solutions, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to Robert.
spk12: Good morning, everyone, and thanks for joining us.
spk11: I'm extremely proud of our team for delivering strong results again in the fourth quarter and throughout 2023. Our operating performance continues to demonstrate that the transformative changes we've made to de-risk our business model, enhance returns and free cash flow, and drive long-term profitable growth have significantly increased the earnings and return profile of the business versus prior cycles. I'll begin today's call by sharing some key insights from 2023 and providing you with a strategic update. John will then take you through our fourth quarter results, which exceeded our expectations again, reflecting better performance in our supply chain automotive business, lower truck maintenance costs, and a lower tax rate, partially offset by volumes in omnichannel retail, and rental demand. I'll then review our 2024 outlook and discuss how we are positioning the business for the cycle upturn. Let's turn to slide four. In 2023, we delivered strong returns during a freight cycle downturn and as conditions in used vehicle sales and rental weakened throughout the year. Despite this backdrop, we generated ROE of 19%, which is in line with our target range of high teens over the cycle and reflects the strength of our contractual business and the actions we've taken to improve the return profile of our business. Comparable EPS of 1295 was above our initial four-year forecast, reflecting better-than-expected performance in used vehicle sales, lower truck maintenance costs, improved results in our supply chain automotive business, and a lower tax rate. These benefits were partially offset by weaker than expected volumes in omni-channel retail and lower than anticipated rental demand. Comparable EPS in 2023 was significantly above the 595 of comparable EPS generated in 2018 prior to our business transformation, highlighting the impact of our balanced growth strategy. Operating revenue grew 2%, reflecting contractual growth of 7%. partially offset by lower rental and the impact from the exit of our UK business. The business generated strong operating cash flow of 2.4 billion, reflecting contractual growth, partially offset by lower rental demand. We continued to return capital to shareholders through buybacks and dividends. During 2023, we repurchased 3.6 million shares. Since 2021, We have repurchased approximately 16% of our shares outstanding. We also increased our dividend by 15% in mid-2023. We're encouraged by the strong returns generated in 2023 by our transformed business model and believe that executing on our balanced growth strategy is enabling us to deliver higher highs and higher lows over the cycle. On slide five, I'll provide some key updates. Executing on our balanced growth strategy has increased our earnings and return profile versus prior cycles and has provided us with additional opportunity for long-term value creation. Further advancing our strategy to accelerate profitable growth in our supply chain and dedicated businesses, we recently closed on two strategic acquisitions. On November 1st, we completed the acquisition of Impact Fulfillment Services, or IFS, which added co-packaging and co-manufacturing capabilities in SCS. Earlier in the month, we completed the acquisition of Cardinal Logistics, a leading provider of customized dedicated transportation solutions. I'll provide more insight on the Cardinal transaction shortly. Our initiatives remain focused on enhancing returns. Adjusted ROE of 19% for the trailing 12-month period is in our target range of high teens over the cycle, and reflects normalizing market conditions and used vehicle sales and rental, as well as our initiatives. These initiatives include pricing and cost recovery actions, which benefited returns in all segments. FMS and DTS achieved target EBT margins for the fourth quarter, as well as full year 2023, reflecting initiatives to increase returns, as well as execution on our enhanced asset management playbook. Our strong balance sheet and solid investment grade credit rating continue to provide us with ample capacity to pursue targeted acquisitions and investments, as well as return capital to shareholders. During the quarter, we repurchased 420,000 shares under our discretionary repurchase program. We currently have authorization for a 2 million share discretionary repurchase program, as well as a 2 million share anti-dilutive program, with approximately 3.5 million in total shares remaining under these programs. Our full year 2023 free cash flow was negative 54 million, below our most recent forecast of approximately positive 100 million, primarily due to higher year-end working capital needs. Turning to slide six, I am very proud to share the results of this slide because they clearly illustrate the increased earnings and return profile resulting from the transformative changes that we've made to the business. In 2018, prior to the implementation of our balanced growth strategy, we generated comparable EPS of 595 and ROE of 13%. This was during peak rate cycle conditions. At that time, the majority of our $8.4 billion in revenue was from FMS. Supply chain revenue had a three-year growth rate of 16%. and operating cash flow was $1.7 billion. Now, let's look at Rider today. In 2023, during a freight cycle downturn, our transformed business model generated meaningfully higher earnings and returns than it did during the 2018 peak. Comparable EPS was $12.95 compared to $5.95 in 2018, and ROE was 19%. well above the 13% generated in 2018. Through organic growth, strategic acquisitions, and innovative technology, we have shifted our revenue mix towards supply chain and dedicated with 56% of 2023 revenue coming from these asset-light businesses compared to 44% in 2018. Supply chain three-year growth rate has also increased to 24%. As a result of profitable growth in our contractual lease, supply chain, and dedicated businesses, operating cash flow grew from 1.7 billion in 2018 to 2.4 billion this year. As shown here, the business is outperforming prior cycles, even when comparing prior peak to current downturn conditions. I'm encouraged by the results of our transformation thus far, and I'm confident that our solid execution in 2023 and momentum from multi-year initiatives positions as well for 2024 and beyond. Moving to slide seven, on February the 1st, Rider completed the acquisition of Cardinal Logistics, a leading provider of customized dedicated transportation solutions. This acquisition further advances our balance growth strategy by accelerating profitable growth in our dedicated business. DTS growth is an important part of Rider's strategy to create shareholder value. Secular trends, including the driver shortage and demand for business intelligence and freight visibility technology, such as RiderShare, continue to drive private fleets to pursue an outsourced dedicated transportation solution. In addition, our dedicated business has demonstrated a resilient earnings profile over the cycle. During the most recent freight downturn, as well as during prior cycles, dedicated earnings held up well, benefiting from favorable driver market conditions and reduced turnover costs, as well as our initiatives. Finally, our dedicated business benefits from sales and operational synergies with FMS. Upselling FMS pipeline and lease customers to dedicated has been the largest driver of new sales activity for DTS for some time. DTS also benefits from access to equipment, asset management, and maintenance services from FMS, enabling DTS to deliver increased value to their customers and drive incremental cost savings. Building upon this foundation, Cardinal's national footprint and complementary contractual services provides us with opportunity to build scale and density in our dedicated transportation network. With this, we'll gain greater economies of scale, and we'll have even more flexibility to optimize resources across our network. Turning to slide eight, the integration process is already underway. On an annualized basis, the transaction is expected to add approximately $1 billion in total revenue and approximately $800 million in operating revenue, which excludes fuel and subcontracted transportation. Approximately 85% of Cardinal's operating revenue is from their dedicated transportation business and will be reflected in DTS. Increasing the scale and density of our dedicated business is expected to drive operating leverage and synergies. Approximately 15% of Cardinal's operating revenue is generated by their freight brokerage, contract logistics, and last mile delivery businesses, which will be reflected in SCS. FMS will provide maintenance services for the Cardinal fleet and we expect meaningful cost synergies as we begin servicing the fleet as well as procuring and disposing of Cardinal vehicles. Cardinal owned and leased vehicles will be provided to DTS via intersegment equipment leases with contractual maintenance agreements consistent with other vehicles operated by DTS. Intersegment lease and maintenance revenue is eliminated upon consolidation. We expect the transaction to be marginally accretive in 2024 and more meaningfully accretive in 2025 after achieving synergies and completing integration efforts. We're very excited about the opportunities ahead and believe that Dedicated will continue to be an important driver of value creation for Rider. The team is focused on a successful integration and realizing the synergies and benefits we are confident are achievable. I'll turn the call over to John to review our fourth quarter performance.
spk06: Thanks, Robert. Total company results for the fourth quarter on page nine. Operating revenue of $2.4 billion in the fourth quarter, up 2% from the prior year, primarily reflects contractual revenue growth in all three segments, partially offset by lower rental revenue. Comparable earnings per share from continuing operations were $2.95 in the fourth quarter, down from $3.89 in the prior year. reflecting expected weaker market conditions in used vehicle sales and rental, partially offset by improved supply chain results. Return on equity, our primary financial metric, was 19% in line with our high teens target over the cycle. The year-over-year decline reflects weakening used vehicle sales and rental market conditions, partially offset by our returns initiatives. Full year free cash flow decreased to negative 54 million from positive 921 million in 2022 due to higher capital expenditures and lower used vehicle sales proceeds. Normalized timing of OEM tractor deliveries contributed to higher CapEx in 2023. Prior year included 400 million in proceeds from the UK exit. Turning to fleet management on page 10. Fleet management solutions operating revenue decreased 4% due to lower rental demand, partially offset by higher contractual revenue from choice lease and select care. Free tax earnings and fleet management were $134 million and down year-over-year as anticipated. Prior year FMS results largely reflect the impact from elevated market conditions in used vehicle sales and rental. Lower used vehicle pricing in the quarter was partially offset by higher sales volumes. Rental utilization on the power fleet of 75% was at the low end of our mid to high 70s target range for the quarter and down from an unusually high level of 82% in the prior year. Lower utilization was partially offset by a 1% increase in power fleet pricing. Despite a weaker used vehicle sales and rental environment, fleet management EBT as a percent of operating revenue was 10.6% in the fourth quarter, within the segment's long-term target of low double digits. For the full year, it was above target at 13.2%. Page 11 highlights used vehicle sales results for the quarter. As anticipated, market conditions for used vehicle sales continue to weaken from elevated levels in the prior year. Compared with prior year, used tractor proceeds declined 39% and used truck proceeds declined 33%, reflecting weaker freight conditions. On a sequential basis, proceeds for tractors decreased 12% and proceeds for trucks decreased 11%, both generally in line with our expectations. During the quarter, we sold 7,200 used vehicles, up sequentially and versus prior year. Used vehicle inventory increased to 8,000 vehicles at quarter end and remains in line with our target inventory levels of 7,000 to 9,000 units. Increased sales volumes and inventory levels reflect higher lease replacement and rental defleeting activity. Although used vehicle pricing declined, proceeds remain above residual value estimates used for depreciation purposes. Slide 26 in the appendix provides historical sales proceeds and current residual value estimates for used tractors. and trucks for your information. Turning to supply chain on page 12. Operating revenue increased 10%, reflecting organic growth from new business, increased pricing and higher volumes, as well as the IFS acquisition. Double-digit revenue growth in our automotive, consumer packaged goods, and industrial verticals more than offset softer volumes in our omni-channel retail vertical. Supply chain earnings increased 35%, reflecting operating revenue growth in the automotive and industrial verticals. In omnichannel retail, year-over-year comparisons benefited from a prior year asset impairment charge of 20 million, which was offset by lower volumes in the current year. Supply chain EBT as a percent of operating revenue was 5.8% in the quarter, below the segment's high single-digit target range. Moving to dedicated on page 13, operating revenue increased 1%, reflecting the recovery of inflationary costs. We expected slower contract sales activity in dedicated, consistent with a softer freight environment. As we discussed previously, we expect the 2023 segment revenue growth to finish below our high single-digit target range. Dedicated EBT remains strong and generally in line with prior year. EBT benefited from inflationary rate increases and EBT continues to benefit from favorable driver conditions as the number of open positions and time to fill for our professional drivers improves. Dedicated EBT as a percent of operating revenue was 9.4% in the quarter and in line with the segment's high single digit target. Turning to slide 14. 2023 lease capital spending of 2.6 billion increased from prior year, reflecting higher lease replacement and growth activity, as well as a return to normalized timing for OEM tractor deliveries. In 2024, we're forecasting lease spending to decline to 2.5 billion, reflecting lower replacement activity, partially offset by higher growth. We expect the ending lease fleet to be up approximately 13,000 units in 2024, reflecting the Cardinal acquisition as well as organic growth. At the time of the acquisition, Ryder's fleet increased incrementally by approximately 2,400 power vehicles and by more than 6,500 trailers. We expect to realize synergies with maintenance costs and fleet utilization by combining the Cardinal and Ryder fleets. 2023 rental capital spending of 438 million was below prior years planned. In 2024, We're forecasting rental spending to increase to $600 million, reflecting modest rental growth. Our ending rental fleet is expected to increase by 8% during 2024, and our average rental fleet is expected to be down by 5%. For 2024, the rental fleet is expected to remain below peak levels. In rental, we continue to increase capital spending on trucks versus tractors as trucks have benefited from relatively stable demand and pricing trends. At year end 2023, trucks represented 60% of our rental fleet, up from 49% in 2018. Our full year 2024 capital expenditures forecast of approximately 3.3 billion is in line with prior year as higher growth is offset by lower replacement capital. We expect approximately 550 million in proceeds from the sale of used vehicles in 2024 down approximately $200 million from prior year, reflecting lower pricing as well as fewer vehicles sold. Higher sales volumes in 2023 reflect higher lease replacement activity and rental defleeting. Full year 2024 net capital expenditures are expected to be approximately $2.8 billion. Turning to slide 15, Our 2024 full-year forecast for free cash flow is expected to be between negative $275 and $375 million, and our forecast for operating cash flow is $2.4 billion. As shown, operating cash flow remains strong, driven by growth in our contractual lease, dedicated, and supply chain businesses, which comprise over 85% of riders' operating revenue. Our free cash flow profiles changed significantly since the implementation of our balanced growth strategy. Since 2020, lower targeted lease growth as well as COVID effects and OEM delays resulted in lower capital spending and higher free cash flow. Proceeds from the exit of the UK FMS business also benefited free cash flow in 2022. The summary on the right side of the slide illustrates the strong free cash flow generated by the business prior to investing in fleet growth. Although free cash flow is expected to be negative $325 million at the midpoint of our range, free cash flow prior to investing in growth capital is expected to be positive $350 million. As a reminder, we expect free cash flow to be positive at most years and positive over the cycle. Our capital allocation priorities remain unchanged and are focused on supporting our strategy to drive long-term profitable growth and return capital to shareholders. our top priorities to continue to invest in organic growth. Strategic acquisitions have been a key contributor to accelerated growth in SCS and have helped transform our supply chain business in terms of expanding capabilities as well as rebalancing our vertical mix. Balance sheet leverage of 232% at year-end 2023 was below our 250% to 300% target and continues to provide ample capacity to fund organic growth and strategic investments, as well as to return capital to shareholders through share repurchases and dividends. With that, I'll turn the call back over to Robert to discuss our 2024 outlook.
spk11: Slide 16 highlights key aspects of our 2024 outlook. In terms of market assumptions, we expect macroeconomic growth to be muted in 2024. We expect market conditions and used vehicle sales and rental to continue to weaken in the first half of 2024 with a gradual improvement in the second half. We are confident that secular trends continue to favor transportation and logistics outsourcing and that our operational expertise and strategic investments will continue to enable us to deliver increasing value to customers and shareholders. We're assuming that U.S. Class A tractor production declines approximately 25 percent in 2024 and that OEM delivery delays for trucks will continue. We expect truck market conditions in used vehicle sales and rental in 2024. Gains from the sale of used vehicles are expected to be below normalized levels of approximately $75 million in 2024, reflecting lower market pricing and fewer vehicles sold. We expect rental utilization to be at the low end of our mid to high 70s target range, on a 5% smaller average fleet. Our enhanced asset management playbook has enabled us to outperform prior cycles, and we expect to continue to leverage and benefit from these actions going forward. In terms of our financial forecast for 2024, operating revenue is expected to grow approximately 13%, above the total company's high single-digit target, reflecting revenue growth in all segments including the impact from recent acquisitions. Comparable EPS is expected to remain strong between 1150 and 1250 in 2024, reflecting contractual growth partially offset by trough conditions in used vehicle sales and rental. ROE is expected to be between 15 and 16.5% in line with our return expectations during trough market conditions for used vehicle sales and rental. Free cash flow is expected to be between negative $275 and $375 million down from prior year, primarily due to lower used vehicle sales proceeds. Overall, we expect to deliver solid returns in 2024 amid trough market conditions and used vehicle sales and rental, reflecting execution of our balanced growth strategy. Slide 17 provides the outlook highlights for each of our segments. In FMS, operating revenue growth is expected to be at the segment's mid-single-digit target due to organic fleet growth and the intersegment revenue from cardinal vehicles operating in DTS partially offset by lower rental demand. FMS EBT as a percent of operating revenue is expected to be in the segment's low double-digit target range, reflecting fleet growth, benefits from multi-year lease pricing, and maintenance cost savings initiatives, partially offset by trough conditions and used vehicle sales and rental. SES operating revenue growth is expected to be in the segment's low double-digit target range driven by secular trends, the IFS and Cardinal acquisitions, and our initiatives. SES EBT percent is expected to be at the segment's high single-digit target range due to growth and pricing actions. In DTS, Operating revenue growth is expected to be above its high single-digit target, reflecting the cardinal acquisition. EBT as a percent of operating revenue is expected to be below the segment's high single-digit target range in 2024, reflecting acquisition integration costs and higher interest expense partially offset by initiatives. We are confident that the strategic acquisitions we've made to accelerate profitable growth in supply chain and dedicated and to expand our capabilities will create value for our customers and shareholders. The team is focused on integrating these acquisitions and realizing their expected benefits and synergies. We continue to manage discretionary spending by leveraging our zero-based budgeting process and are not planning incremental spending on strategic investments in 2024. We expect to continue share repurchase activity. Overall, we're excited about the opportunities ahead of us, and expect all segments to benefit from profitable contractual growth. Slide 18 provides a chart outlining the changes from 2023 to reach the high end of our 2024 comparable EPS forecast. EPS headwinds from our transactional businesses reflect expected trough market conditions. Lower gains are expected to reduce EPS by 225. We expect used vehicle pricing to be below prior year and expect sequential declines through the first half of the year with some gradual improvement in the second half. Used vehicle sales volumes are expected to decrease, reflecting lower replacement activity versus the prior year. Rental is expected to reduce EPS by 70 cents, primarily reflecting lower demand on a smaller average fleet. Our 2024 forecast EPS does not include any outsized earnings from gains or rental. FMS contractual and other is expected to contribute $1 of EPS, primarily reflecting growth and higher lease pricing. Profitable growth in SCS and dedicated is expected to benefit EPS by $1.50. This increase reflects ongoing secular trends, as well as our initiatives to accelerate growth and increase returns in these businesses. The benefit of a reduced share count from share repurchase activity is expected to offset a higher tax rate and employee compensation costs. This brings the high end of our comparable EPS forecast to 1250 with a range of 1150 to 1250 for the year. The transformative changes we've made to the business model are delivering strong results. Profitable growth in our contractual businesses is largely offsetting the negative impact of trough conditions on the transactional parts of our business. Turning to page 19, we're forecasting comparable EPS of 1150 to 1250 versus 1295 in 2023. We're also providing first quarter comparable EPS forecast of $1.55 to $1.80 versus the prior year of 281. Historically, the first quarter is the lowest earning quarter and represents the most challenging year-over-year comparison in 2024 given where we are in the cycle. Weaker expected market conditions and used vehicle sales and rental during the first half of 2024 put additional pressure on year-over-year earnings comparisons in the earlier part of the year. In addition, the size of our average rental fleet in the first quarter is expected to be 12% lower than the prior year in line with lower demand. Turning to slide 20, In addition to managing through the down cycle, we're also focused on positioning the business to benefit from the cycle upturn. Although the majority of our revenue is supported by long-term contracts that generate relatively stable and predictable operating cash flows over the cycle, each business segment has opportunities to benefit from the cycle upturn. The majority of our cyclical exposure resides within FMS in rental and used vehicle sales. Improved freight conditions should increase demand for these businesses. In rental, we intend to grow the fleet as we approach the cyclical upturn expected in the second half of 2024 to capture this incremental revenue and margin opportunity. In used vehicle sales, we continue to leverage our expanded retail sales network in order to maximize proceeds with the potential to generate used vehicle gains above normalized levels. An additional opportunity on the horizon for FMS is the potential for pre-buy activity ahead of the 2027 EPA engine technology changes. The industry is generally expecting some level of pre-buy activity given the expected impact on upfront costs and maintenance cost implications. Based on what we see today, pre-buy activity could begin as soon as late 2025 as we have historically seen higher levels of fleet growth a couple years ahead of the change. We also would expect used vehicle pricing to be supported by demand for the old emissions technology. Increased engine complexity and cost generally favor the outsourcing decision, which would benefit lease sales activity. Indedicated, improved driver availability, and lower recruiting and turnover costs benefited 2023 earnings, but have been a headwind for new sales and revenue growth. As the freight cycle strengthens, and the driver availability becomes more challenging, we expect to see incremental sales opportunities and improve revenue growth in DTS as private fleets seek solutions to address this pain point. In supply chain, weaker volumes in our omnichannel retail vertical were a headwind to revenue and earnings during 2023. We continue to believe in the long-term growth prospects for our e-commerce fulfillment and last-mile delivery of big and bulky goods and have expanded our footprint to support this business. We expect supply chain results to benefit as omnichannel volumes recover and the incremental footprint is leveraged. We've been pleased with the overall business's outperformance during this down cycle and have appropriately positioned all three business segments to benefit from the cycle upturn. Turning to page 21, Rider is delivering value to our shareholders with more to come. Since implementing our balanced growth strategy, we have generated strong returns during each phase of the cycle. We achieved higher highs during the 2022 up cycle and generated significantly higher returns during the 2023 down cycle relative to prior downturns. In 2024, we expect ROE to outperform prior cycles despite trough conditions and used vehicle sales and rentals. We continue to see significant opportunity for profitable growth supported by secular trends, our operating expertise, and ongoing momentum from our multi-year initiatives. We remain committed to investing in products, capabilities, and technology that will deliver value to our customers and our shareholders. Before we go to questions, I'd like to remind everyone that we're planning an investor day for June 13th in New York City, so please mark your calendars. We're planning a half-day event that would include a leadership luncheon and a solution showcase where in-person attendees can learn more about the innovative technologies and services that are driving riders' profitable growth. More details will be forthcoming regarding the event and required registration. That concludes our prepared remarks. Please note, we expect to file our 10-K in the next few days. We had a lot of material to cover today, so please limit yourself to one question each. If you have additional questions, you're welcome to get back in the queue, and we'll take as many as we can. At this time, I'll turn it over to the operator.
spk02: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
spk14: And we'll go first to Jordan Alliger with Goldman Sachs.
spk05: Just a couple things. One, on the supply chain business, you mentioned, I think, various price actions to get margin back to targeted levels in 2024. Can you maybe give a little bit more color on sort of your plans in that segment? And was it sort of pricing getting a little bit off that led it to be somewhat below margin target in the fourth quarter?
spk11: Yeah, no, I'll let Steve give you a little more color on that. But, no, I think most of the actions that we need to take have been taken. We have a little bit of headwind from some of our e-commerce and last mile business is probably not new news to most people. The industry has been a little softer. But other than that, the contractual businesses are still performing well.
spk08: Yeah, Jordan, I would really put in three buckets as you look into the year. It's – We had some one-timers earlier in the year that will not repeat themselves with a bankruptcy, and we already have established rate increases for underperforming accounts. We've got the acquisition, which is a big piece. And then, as Robert said, the omni-channel volumes across the board, whether it be last mile, e-com, or even in our high-tech business, are going to rebound here, hopefully in the back half of the year. But we've seen some softness there.
spk05: Great. And then just sort of – The second question, you know, with regards to Cardinal, that was helpful color. I guess the question is excluding Cardinal. I don't know if you could give some sense for this, but excluding Cardinal, would you say that the DTS operating revenue and EBT margin in particular for 2024 would be sort of at or around targeted levels, you know, excluding the impact from Cardinal?
spk11: Well, I would tell you the bottom line, yes. On the top line, we'd still be a little soft. primarily driven by the fact that we're still in a pretty soft freight environment but we would expect that to start to pick up as the freight environment picks up so the acquisition though is a real shot in the arm of that business because it really increases the scale and the density of that business and really provides us opportunities to really capitalize on some significant synergies that we're going to be working on this year to integrate and we should really see the bulk of that in 2025. Great, thank you.
spk05: Okay, thank you.
spk02: If you find that your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit 2. We'll go next to Scott Group with Wolf Research.
spk10: Hey, thanks. Morning. So any color on how to think about first half or second half from an earnings standpoint. And then I was looking at the earnings bridge you gave us a year ago, and FMS contractual is supposed to add $0.10 to earnings, and SCS and dedicated were supposed to add about $1 to earnings. And this year, FMS is supposed to add $1, and SCS and dedicated $1.50. So I just want to understand what's driving much better contractual earnings in 24 versus 23. Is that a fleet comment? Is that a pricing comment, cost comment? Just any color there. Thank you.
spk11: Yeah, I think a lot of that is the growth we're expecting in FMS, part of that from Cardinal as we bring in the acquisition. But growth in our lease business is really the biggest driver, along with maintenance costs. I think overall we've done a great job of bringing down maintenance costs. But as it relates to the first half, second half, I'm glad you asked that question. I've seen some questions about our Q1 guidance. First, I want to mention that our Q1 guidance is consistent with last year and pre-COVID seasonality decline from Q4 to Q1. Think about Q4 of 23 versus Q1 of 24. And you go back, you look at Q4 of 22 to Q1 of 23. Generally in line and also in line with the pre-COVID During the COVID years, you did have an anomaly because used vehicle pricing had been declining from these astronomical levels. So Q4 sometimes was at a large, I'm sorry, Q1 was at a larger percentage than what it would normally be as a result of the normal seasonality. So it's very consistent with where we would expect to be at this point in the cycle with rental and used vehicle sales. now continuing to decline and really bottoming out. We are expecting some pickup in rental and used vehicle sales in the second half of the year. If you look at the top end of our range, if you look at the bottom end of our range, that assumes no decline. I'm sorry, no pickup or uptick in demand for rental and used trucks. I think we've given you the full range of where we think things could end up. I think based on where we are in the cycle and where the spot market is, we are getting long in this downturn. I think we're now almost at two years, which is definitely longer than what most of these cycles go. So I think it's reasonable to expect in the second half some type of a modest pickup. We're not even on the high end expecting a significant pickup, just a modest pickup in rental and used vehicle demand. But I do want to clarify that the range does contemplate no pickup in the second half of rental and use vehicles at the bottom end.
spk10: Okay, that's helpful. And then if I could just ask one more, that appendix slide on the residuals. So it looks like the tractor price is sort of like now like right at the range for the residual assumption. So do we need to consider any residual
spk11: value adjustments what is this if not what does this mean for gains going forward just any any thoughts here thank you yeah so so if you recall that for tractors we have a range and that range is because during downturns we do have lower residual values for that down obviously we're in a downturn so we're the residual values are really at the lower end of that bar so yes as you go into this year we're expecting that decline to to level off at some point and then start to come back. So where we sit right now, we feel comfortable that we've got the residuals where they need to be during this downturn and would not expect any additional changes there. Again, what we're expecting is to see a continued decline through the first half and then some type of modest pickup in the second half.
spk15: Very helpful. Thank you, Robert. Thank you, Scott.
spk02: We'll go next to Jeff Kaufman with Vertical Research Partners.
spk03: Thank you very much. First of all, congratulations. You know, strange year. Second of all, I just want to make sure I'm understanding what you're talking about with fleet and units. So you're picking up about 2,900 vehicles through Cardinal, but your net change in vehicles by the end of 2024, There's only about 700 more vehicles in DTS. What happens to those other 2,100, 2,200 Cardinal vehicles that you're bringing in?
spk11: No, I'm not sure those numbers are right, Jeff. Total units that we're picking up from Cardinal, that's power and trailers, is just under 9,000.
spk12: So we're expecting lease.
spk11: fleet, which includes those units, to be up about, I think, 12,000, 13,000 is what we're expecting. So, yeah, all those Cardinal vehicles are going to Dedicated. So Dedicated's fleet will be up at least that amount, at least the 9,000 units from Cardinal.
spk03: Okay, yeah, I was a little confused because I think I heard like 12,600 vehicles or something like that. And it was only $11,800 and a quarter. So I misunderstood that $12,000 would have been incremental in terms of total.
spk11: By the way, it's not in the fourth quarter numbers yet. Remember, we did this acquisition in February. So is that part of it?
spk03: Yeah, no, that's my point. So how much is the lease fleet itself going to be up from where it finished 2024 or 2023 by the end of 2024? Tom? Okay.
spk09: The lease fleet, including the Cardinal acquisition, will be up around 13,000 units.
spk12: So if you assume 9,000 or so of those are Cardinal, you're up another 4,000 units. Okay, yeah, that's what I was going for. Which is in our target range of the 2,000 to 4,000.
spk03: Okay, very good. That was my question. Thank you.
spk15: Thanks, Jeff.
spk02: We'll go next to Brian Ausenbeck with J.P. Morgan.
spk04: Yeah, thanks. Appreciate you taking the question. So maybe just on Cardinal, Robert, you mentioned a few of the synergies and the opportunities here. I imagine better backhaul, better density, the maintenance. Can you give us a sense in terms of when you start to see those ramp up, you know, what the accretion could look like on this in 2025? And, you know, maybe if you exclude some of the acquisition costs, what that's going to be in 2024 as well?
spk12: Yeah, I guess I'd tell you, 24, it's marginally accretive, so not a big number.
spk11: We're going to spend some money in the integration and really integrating this transaction into Rider. It really becomes more accretive in 2025. And I guess what I would give you there is that if you look at all of dedicated, our target is to be, from an earnings standpoint, to be in the high single-digit range. In 2024, we're not going to be because of the integration costs. As you get into 2025, you should expect us to be, if not, they're approaching that high single-digit range on a much higher revenue number now that we have Cardinals. So that would be reflective of beginning to really see those synergies come through.
spk04: So the underlying Cardinal in DTS would be sort of equivalent to which you have now when it's on a run rate, fully integrated basis, or could it actually be? From a return standpoint, yes.
spk12: Right. After we integrate, we have the synergies.
spk04: Okay. And then just as a follow-up, can you just talk about being at the sort of the trough of the market in a couple different ways, what the competition, what the pricing looks like? We saw a little bit of an uptick in Early terminations, we got lower extensions, so it's hard to really read into the asset management side of things. But maybe you can just give us some color on competition, the pricing trends, and how the asset management playbook is progressing here into the extended trough.
spk11: Yeah, I wouldn't read much into that early terminations and redeployments because some of that was internal supply chain units that we had to move from one account to another, and it shows up as an early termination, and it was just a movement within our supply chain business, dedicated business. But in terms of what we're seeing in the market, I think, look, we're still seeing a soft market in rental and used vehicle sales. There's no doubt that has continued from Q4 into Q1. As we just look at the larger trend, though, and where we're seeing the spot market now seems to be bottoming out, typically there's a lag, let's call it about six months, between spot market bottoming out and used tractor market and maybe even rental coming back. So, you know, it's beginning to line up some. Still no one's, I think, ready to call the bottom yet. But based on historical data, cycles, we would expect things to be beginning to bottom out. But, Tom, give them some additional color maybe on the used truck and rental market.
spk09: Yeah, I think it's what you might expect. With the little bit lower utilization than what we see in peak cycles, there is some certainly competition for pricing in the rental market. And as you see, inventories build in the used vehicle sale world, not only with us, but as an industry in general. You're seeing pricing pressure in UBS. And like we said, we expect the pricing to continue to fall through the first half of the year, then some uptick in the back half of the year. In terms of lease pricing, which I think was part of your question, I would say on existing equipment or idle assets that are in the market, We are seeing some price pressure there, but on new units, new capital spend, pricing is generally in line with what we expect, and I think we've said this before as well. Our biggest competition in the leasing market is actually ownership, not some of our core competitors, and we still have a pricing benefit versus ownership that's pretty nice regardless of the environment that we're selling in.
spk11: Yeah, and I would just add that Tom and his team have done a great job of delivering on our growth targets of 2,000 to 4,000 lease units a year at our target returns. And even in a more competitive market, certainly that we've been in here over the last year, have been able to continue to deliver on that.
spk15: So really proud of the work that they're doing. Okay. Thanks, guys. Appreciate it.
spk02: We'll go next to Allison Polonek with Wells Fargo.
spk13: Hi, good morning. Good morning. I just want to go back to SCS to make sure I understand the outlook for this year. Could you maybe talk to excluding the IFS acquisition, how you're thinking through that? Are we sort of flat to up slightly, or could that core result be down? And then for the EBT percent target in terms of the the growth and pricing actions. Is there a mixed benefit in there as well that's helping to drive that? Just want to understand sort of the dynamics there.
spk11: Thanks. Yeah. If you take IFS out, certainly earnings for supply chain are still up in a meaningful way. You think about it, supply chain's earnings this year as a percent of revenue, operating revenue, were below our target. There was certainly some write-off we had to do, write-down we had to do for a customer. Plus, there were some challenges in the year. We feel like this year, we are certainly heading into this year with a much better profile and portfolio and feel confident that that core earnings for the earnings leverage for our supply chain business will get back to the target range. Plus, you have the benefit of the acquisition. Steve, is there anything else that you want to add there?
spk08: Yeah, Allison, I think you were asking, too, about the top line growth. If you take IFS out organically, we're still going to grow right around 4% or 5% in the base business in the year.
spk13: Got it. And then one quick thing. I don't know if I missed this. The working capital build at the end of the year, could you walk through the dynamics of that?
spk06: John? Yeah, so, Allison, the working capital movements you saw there was a little bit of a drag at the end of the year. We did see... our receivables balance move up from what we typically see. And then with the acquisition we made from IFS, that was a little bit of a drag as well on the working capital.
spk14: Got it. Thank you. We'll go next to Justin Long with Stevens.
spk01: Thanks, and good morning. I think you just gave the number for organic growth for the supply chain segment, but I was curious if you could provide that same forecast for dedicated, just given the noise with the acquisitions, and maybe comment a little bit more broadly on what you're seeing in the dedicated pipeline and from a competitive standpoint. Are you still seeing opportunities to deploy capital in dedicated at an attractive return, or Is that tougher to do right now, just given where we are in the cycle?
spk11: Yeah, I would tell you, excluding the acquisition, dedicated is relatively flat. I think given, especially, that's the way we planned it out, especially given we had a lot of effort to integrate this acquisition this year. And the market, we expect to continue to be somewhat soft, at least through the middle of the year. We start signing stuff in the back half of the year, that will more benefit 2025. But I'll let Steve give you some additional color.
spk08: I think from a pipeline standpoint, we're down at the end of the year versus last year, single digits. Customers are continuing to delay decisions. Typically, it's about a six-month decision. It's now protracted out to about a nine-month. You've got some timing issues there. Deal size is slightly down, but we're focused on our marketing efforts. Our sales team is refocused on expanding our book of business across customers and many other initiatives that we've got out there. So, as Robert said, I expect the first year to be kind of a slow part, and then as the market bounces back in the back half, then pipelines should increase.
spk15: Understood. Thanks for the time. Thanks, Justin.
spk02: At this time, there are no additional questions. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.
spk11: Okay. Well, thanks, everyone, for your interest. Listen, I certainly am proud of the performance in 23 and excited about our outlook for 2024. We've been talking about this transformation that we've done through the balanced growth strategy with higher highs and higher lows. I think you're seeing now three consecutive years of us being able to deliver on that. As we continue to grow the contractual earnings of the company, you're going to have the ups and downs of rental and used vehicle sales, but each year that contractual earnings number is going to continue to, we expect, and we certainly are focused on continuing to grow that number and certainly within the ranges of our return on equity targets that we've outlined. So we feel very good about where we're at in the execution and excited about what we're going to deliver this year. So thank you all for your interest and look forward to seeing you soon.
spk02: This does conclude today's conference. We thank you for your participation.
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