Now, some background coverage of transportation for JP Morgan. Thank you all for being here in New York. We're going to kick off the transportation track of the Industrials Conference here with Ryder. Very happy to have John Diez here. He's the EVP and CFO. Also, Calene Candela is in the audience from Investor Relations. So John has a few slides that he's going to walk us through, and then we're going to jump right into Q&A. So with that, without further ado, let me kick it over to John.
All right.
Thanks for being here.
Thank you, Brian. Let me give you a quick recap on Ryder, and then certainly happy to take any questions. So for those of you that are not familiar with Ryder, Ryder is a $12 billion outsourcing transportation and logistics provider. We've been doing business for over 90 years, and we're organized around three segments. You'll see there in the bottom left, Fleet Management Solutions represents our leasing and rental business, where we support 250,000 vehicles in North America, providing both the leasing, maintenance, and other ancillary services for private fleets. Leasing are typically three or five to seven year contracts. Rental are usually short-term rentals in support of our customers' seasonal or surge capacity needs. That represents just over 40% of the business. Supply Chain represents another 40% of the business. That's a growing business for us.
We've grown it organically and through acquisitions, where we provide door-to-door logistics services, anything from transportation, warehousing, to final mile delivery to the end consumer. That supply chain business is really big in the automotive space, consumer packaged goods, supporting industrial manufacturing, as well as omnichannel retail. And then the last component of the business is our dedicated business. We just completed a significant acquisition there that represents nearly 20% of the overall revenue. That is a little bit different than most specialized dedicated, where we provide significant engineering support, safety services, and our drivers typically are doing some of the handling of the product on behalf of the customer. You'll see there we have a pretty diversified customer base supporting a wide array of industries, from food and beverage to automotive, housing, and business services.
So over the last five years, we've been working on what we call the balanced growth strategy. And the balanced growth strategy has three components. One was we set out to de-risk and optimize the model. From a de-risking perspective, what we tried to do is, if you look at our ChoiceLease product, we realized that we were taking on too much risk on the backend side of our disposal of used vehicles. And what we did was we reduced residual values priced into our customer leases to really ensure that we get the returns we're looking for over the life of the lease. So that was a journey that we started 5 years ago. We're substantially complete with that effort. We also looked at our portfolio of businesses. We exited the last piece of business that was outside of North America, which is our U.K. business.
It had been a lagging business from a returns perspective, and that was a business that we thought we were better off exiting than continuing to invest resources and effort into it. We did also look to enhance our returns. What that looks like is, from a ChoiceLease perspective, not only did we reduce residual values, but we also looked to enhance our returns. Typically, our leases, we would price them to anywhere from 60-90 basis points spread above our cost of capital. We targeted to enhance that from 60-90 to 100-150. The good thing is, we've been realizing the 150 spread. Today, we're about 80% complete with that effort of renewing leases at the higher returns, and we expect that to be substantially complete by the end of the year.
You'll see there that is contributing about $125 million annual benefit for the enterprise. We also looked at our vehicle maintenance costs. So we support the 250,000 vehicles I mentioned earlier across 760 facilities across North America. With that, we spent probably about $1.3 billion of maintenance costs each year, and we set out through a multi-year effort to reduce that cost by $100 million. We were able to successfully complete that effort last year through process redesign, better procurement practices, and that has contributed to the overall returns of the business. You'll see there the third component is driving long-term profitable growth. We looked to kind of diversify our business mix away from our asset-intensive business and grow really our asset-light supply chain dedicated business. That was back in 2018 about 40% of the overall business.
Today is nearly 60% with the acquisitions and the growth we've experienced in that space. Here's the tail of the tape of what we've been able to accomplish through the balanced growth strategy. You'll see there on the left where we were in 2018 at the height of the previous freight cycle, which was 2018, comparable EPS just under $6. Now, in a freight cycle downturn, we're nearly at $13 or $12.95. If you look at our return profile, we went from a business that was anywhere from 10%-15%, depending where you were in the cycle, to now where last year, we produced 19% return on equity, and typically, we're anywhere between 15%-23% on return on equity, depending on where we're at in the cycle.
You'll see there the composition of the business growing from $8 billion-$12 billion, with the majority of the business now in our asset-light supply chain dedicated space. You'll see down at the bottom, our profile of cash flow has improved significantly with the growth in the business. We went from $1.7 billion-$2.4 billion over the last five years. So if you look at 2024, where we're at, we're projecting the trough of the UVS, or used vehicle sales, and rental cycle. Our UVS and rental business usually lags the freight cycle, so we're usually about six months behind the freight cycle on the spot rate movements that you see in the truckload space. That's what we're calling for. The first half will be softer, and then we're expecting a second half recovery in 2024.
The comparable EPS will be down from 12.95 a year ago to the range of 11.50-12.50. What's important there, there's about $3 of headwind from both UVS and rental combined. We think as we get into 2025, obviously, that $3 of headwind will reverse. What we're really excited about is what's happening with our recurring revenues. 85% of the business is contractual, and those contractual product lines, lease, supply chain, and dedicated continue to grow and contribute to the overall earnings profile of the business. From a returns perspective, you'll see their return on equity in the mid-teens, 15-16.5. That's in a trough environment, which is above where we've been in prior peak levels from a business standpoint. And then free cash flow there, down a bit, primarily as we refresh our rental fleet ahead of the upturn.
There's quite a bit of capital that we're looking to deploy this year towards refreshment of that fleet. Obviously, as we look at the first half, if conditions don't improve, we could pull back on some of that capital spending. From a lease standpoint, those are our estimated capital expenditures. We'll probably spend this year on vehicles about $3 billion. A good portion of that is assigned to leases. If market conditions or customers do not sign up for new leases, then obviously, we won't spend the capital. So those are numbers that are estimates today that could obviously get adjusted depending on what market conditions do. And then lastly, I did want to just share with you, we are prepared for the cycle upturn. We expect the overall market to improve going into next year in the second half, and then clearly, we expect better things for 2025.
With that improvement, you should see a bounce back in both used vehicle sales performance and rental. Usually, when you see the freight market start to improve, you also see improved sales in both ChoiceLease and dedicated, which will drive higher contractual growth for us. We're also expecting activity to start picking up at the end of 2025 ahead of the 2027. And just technology change, that's a change that will impact private fleets with higher cost and potential for less reliability. Anytime you have a technology change, that usually creates demand on the front side of that change for the old technology. Then on the backside, we do expect following the technology change, you'll see elevated used vehicle pricing as we've seen that in prior cycles.
Then lastly, I'll mention here, omnichannel retail volumes have softened over the last 12 months as we've seen market conditions here in the U.S. soften a bit. We expect that to bounce back and be a big contributor for us as we get into 2025 and 2026. I think that's a very quick recap.
Okay. Great. Quick recap. Yeah. No, thanks, John, for getting us started there. So maybe if any questions in the audience get my attention, we'll get a mic too as we go through these. But let me just kick it off with one about the outlook. One thing we'll ask everybody this week is back half recovery. Everybody seems to have one in their outlook. And so I just wanted to hear a little bit more about what is in yours as you touched on it briefly there, but it sounds like you're expecting a little bit more help from the freight market. So maybe you can elaborate on sort of the assumptions that are built into your outlook in the back half.
Yeah. So our expectations for this year are really based on we finished last year with kind of what looks to be the bottom of the freight cycle. The spot rate market has been kind of moving sideways, and there's no indication just yet of whether we're going to get a recovery here quickly or if it's going to continue to slide. But all indications is we're bouncing along the bottom. So our business typically has a six-month lag, and what we're projecting is that to kind of play out. I would also highlight that for us, this is probably the longest downturn we've seen. A typical freight cycle will last no more than 18 months, and we're going to be going on two years now with this downward trend. So we think we're on the final stages of this cycle.
That's why we're calling for the second half recovery and how it impacts our business.
Okay. One of the things that stood out from the last quarter earnings call is on the first quarter, it seemed like we were all a little bit off in terms of where the seasonality was going to be. So maybe you can help just kind of walk through the seasonality of the business, if there's anything that we should be a little bit more mindful of, because I think that was a little bit of a concern when you look at annualizing that throughout the rest of the year. It seemed like there is, in fact, a big back half recovery. So maybe you could put a little more context around that.
Yeah. The way we look at the first quarter guidance was one of what was happening in the business sequentially. If you look at pre-COVID and what's transpired during COVID and thereafter, we have seen that pre-COVID, you usually get kind of a sequential downturn from Q4 into Q1, primarily driven by rental. That impacted us. That's typically about a 30% downturn from Q4 to Q1. But we also have the dynamic of what's happening in the used vehicle space. Used vehicle pricing, unlike the last couple of years, which has been during COVID, it was going up, then the last couple of years it's been sliding down. We do expect that to continue to slide. That added additional pressure to the first quarter guidance.
We are expecting second half recoveries in both those transactional product lines, which also makes the kind of the projections in the second half a little bit more robust.
Okay. Got it. So you mentioned the $3 headwind from UVS and rental. So I think one of the interesting things that Ryder's done is talk about the normalized or the core earnings. So I mean, because of the range for this year, are we all core now, or is there still another $3 that can come back when that sort of normalizes on those two items?
Yeah. So to give a little bit of a reference, so we had called for core earnings last year in 2023 to be about $11, which we delivered on that against our comparable EPS of $12.95. That had outsized used vehicle gains, and rental actually performed in line with what we would think a normalized cycle would look like. Now, as we look at 2024, that $12.95 is now the range of $11.50-$12.50. Those are normalized earnings. So as you look at the business, the health of the business, we are going up from $11 to $11.50-$12.50. Our range on that $11.50 side does contemplate if there isn't a second half recovery. That captures kind of the impact of continued softness in both rental and used vehicles. So if we do have a second half recovery, we should get closer to the $12.50.
If the recovery doesn't happen, it's in the bottom end of our range.
So when you look into it, it's a little early for 2025, but you have a business that allows you to see a lot further into these contracts. I think you said 85% is more or less contractual. So do you have good visibility into 2025? And that gives you a little bit more certainty in the back half, recognizing that there's a little bit of range in terms of what the freight economy does or not. So how much visibility do you have into 2025 already?
Yeah. So our visibility for 2025 is primarily attributed to our lease product line. If you look at delivery windows for trucks, those are out. If we place an order for a vehicle on behalf of our customer, those vehicles aren't getting delivered until almost a year out. So we have some visibility there on trucks. We do see that truck leasing activity continues to be strong for us. On the tractor side, that is a market primarily tied to the freight environment, which is a little bit softer. And that one, we've seen the OEMs are now delivering at traditional three to four months turnaround time on delivering new equipment. And that business, obviously, we'll see what the second half recovery looks like. That business should accelerate as we get into the second half.
What we are projecting is dedicated has been soft, as we've seen softness in the overall economy. Availability of drivers is much easier. So private fleets looking to outsource, it's not that compelling right now. But as the market starts to pick up in the second half and going into next year, we do expect our dedicated activity to pick up. And then supply chain, we continue to see good, healthy activity, I would say, in the industrial automotive side of the house. Retail has been a little bit softer, but that industrial automotive side, we do expect that to continue to remain fairly strong. We are seeing some activity on the nearshoring side with our Mexico operations, which should add a little bit of support for 2025 growth.
One other big thing that's going to be on the agenda for 2025 would be Cardinal Logistics. So I think it's a unique position for you to be able to comment on that, being the CFO and also having run dedicated for a while. So maybe you can just start at the big picture level and give us a sense of the background of the acquisition, what was attractive about it. I think they were former Ryder employees, if I'm not mistaken, so coming back home to some degree. But what made it a good fit here and now for Ryder?
Yeah. So Cardinal was a great fit. Cardinal was the number 7 provider in the dedicated space. With the combination of Ryder's dedicated business and Cardinal's, we're now a close second to the number 1 provider in the space. What was attractive for us was the ability to not only add scale and density, but they did a lot of their maintenance on the fleet with third-party providers. We thought that was an opportunity for us to create value for our shareholders through synergies. It added quite a bit of density in select markets that will give us the opportunity from a dedicated standpoint to double-utilize equipment and also utilize available driver capacity. And then most important for us was kind of the culture of the team. As you mentioned, the founders of Cardinal are former Ryder individuals, operate very much in line with how we operate our dedicated business.
That business is also geared towards the specialized side of the market, which we think is the more attractive and stickier part of dedicated. There's dedicated capacity where you're bumping docks and providing primarily transportation services to the retail side of the house. Their dedicated business was very specialized, supporting metals, construction, food distribution. And those are markets that we tend to enjoy good support and good retention levels from our customers. So overall, it was a great fit from both culturally and kind of the financial returns we expect from the business. It added about $1 billion to the top line, $800 million of operating revenue as we like to kind of portray the business. So it's a good-sized addition to the overall portfolio for Ryder.
So on the asset side, it sounds like they're maybe a little bit different, if I'm hearing correctly, in terms of the asset, what Ryder typically has. So how does that work in terms of integrating into the fleet and building density? Can you still do 2x the can you swap out the seats? Can you do the slip- seating even if you have metals versus working for CVS or Walgreens?
Yeah. So their delivery profile is short distances, usually around 200-300 miles, which lends itself for what we call day cab tractors, non-sleeper tractors. So we do have the ability that's very much in line with what we do in dedicated today. So that equipment profile is very much the same. The trailers may be a little bit different in that they do quite a bit of flatbed hauling, which doesn't lend itself to double-utilizing the equipment. And then clearly, with that shorter haul network, there's availability for utilizing drivers, double them up within a daily activity, which gives us good leverage points for the business.
Okay. So you can still use the drivers even though the trailing equipment's different. You can still double utilize that. Okay. So what does integration for a big asset look like?
Yeah. This one's a little bit different. So we've done a number of acquisitions here in the last four years. Primarily, they've been new capabilities that we've added on. This is the first one of this size where we're really integrating. So we've got similar operations, similar technologies, similar assets, if you will. So now we're really looking at, over the next year, spending time to integrate those businesses both from a technology platform, operational platform, to get alignment there and really maximize the synergies. As you saw in our release, we're not projecting any meaningful synergies in the first year in 2024. But then as you get into 2025, we do think that business should start scaling up and the returns on that business to get into the high single digits, which is the target for the overall dedicated business.
So you mentioned a couple of the synergies, the maintenance program. I think there's probably some upselling to dedicated potentially, or maybe it's more on the leasing side. But can you just walk through in a little bit more detail some of the synergies you're expecting with this?
So there's, I would call, three main components for the synergy play here. One is around maintenance. If you look at the overall fleet, it's about 3,000 power units, about 9,000 trailers, which we can provide through our maintenance programs on the fleet management side, provide a comprehensive maintenance program for them, save them money immediately, and improve their uptime, which will improve customer service. Secondly, the power units are primarily financed via operating leases with banks and financial institutions. As we turn over those leases, we're obviously going to be able to take advantage of our purchasing power on the front end and finance those at better rates than they can today, which will also contribute to the overall synergies and performance of the business.
Then I would say lastly is just integrating them into our dedicated model and creating those opportunities for leverage points both from an overhead perspective but more importantly, operationally. That will also contribute to the overall returns of the deal.
One of the—excuse me—topics that came up on the fourth-quarter call across just the whole industry was insurance. And obviously, it's not a favorable environment for a lot of carriers. So given just the scope and scale of Ryder, I don't think we've really heard too much in terms of detail or at least materiality that some other carriers have talked about. But how is this affecting your business and how are you controlling for that risk and sort of pricing it into these contracts?
Yeah. So the insurance side primarily impacts our dedicated business where we're obviously moving goods over the road. What we continue to do there is invest in technology to improve our overall safety performance. We've been very pleased with our safety performance. We do think we have a best-in-class safety record compared to other carriers out there. We have seen a rise in insurance premiums. I think what's differentiated us relative to some of the other carriers is we really have been operating and executing very well on the safety side. We haven't had some of these large claim events that other carriers have suffered from. So for us, it's continue to execute on our safety programs, continue to improve there, and continue to deliver on behalf of our customers.
If we do that and continue our great safety record, not only will that help us from a cost perspective, but it will help us grow the business from a dedicated perspective over time.
Maybe the last question on dedicated. It seems like at this point, customers are sort of paring down the size of their fleets, maybe not canceling contracts, but just paring down the size of the fleets, maybe not outsourcing as quickly. Do you have a sense in terms of where we are in that continuum? Is the market sort of troughing out? Are you seeing that pare down decelerate a little bit? Are you finding some stability? How does that look and also, I guess, compared to the pipeline of new activity?
Yeah. So we started seeing a significant pare down last year. And as Brian mentioned, not necessarily canceling contracts but eliminating excess capacity from their networks. And that really happened all through last year. We do expect this coming year things to continue to improve. So we think we're kind of troughing out. As you mentioned, we do expect this year to be a better year from a volume perspective and dedicated, especially as we get into the second half of the year with a pickup in activity. We do see our customers have pared back their inventories. So inventory levels are now starting to get to ideal levels. And hopefully, now they're going to need to add to their inventory, which will create demand momentum for our dedicated business.
That's where we see things playing out right now is we're kind of on the bottom end of that market. Then we should see things start to pick up here in 2024.
So in terms of just overall pricing and demand in the market, maybe from the lease side, excuse me, how would you characterize that? You mentioned the repricing program that's been going on for quite some time would be done by the end of the year. What are you seeing in lease and rental in terms of being able to get a reinvestible price in the market?
Yeah. So from a lease perspective, we primarily offer leases to private fleets. So many of the private fleets, we have a compelling value proposition, our ability to procure equipment, maintain that equipment, and then on the backside, realize higher residual values than they could do it themselves. It's still a compelling value for them to outsource to Ryder. We've seen that play out through our repricing of the portfolio, if you will, over the last couple of years. We haven't seen a slip there. We continue to grow the lease fleet and be able to command the pricing that we're looking for to get the returns. So that has been healthy. I would tell you right now where we are seeing pricing pressure beyond rental. So we have been increasing pricing on rental as well the last several years.
I think you are going to see a more muted movement in our pricing for rental in 2024. That's really a reflection of what we're seeing in the marketplace. There's still excess capacity out there where there's plenty of equipment available in the marketplace if you need a rental piece of equipment. That is one that we're watching carefully. Obviously, that may change as we get into the second half when we may see a lift in pricing activity in the second half. We're not calling for anything meaningful in that space this year.
When you look at the pricing of the evaluations of the underlying assets, you have those residual charts that we all flip to when they come out in the press release presentation, rather. But there is a little concern that we're approaching sort of the lower end of those assumptions. But as I understand it, you already have basically a downturn priced into the residuals. So maybe you can walk through what you expect in terms of gain and loss on UVS and then if there's anything to consider when it comes to maybe reassessing residuals overall.
Yeah. So several years back, we adjusted our residuals downward for both trucks and tractors. If you look at those charts, we are now on the long end of this extended freight cycle. And we're getting near kind of our residual peaks for both trucks and tractors. We do expect that to bottom out in the middle part of the year. We think we're adequately positioned from a residual value perspective today. Clearly, if the market continues to extend into next year, we'll look at that going into next year. But right now, if you look at where our residuals are at relative to the projections for this year, we should be fine. So our used vehicle gains have come down from two years ago from $400 million. We should be below our normalized used vehicle gains of $75 million-$100 million in 2024.
That's what we called for in the guidance. We're not expecting any losses in 2024. Clearly, we'll be below our $75 million-$100 million normalized level.
We have a few more minutes. I want to touch on SCS. You already talked a little bit about some of the demand trends you're seeing from those end markets. You also mentioned nearshoring in Mexico. I believe you just opened a new facility in Laredo. You've got a drayage area down there as well. Maybe you can talk about what you're seeing specifically on the border and the cross-border and how Ryder fits into that dynamic.
Yeah. So we're very proud of the work we've done here over the last 30 years in Mexico and supporting inbound manufacturing. So manufacturing in Mexico for consumption in the U.S. is really what we support. We started down there primarily supporting automotive companies. And today, we support a great number of industrial customers as well as CPG customers that move product from Mexico into the U.S. for consumption. What we do there is we support them not only from a warehousing standpoint but also from a transportation standpoint. So we provide cross-border services. We have all the certifications. And today, we do about 250,000 border crossings. We think that positions us well with what we continue to see, with more manufacturing moving from Asia to Mexico. We continue to see good demand signals there for our business, especially on the industrial side, for manufacturing activity and support.
We've added, as you mentioned, this new facility in Laredo. That facility, we expect, will provide great support. We'll look to continue to add facilities along the border in support of inbound production into the U.S. for consumption for the U.S. consumer. That continues to be healthy. I would say we're in the early part of that transition. These are long-term commitments that these companies make when they decide to build a manufacturing plant in Mexico. We're typically brought into those discussions later in the process. But we continue to work with our customer base and prospects to get in front of that earlier rather than later. That is a transition that we continue to see to pick up steam here in the last 18 months.
Maybe we'll close with one just on last mile and e-fulfillments, which has been another area within the portfolio that's grown pretty well. I think you got into that in 2018 with the purchase of MXD. So how has that been growing sort of in the post-COVID normalization? And where do you see that business size and scale-wise in the next couple of years?
Yeah. So the big and bulky last-mile delivery business that we bought into back in 2018, we see that long-term, that's a good business for us. We expect that to continue to grow. We did see the cycle where during the height of COVID, that business was growing exponentially. And then we've seen now post-COVID, that business kind of retrench a bit. So we have seen softness there. We are seeing softness across the whole retail sector, especially over the last 12 months. But we expect that longer term to really pick up and be a contributor for us as we continue to grow in the last-mile delivery space.
Okay. Well, unfortunately, we are out of time. But John, thank you very much for kicking us off here at the conference today. Really appreciate it.
All right. Thank you. Enjoy the rest of the conference.
Thank you.