Ryder System, Inc. (R) Q1 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ryder System First Quarter 2022 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce 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 remain 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 multiyear 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 a 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 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 1 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 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 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 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 on target -- 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.

[Operator Instructions] 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 said, we are fundamentally changing the structure of our contracts. I think we shared that with you back late last year. So it is -- there is a process that we're going through, I'd say on the SCS side, we've got a couple of accounts that we're going to close up here in Q2. And on the Dedicated side, maybe a little larger percentage, about 15% of the business that we're still trying to negotiate through. So as John and Robert both said, we expect that to return in the second half.

[Operator Instructions] We'll now take our next question from Scott Group with Wolfe Research.

Can you help us with the $2 of higher earnings guidance for the year? Is there any way to put sort of some of the buckets? How much is from used, how much from rental, how much from anything else? And then just, Robert, bigger picture. When I look in the first quarter, 19% FMS pretax margins, that doesn't feel sustainable. Now negative margins in '19, '20 certainly aren't the right number either. I'm struggling a little bit, what do we think -- what should we think is a sort of the right normalized margin or range of margins for this business going forward?

Yes. Let me first address the first part of your question really around, how much of the raise is really used vehicle and rental versus the rest. I'll tell you, the majority of the raise for the full year, so the $2 increase, is driven by outperformance in used vehicle and rental. I mean we saw both of those really have an extremely strong first quarter. We're continuing to see that strength in April. So really, we haven't seen any signs of a slowdown. However, as part of our original plan and forecast and our current forecast, we are assuming that there will be some slowdown in the second half, some moderation, if you will, in both of those. It is very difficult to tell though when that's going to happen. I think everybody is trying to predict this cycle and it's not very easy to predict. So we'll see how it goes, but that's the assumption that we've made. If you think about earnings for the business, we talked about -- on the last call, we talked about overearning based on the forecast we had given over earning from rental and UVS of maybe $2.50 to $3. So you add the $2 to that now and you're probably looking at $4.50 to $5, which would still get you around that $9 if you just do the math of earnings -- comparable earnings for 2022. But obviously, that's not -- we don't expect that to happen in 2022. So if you move forward to '23 and '24, you have to add to that $9 the growth of the base business. So the growth we're expecting to see in lease, the growth in earnings we're expecting to see in our Supply Chain and Dedicated businesses, which will certainly offset and raise that $9 over time. So I think that's probably a way to look at the whole business. In terms of the margins, we've laid out the target for FMS as being low double-digit margin percent as really a good run rate level and long-term target. And clearly, we're way above that now because of what's happened with rental and UVS.

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

I think just starting with your FMS leasing business, pricing gains continue to be really strong. And I think you continue going forward with upcoming renewals, as you noted. But has the lack of truck -- of simply truck availability impacted almost near-term volumes, so to speak? And then is there an opportunity as we look forward, well, you'll still have some nice pricing on renewals but also there will be more vehicle availability where you'll see some nice, call it, volume gains as well. Would you look the benefit of both?

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, sure. Thanks, Robert. Stephanie, I think I mentioned this on the last call, but we are somewhat constrained by the amount of slots that we've been able to get. And because of that, the majority of our sales here in the first quarter, we're really with our existing customer base and focused our sales on the existing customer base, which, I guess, to some extent, would limit our growth in the short term. As John mentioned, though, by the end of the year, we do expect the lease fleet to be up about 4,000 units year-over-year, which should carry well into 2023. And we did finally see in Q1 sequentially an increase in the lease fleet. In North America, I want to be clear on that, but the North American lease fleet was actually up from Q4 to Q1, and that was the first time we had seen that. So we finally turn the corner there on the lease fleet growth. So we should expect to see some lease fleet growth, particularly in North America, as we move forward. And then as supply -- as you mentioned, as supply kind of opens up when we start to see more lease deliveries and the OEMs produce more, we should expect to get 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. Economy was booming and starting to slow down. Ryder was adding the fleet, some people question 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. I think, look, there's -- a lot of things are different than in 2018. Clearly, we're in a very robust environment, I would say, much more so even than we were in 2018, as it relates to rental and UVS. We have -- as we've come out of this, have certainly grown the lease -- the rental fleet, but have also made sure we don't overextend that growth, as we manage through it and make sure that we have avenues to redeploy equipment as rental, we expect at some point will slow down some. But I'll tell you what's different. A few things that are really important that are different. Number one is the lower residual values that we have on the books now. We've certainly taken residual values to much lower levels at the beginning of '19, which in a lot of ways, derisk the earnings of the company. We've also, as we talk about on each call, have increased the spread on our leases, which are producing better earnings for the company also. So we've raised the watermark, if you will, of earnings for the company that even in a slowdown, you are going to see some impact from maybe less rental margin, less gains. But overall, the overall earnings of the company are in a much different place than they were back in '18. So I think that's the biggest difference. Other than that, I'll tell you, Tom has a playbook that he uses to manage through rental ups and downs. And I know we've talked a little bit about it externally, but John -- I mean, Tom, if you want to give him a little color on some of the things that you're doing to help manage the ups and downs of the rental fleet through the cycle.

Yes, just being really thoughtful about -- I'll start with the lease fleet, but being very thoughtful about the term outs of our lease fleet, the length of the leases that we're selling today with a view towards when we expect the downward cycle to come or when the downward pressure on used truck pricing happens, to have fewer units coming through the system during that time frame. And then, of course, from a rental perspective, we always have the lever to redeploy equipment and move vehicles to lease applications. I think one of the things that may be different going into this cycle as well is the growth we're seeing in Supply Chain and Dedicated, and we can use those rental assets to move into Supply Chain and Dedicated to support their growth needs as opposed to purchasing new equipment. That's a good avenue for us, as we're seeing a strong growth there. And then, look, we've got thousands of customers that need vehicles. We always have some level of replacement that happens in the lease fleet, and we can fund those replacements with existing equipment versus buying new as well. So we run all those plays as we go through a downward cycle. And we believe as we go through the next one, whenever that is, we'll be able to run those plays and adjust the fleet so quickly.

That was a great answer, and that's my one question.

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

Just want to talk and sort of in line with the last question. SCS, could you maybe -- nice organic growth there. Could you talk to the pipeline of opportunities? Is it slowing? Or is it to continue to expand? And I guess, along with that, with the recessionary fears, how should we think of that business through cycles at this point? How should that perform for you? Just any thoughts there?

Yes. Well, let me just say that SCS had a record sales year last year, new contract signing, had another record first quarter -- this first quarter. So the pipeline is certainly continues to be very strong, as companies are really focused on their supply chains and how they can improve them and really right in our sweet spot of what we do. The other thing -- I'll hand it over to Steve in a second, but I do want to remind you that Supply Chain, Dedicated and lease are all contractual businesses, multiyear contracts. So they are much less prone to swings in the economy. Obviously, supply chain has been impacted this go around because of auto, but auto has a lot of pent-up demand now, which we should see an improvement over the next several years, as all those vehicles need to be built. And that will certainly benefit our business there. And certainly, as we work through some of the unprecedented labor issues that have been out there for drivers. But Steve, do you want to give a little more color on supply chain?

Yes, Robert, thank you. Allison, yes, the pipeline remains very, very strong. As Robert said, we had another record quarter here in Q1. We're going to relaunch our Ever better campaign from a TV perspective in late summer of this year. So we had great trends -- traction over the last couple of years with that and contributed a very large percentage to the pipeline. Yes, you can't undermine to the pent-up demand in automotive. We hope that, that's going to come back in a big way here in the back half of the year. Our continued investment -- if you look back to Slide 5, our continued investment in brokerage is a good on-ramp for us as well as our technology investments. RyderShare is a differentiator in the market and has contributed both on the SCS and the DTS side and then our continued investment in our e-commerce platform as well as our RyderView 2.0, which is the big and bulky last-mile customer-facing technology. So we believe we're leading the market in a number of technology areas, which are extremely important to 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. From a -- we are seeing some longer-term contracts here recently over the last year or so. We've got some 10-year contracts that have come through for us, which is -- we haven't seen that over the last four or five years, but typically a 3- to 5-year deal is what we're signing 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. If you think about the capital that we've invested in the units that are yet to come in, in rental and even forward looking a bit, but generally speaking, you'll see the growth of the rental fleet to be almost exclusively trucks and not tractors. So the tractor business really there to support any of our lease customers in the lease growth business. And what we've seen just recently in the first quarter is less reliance, we track kind of the business that we have in the various SIC codes across. And you can imagine, we do business with everybody in rental, but the reliance on transport is down year-over-year. We're seeing more in the food and beverage type industries and, of course, the support of e-commerce, which is almost exclusively trucks, and we expect that to continue as we move forward. And certainly, our capital being invested in rental is to support that growth in e-commerce.

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, it's still on pace for another record month. So we are not seeing yet any slowdown there. It doesn't mean that we won't see some at some point, possibly in the tractor side, but we haven't seen it. And then you're -- the second part of your question about what percentage of the uplift -- I'm sorry, of the over-earning, if you will, is UVS versus rental is -- John, I think it's 80%, the majority of it is UVS. John, do you want to -- you got the numbers there?

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.

Yes. All of that helps. And obviously, Robert, there's concerns about the contagion in the truckload market. And so I think that, that context is very helpful for how the rental fleet is positioned this cycle versus the prior cycle. I'll get back in the queue.

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, will. So Brian, let me hit the auto side. We're still experiencing part shortages. It started off as a semiconductor and now it's kind of spread through some other components. So as that kind of solidifies in the back half, we should get back to full run rates. So that isn't unknown. On the e-com side, let me take a minute just to kind of talk a little bit broader about the acquisition. The big thing is that -- this acquisition brought to us is that now gives us a port-to-door capability. So the Whiplash team, great operating team, great sales team. They exceeded sales expectations in Q1. But now we can go to customers, whether they're small, emerging brands all the way up to blue chip customers, provide port drayage services in the Northwest, L.A. area, New Jersey and Savannah. And then, again, the technology stack, we believe, is a differentiator as well as the parcel optimization capability. So exciting for us. I think the integration is going on track to our expectations and starting to see some cross-sell opportunities with the base business.

I'll just add to that a couple of points. One is the auto. So the second half, we're really looking at disruption still in Q3, I think, in general, across our customers and then Q4 maybe tailing off a little bit. But really a big driver of the improvement is our price and contract renegotiations that we still continue to feel very positive about. The other thing I would add is this e-com -- is, as Steve mentioned, we're really happy with the operations we've picked up. We do think that will become a meaningful part of the supply chain story over the next several years. And certainly be accretive and I think a big part of the growth.

Right. And is there anything else you think you need to add to fully flesh out that solution? Or is it pretty much all in place at this point and just looking to grow?

Yes. I would say the technology stack is where the team is focused right now. We always have to stay ahead of the competition there. So we've got a plan that we'll be investing here in the back half of the year, so that will kind of come out call it, early '23. And then new locations. We're going to add in the e-com space, we'll probably add a little over 1 million square feet. You may have seen the press release earlier this week. We opened up a new location in Columbus, Ohio. We've got a new location opening up in L.A. and then the one we talked about earlier this year in the south of Atlanta. So that's a continued investment across the board. Same thing on the big and bulky side. This year, we've already expanded two locations and added two new locations to their portfolio, and we've got about five more expansion/editions planned for the back half of the year. So space, you got to get closer to the customer, so you can speed up the delivery to the end consumer.

The other thing in terms of modeling out the growth for e-com, it is really a hot area right now. And I think -- if you think about where that business could be in the next several years, we are expecting that business to be a $1 billion business in -- whether it's three years or four years, but we do see that. At the growth rates that we expect, that's a $1 billion business for us.

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

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.

We'll take our next question from Bert Subin with Stifel.

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'm going to give you the easy answer, which is both. But I'll tell you, look, I think the way to look at it is the earnings power of the company has gone up. That is primarily driven by FMS initially, and I would say lease and all the maintenance -- it's not just lease, it's the maintenance cost initiatives that we put in place over the last number of years that have produced $100 million in savings, a lower annual cost, if you will. ZBB, our zero-based budgeting program that we put in place several years ago, also brought us significant reduction in annual cost. And then now I would tell you you're beginning to see the benefits of the Supply Chain and Dedicated growth. And that, I would tell you, the lifting of the base is maybe more FMS. The future growth is maybe more Supply Chain and Dedicated. That might be the best way to look at it.

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. No, that's just applying the $4.50 to $5 to this year's number. So next year, as we continue to get lease benefit, you're going to get an offset to that number, which will make the $9 higher. As we grow Supply Chain and Dedicated, they're going to generate more earnings, you're going to get a higher number. As we -- just catching the tail of the margin improvement in Supply Chain and Dedicated for next year, Supply Chain and Dedicated margins are going up significantly between the first and second half of the year. Next year, you're going to get the benefit of that also as that catches its tail. So all of that, I would say, is our offsets, if you will, to that takeaway, if you want to look at it that way, and would move that $9 up as we go 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?

Yes. Look, we have not given that level of detail. The level that we have given is -- and maybe, of course, you guys would do a little bit more math, but we've said that historically, we were getting 60 to 100 basis points spread. And we're now targeting 100 to 150 and getting about 150 basis point spread. So that difference in spread is really the ongoing benefit each year as you turn over 50% of the fleet, you're going to get that improvement in returns on the units that you're turning over, plus the better growth.

And then just last one. You said that, that number assumes $75 million to $100 million of gains. When I just look back '16 through '20, you guys were seeing losses on sales. What -- is that sort of because of changes in accounting, is that something that can happen again? Or is it very unlikely to happen again if used really starts to slow at some point?

Yes. Yes, Scott, that's the big difference, right? We've significantly lowered our residual value assumptions. So we are certainly -- we feel we are positioned in a way that it's very unlikely that we would see the need for losses -- to record losses or any type of additional depreciation. So that's what we're estimating that -- if you just think of -- if you just look at pricing where used truck pricing can go, even when you get to the trough levels, we still think we're pretty close -- or near the trough levels, we're still pretty close to that $75 million to $100 million. So that's why we've kind of given that level of an assumption when we came up with the $4.50 to $5.

So if used prices go back to where they were three years ago, you're still going to do $75 million to $100 million of gains?

If they get it, right around there, right around. I'll tell you, we have -- the way that we've set up because we talked about in the way we've established our residual values, we've also built in a downturn. So assuming there is a downturn to historically trough levels, right, the ones that happen once every 20 years, we would have less than $75 million. It'd probably be close to breakeven. But if you go to anything more normalized, you're in that $75 million to $100 million.

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.