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Ryder System Inc (NYSE:R)
Q4 2021 Earnings Call
Feb 11, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. And welcome to the Ryder Systems Fourth Quarter 2020 Earnings Release Conference Call. [Operator Instructions]

I would now like to introduce Mr. Bob Brunn, Senior Vice President, Investor Relations, Corporate Strategy and New Product Strategy for Ryder. Mr. Brunn, you may begin.

Bob Brunn -- Vice President, Senior Vice President Investor Relations, Corporate Strategy and New Product Strateg

Thanks very much. Good morning, and welcome to Ryder's Fourth Quarter 2020 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 Scott Parker, Executive Vice President and Chief Financial Officer. Additionally, John Diez, 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.

At this time, I'll turn the call over to Robert.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Good morning, everyone, and thanks for joining us. On our call this morning, we'll provide an overview of 2020 and review our fourth quarter results. We'll then turn our -- we'll then discuss our outlook for 2021 and review the progress we're making on actions to achieve our ROE targets. Following our prepared remarks, we'll open the call for questions. With that, let's turn to an overview of 2020.

We're encouraged to see economic and freight conditions continue to improve, which is benefiting all areas of our business. Market awareness of the importance of supply chain reliability has increased as a result of the pandemic. We believe that accelerating trends in the areas such as e-commerce fulfillment, last mile delivery of big and bulky goods and onshoring and nearshoring will continue to support growth opportunities, especially in our supply chain and dedicated businesses.

We made important progress on our actions to achieve target returns and expect to continue -- that to continue in 2021. Despite the numerous challenges faced in 2020, we remain focused on investing in innovative customer solutions and branding that support our long-term strategic objectives. In the second quarter, we launched RyderShare, our freight visibility and collaboration platform and are encouraged by the traction we've already seen with nearly two million shipments tracked to date with supply chain and dedicated customers.

In the third quarter, we launched a brand awareness campaign communicating Ryder's broad range of logistics capabilities, which has resulted in an increase in sales leads and website activity. We also launched RyderVentures, our corporate venture capital fund focused on investing in disruptive technologies that is intended to help bring new and innovative products to our customers.

Full year 2020 earnings were negatively impacted by the depreciation from prior residual value estimate changes in COVID-19. These headwinds were partially offset by higher lease results and lower maintenance costs. The depreciation impact is expected to decline going forward and vehicle residual value estimates are set at or near historic lows. Supply chain automotive activity was impacted by COVID-19, but has recovered.

Rental and used vehicle sales were also impacted and continue to improve. During 2020, we generated record free cash flow of $1.6 billion due to lower capital spending, and our leverage was reduced to within our target range as of year-end. While 2020 presented unprecedented challenges, I am extremely proud of the many ways in which the Ryder team supported our customers and our community safely and efficiently. Although we still have work ahead of us, I'm confident that Ryder is well positioned for 2021.

At this point, I'll turn it over to Scott to discuss fourth quarter results and key trends that we saw in each of our business segments.

Scott Parker -- Executive Vice President and Chief Financial Officer

Thanks, Robert. Total company results for the fourth quarter on page five. Operating revenue of $1.8 billion in the fourth quarter was in line with the prior year as higher revenue and supply chain was offset by lower revenue in state management and dedicated. Comparable earnings per share from continuing operations was $0.83 per share in the fourth quarter as compared to a loss of $0.01 in the prior year.

Higher earnings reflect improved vehicle -- used vehicle sales results and a declining depreciation expense impact related to prior residual value estimate changes. Improved lease and rental results also contributed to higher earnings. Adjusted ROE for the trailing 12-month period reflects lower earnings, mainly due to depreciation expense related to prior residual value estimate changes and COVID impacts. Record free cash flow in 2020 reflects lower capital spending and improved working capital management.

Turning to FMS results on page six. Fleet Management Solutions operating revenue decreased by 3%, primarily due to lower rental revenue, partially offset by higher lease revenue. Rental revenue declined 7%, reflecting lower demand, partially offset by a 6% increase in pricing. ChoiceLease revenue increased 1%, primarily due to 4% higher pricing on lease vehicles, partially offset by the impact of a lower active fleet due to reduced sales and renewal activity.

FMS realized pre-tax earnings of $60 million, which includes $86 million of depreciation expense impact related to the prior residual value estimate changes, net of realized gains on the sale of used vehicles. This impact is lower than the prior year, resulting in a year-over-year earnings benefit of $62 million. Included -- including this benefit, total FMS pre-tax earnings improved by $141 million.

Results also benefited from higher lease performance, reflecting lower insurance costs from the discontinuance of our lease liability insurance extension program and higher pricing. Rental results benefited from lower maintenance costs, including benefits from our cost savings initiative and earlier actions taken to align the fleet with lower demand due to COVID and higher pricing. Utilization on the power fleet was 79% in the fourth quarter, above the prior year of 76% on a 16% smaller fleet.

Utilization improved throughout the quarter as we saw incremental demand. FMS EBT as a percent of operating revenue for the fourth quarter was 5%. For full year 2020, it was negative 3.1%, Below the company's long-term target of high single digits primarily reflecting depreciation expense from prior residual value estimate changes. Page seven highlights global used vehicle sales results for the quarter.

We're encouraged by the continued improvement in the used vehicle market conditions with double-digit price increases for both tractors and trucks. Globally, year-over-year proceeds were up 15% for tractors and 22% for trucks. Sequentially, tractor proceeds were up 13%, and truck proceeds were up 16% versus the third quarter. Higher sales proceeds primarily reflect improved market pricing, and to a lesser extent, a higher mix of vehicles sold through our retail channels.

On the second quarter call, we provided the sensitivity, noting that a 10% price increase for trucks and a 30% price increase for tractors in the U.S. is needed by 2022 in order to maintain our current policy depreciation residual estimates. Since the second quarter, U.S. truck proceeds were up 20% and tractor proceeds were up 24%. Although these increases are not age or mix adjusted, they are generally indicative of pricing improvements that have occurred since the second quarter of 2020.

As such, based on these improvements, current truck residual values has exceeded levels that would not require additional policy residual value adjustments and our current tractor values are approaching those levels. During the quarter, we sold 7,000 used vehicles, up 17% from the prior year, reflecting improved market conditions and investments that expanded our retail sales capacity. These vehicle for inventories held for sale was 7,700 vehicles at quarter end and is squarely within our target range of 7,000 to 9,000 vehicles. Inventory was down 1,700 vehicles from the prior year and down 3,000 vehicles sequentially.

Turning to supply chain on page eight. Operating revenue versus the prior year increased 8%, primarily due to new business, higher pricing and increased volumes. Growth was driven by the consumer packaged goods, retail and automotive sectors. SCS pre-tax earnings increased 5%, reflecting higher pricing and new business, partially offset by favorable insurance claims development in the prior year and higher compensation-related costs. SCS EBT as a percent of operating revenue was 6.8% for the quarter. It was 8.6% for the full year, in line with our long-term target of high single digits.

Moving to Dedicated on page nine. Operating revenue versus the prior year was down 4%, reflecting the impact of lower contractual sales in late 2019 and early 2020. The DTS earnings before tax decreased 16% due to favorable prior year insurance claims development, partially offset by improved higher operating performance. DTS EBT as a percent of operating revenue was 6.6% for the quarter. It was 7.9% for the full year, in line with our high single-digit target.

I'll turn the call back over to Robert to discuss our outlook for 2021.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Thanks, Scott. As a reminder, page 10 highlights our primary long-term financial target of 15% ROE over the cycle. The segment operating revenue growth and pre-tax earnings goals we previously outlined and that are shown here are key components to achieving this target. As we mentioned before, reaching our adjusted ROE of 11% to match our cost of equity is just an interim target. On page 11, we've outlined some key assumptions for our 2021 outlook.

As visibility has improved from last year, we thought it was an appropriate time to reinstate financial guidance, albeit with somewhat wider ranges than in the past due to lingering uncertainty regarding COVID and the overall economy. Our 2021 forecast is based on our assumption of a moderate macroeconomic growth environment for the year. For the full year, we're expecting mid single-digit operating revenue growth for the total company.

SCS and DTS are expected to grow by high single digits, in line with their long-term targets. FMS operating revenue growth is expected to be near the lower end of its mid-single-digit target due to lower lease sales. We expect the full year tax rate to be in its normal range of the high 20s, assuming the current tax policy. In FMS, the depreciation impact from prior residual value estimate changes is expected to continue to decline, resulting in year-over-year earnings benefit of approximately $220 million for the full year of 2021, $50 million in the first quarter of 2021 and $100 million in the full year of 2022.

These benefits do not include any potential impact from gains or losses on sale or valuation adjustments. Rental revenue, used vehicle sales results and lease sales activity are all expected to be higher in 2021. In SCS, we expect higher contractual sales activity and pre-tax earnings as a percent of operating revenue to remain in the high single-digit target range, driven by improved operating performance, partially offset by increased strategic investments. DTS contractual sales activity is also expected to be higher than the prior year.

However, pre-tax earnings as a percent of operating revenue is expected to be slightly below the high single-digit target range as increased strategic investments offset the benefits of growth. Turning to page 12. As we laid out in late 2019, we continue to execute on our capital allocation strategy to achieve our long-term ROE target of 15% and generate positive free cash flow over the cycle. We're focused on accelerating growth in our higher ROE supply chain and dedicated businesses, with moderate growth in our capital-intensive FMS business.

We remain committed to our dividend, subject to Board approval, and plan to continue to reduce leverage to improve balance sheet flexibility for strategic opportunities and/or future share buybacks. We also plan to continue to invest in capabilities that will provide long-term revenue and earnings growth opportunities for Ryder and leverage disruptive technologies in our industry. These capabilities may develop organically through acquisitions or via strategic partnerships and investments.

I'll turn the call back over to Scott to discuss capital spending and cash flow.

Scott Parker -- Executive Vice President and Chief Financial Officer

Thanks, Robert. Turning to slide 13. Full year gross capital expenditures, shown in the chart at the bottom of the page, are expected to be between $2 billion and $2.3 billion in 2021, up from $1.1 billion last year. This increase reflects higher investments in the lease and rental fleets following the year in 2020, where spending was well below normalized replacement levels primarily due to COVID. In 2021, lease capital expenditures are expected to be between $1.4 billion and $1.6 billion, up from around $850 million in 2020.

Lease sales activity is forecasted to improve as a better economic environment resulting in increased capital spending. However, a modest decline in lease fleet is still expected due to low sales activity in late 2020 and early 2021. Forecasted lease spending this year is in line with the normalized replacement spending of about $1.3 billion to $1.4 billion, as shown by the dotted line on the chart. Rental capital expenditures are expected to be between $500 million and $600 million, up significantly from $85 million last year.

Approximately $250 million will be used to grow the rental fleet by approximately 10% in order to capture increased demand expected from strong e-commerce and freight market activity. The remaining investment will be used to refresh the fleet. As shown on the chart, forecasted rental capex spending in 2021 is above the normalized level of rental replacement of $450 million, following a well below replacement spending last year.

Turning to slide 14. 2021 free cash flow is expected at $400 million to $700 million and reflects our strategy to balance growth in the capital-intensive FMS business with generating free cash flow over the cycle. 2021 forecasted free cash flow is below the record level of last year under COVID conditions but is well above historical levels. Balance sheet leverage this year is expected to remain within our target.

Importantly, we expect to approach our interim ROE target of 11% this year, driven primarily by the declining depreciation impact from prior residual value estimate changes. Rental demand recovery and initiatives, including maintenance cost savings, are also expected to contribute to higher returns. Comparable EBITDA increased in 2020 reflecting contractual growth and improved operating performance. We expect comparable EBITDA to continue to increase in 2021.

I'll turn the call back over to Robert to discuss our strategic initiatives.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Slide 15 highlights some of the key strategic initiatives and investments in technology that we expect will enhance the customer experience and provide long-term revenue and earnings growth. We're continuing to expand the capabilities of our visibility and collaborative logistics platform, RyderShare. Launched in the second quarter of last year, RyderShare offers deeper capabilities in our competitors' solutions and is translating to efficiency gains and improved customer experience.

In addition, RyderShare provides us with a strategic advantage that is enabling us to win more business and larger deals. We're continuing to leverage our e-commerce capability by utilizing strategically located e-fulfillment sites and Last Mile facilities capable of reaching 99% of the U.S. consumer in two days or less. Additional planned investments include enhancements of order management and fulfillment software. We believe these investments will position us well to leverage trends toward increased e-commerce activity.

We're encouraged by the continued profitable performance of Ryder Last Mile, which provides home delivery and white glove installation for everything from furniture to large appliances. We realized the leverage in Ryder's Last Mile network and delivered returns last year above our overall target for supply chain solutions. We launched an exciting brand awareness campaign in the third quarter that highlights Ryder's broad range of logistics capabilities.

We're encouraged by the increase in sales leads and traffic to ryder.com following the campaign, which will continue to run in 2021. We're continuing to expand our retail and used vehicle sales capacity. We increased the number of retail sales locations by 25% and have an additional 5% increase planned for 2021. In addition to physical locations, we're planning -- we're also expanding our online sales capabilities with investments in technology and sales headcount.

We're continuing to invest in our multiyear maintenance cost savings initiative, which has already generated annualized savings of $50 million, with an additional $30 million forecast for 2021. Included in this initiative is enhanced shop workflow and productivity, which is expected to lower maintenance costs and improve the customer experience. Turning now to our EPS port outlook on page 16. We're forecasting four year comparable EPS of $4.15 to $4.65, well above a loss of $0.27 in the prior year.

The key drivers of the earnings improvement are depreciation and used vehicle sales tailwinds, improved rental demand and contractual growth. We're also providing a first quarter comparable EPS forecast of $0.50 to $0.60, significantly above the prior year loss of $1.38. Turning to page 17. In support of our expectation to approach our 11% interim ROE target in 2021, I'll provide you with an update on our actions to increase returns.

As shown in the chart, we expect to make continued progress toward our long-term adjusted ROE target as we move past higher levels of depreciation impact related to prior residual value estimate changes. The declining depreciation impact was a key contributor to the improvement in ROE since the second quarter of last year. In addition, continued cyclical recovery and rental demand and utilization is expected to provide earnings and returns benefits.

The remaining improvement needed to reach our ROE target is expected to come primarily from initiatives that include lease pricing increases that are more targeted to certain applications and customer segments; cost actions, including our multiyear maintenance cost savings initiative; and accelerated growth in our supply chain and dedicated businesses. Slide 18 and 19 highlight the progress we're making on the five key areas I just outlined. Improved used vehicle market conditions are expected to benefit used vehicle sales performance and returns in 2021.

We're continuing to expand our retail and used vehicle sales capacity through the combination of digital investments and physical locations, as noted earlier. In rental, we've aligned our fleet size with changed market conditions, and we're pleased to see higher year-over-year utilization in the fourth quarter versus the prior year. We're now planning to increase the size of our rental fleet to capture higher expected demand, driven by a strong e-commerce and freight environment.

Full year 2021 rental pricing and utilization are expected to improve versus the prior year. In FMS, results continue to benefit from our lease pricing initiatives. Revenue on new lease vehicles increased year-over-year by mid-single digits, reflecting these pricing actions. We're also using data analytics to further refine portfolio pricing optimization and capital allocation decisions.

Turning to slide 19. In 2020, we delivered $30 million in annual savings, as expected from our multiyear maintenance cost savings initiative, further contributing to higher returns on lease and rental vehicles. Program to date savings are above $50 million, and we expect to achieve an additional $30 million in savings in 2021. Returns are also benefiting from the discontinuance of our lease liability insurance extension program last year. We're investing in strategic initiatives to accelerate growth in our supply chain and dedicated businesses.

These include our brand awareness campaign and continued investments in RyderShare in our e-commerce fulfillment solutions. We continue to see strong trends that support logistics and transportation outsourcing and believe we're well positioned to leverage these compelling opportunities.

That concludes our prepared remarks this morning. Before we go on to questions, please note that we expect to file the 10-K later next week. We have a lot of material 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 to open up the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we'll go ahead and take our first question from Stephanie Benjamin from Truist. Please go ahead.

Stephanie Benjamin -- Truist -- Analyst

Hi, good afternoon everybody.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Hi, Stephanie.

Stephanie Benjamin -- Truist -- Analyst

Robert, on prior calls, you kind of called out a focus to moderate lease growth this year. Just given the acceleration in the freight environment, has this focus changed at all? Or I guess, said another way, how are you thinking about prioritizing new lease growth or lease renewals and pricing, I guess, particularly in relation to the guidance you've laid out in the FMS segment for this year?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes, Stephanie, that's a good question. We're -- as we mentioned, beginning in 2019, we really talked about changing our capital allocation strategy and really focusing on accelerating the growth in the supply chain and dedicated business and moderating the growth in our more asset-intensive leasing business.

So as we -- as part of doing that is we've also been putting through some price increases in our lease portfolio, which we're beginning to really see the benefits of that. So as we go into next year, we expect to continue to do that maybe more surgically than we did over the last couple of years. So with that, I expect that there will be -- we'll start to eventually see growth in the lease portfolio, but probably more toward the tail end of the year sequentially.

And then we're going to continue to really try to make sure that we're getting the appropriate returns on that business. So I would say growth -- we're still going to have growth, but just probably won't see that until the tail end of next year -- I'm sorry, of this year, the tail end of 2021.

Stephanie Benjamin -- Truist -- Analyst

Got it. Thank you so much.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Thank you, Stephanie.

Operator

[Operator Instructions] And we'll go ahead and take our next question from Scott Group from Wolfe Research. Please go ahead.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Good morning guys.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Good morning, Scott.

Scott Group -- Wolfe Research -- Analyst

So can you just share with us what the assumption is for gains on sales this year? And then can you talk about any impact you're seeing on the supply chain side from some of these auto issues? And if this is spilling over into your ability to get trucks this year?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Sure. Well, the assumption around gains of sale, we didn't -- as you -- those who've been following the company a while, we didn't give a waterfall this year just because all the different things that are going on. But as it relates to gain on sale -- if you just think about the gains that we had in the UBS net that we had in the fourth quarter, which was about $18 million, that's a pretty reasonable run rate going forward.

I think for this year, we'll probably be a little bit below that run rate in 2021, primarily because of volume. So even though we expect price increases, which would help these are going to have less bonds just fewer units to sell. So overall, slightly below that run rate. And then around, oh, around the semiconductor issue in auto.

We have built in -- we've had a little bit of an impact from that. I wouldn't say it's a major impact. We've built some of that into the forecast. And clearly, with the range that we have, we think we've got a pretty good handle on it. But Steve, I don't know if you want to add anything on that?

J. Steven Sensing -- President, Global Supply Chain Solutions

Robert, I would just say we're working with each one of our OEMS, a very diverse customer base. And right now, we're just taking it really week-to-week. But I think it's been, as Robert said, minimal impact to date.

Scott Group -- Wolfe Research -- Analyst

And just to be clear, you're talking minimal impact in terms of your supply chain auto business or minimal impact in terms of your ability to start getting trucks?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

That was on the supply chain impact. On their ability to get trucks, we haven't had a big impact yet. We're managing through that. It would be primarily probably on the rental side that we would feel it. But we also have some flexibility of when we sell our rental trucks to be able to accommodate for that. So John, I don't know if you want to add anything to that on what we're seeing.

John J. Diez -- President, Fleet Management Solutions

Yes. So as Robert stated, we haven't seen the impact yet. We are monitoring the situation. We do expect some level of disruption as we've seen a record ramp-up in vehicle manufacturing activity with that Class eight production moving up following the COVID decline. So we do expect some level of disruption as we get into the year. And certainly, that will elongate some of the lead times for some of the vehicles. But for now, we haven't seen any impact on the business as yet.

Scott Group -- Wolfe Research -- Analyst

Got it. Thank you, guys. I'll get back in queue.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Thanks, Scott. We'll go ahead and take our next question from Todd Fowler from KeyBanc Capital Markets. Please go ahead.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Great. Thank you and good morning. I appreciate the effort in putting out full year guidance. I know there's a lot of moving parts this year. But just thinking about the first quarter as a percent of the overall guidance for the full year, it seems a little bit lower than maybe where you've been from a seasonal standpoint.

So maybe you can talk about the seasonality that you're expecting throughout the year and kind of the cadence of earnings relative to where we're at in the first quarter? And then just on the free cash flow guidance, the $400 million to $700 million, is that the right way to think about a normalized range with what you're targeting from a capex standpoint going forward?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes. I guess the first thing, from a sequential standpoint, if you look at the first quarter, we are seeing the normal sequential seasonal, I would say, slowdowns that you get in the first quarter in transportation. So rental utilization sequentially down from the fourth. Lower gains on sale primarily due to volume, so less units that are sold in the first quarter versus the fourth.

Maintenance costs usually come up a little bit with the weather and then lower lease miles. So it's -- those are the big drivers really of the sequential decline. And I think -- but I think as you look at as a percentage of the total for the year, I think we're also getting improvement throughout the year, right? Rental picks were expecting to pick up seasonally, which would give us more earnings later in the year.

Plus, we're growing the rental fleet, as we mentioned, we're growing the rental fleet 10%. And in addition to that, remember, the benefits that we're getting from less depreciation due to the prior residual value estimate changes, those are also growing somewhat in the second half of the year. So that might be why you have a little bit less in the first quarter than in the prior periods. And then your second question around free cash flow.

I think -- remember, we got built in there a little bit of growth in rental, about $100 million. And then lease kind of at a replacement level from a capital standpoint. So if you were to really look at normalized only replacement capital, you're probably a little bit above that range that we're giving this year because that does have some growth in it. So you'd probably be up closer to that $700 million, $800 million free cash flow number. If it was just replacement capital.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Got it. Okay. I squeezed two in with 1, so I'll turn it over, but that was really helpful on both of those things, Robert.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

All right. Thank you, Todd.

Operator

We'll take our next question from Allison Poliniak from Wells Fargo. Please go ahead.

Allison Poliniak -- Wells Fargo -- Analyst

Hi, guys. Good morning. Just want to touch on the brand awareness campaign. I know it's early stages, but any color or commentary that you can provide? I know you talked about increased sales leads. But any color on either the quality, conversion rates relative to what you were anticipating at this point?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes. We're very pleased with what we're seeing so far. And this is a multi-channel type campaign. So you'll see us on some of the news networks, but a lot of it is also online. And we are seeing the pipeline really grow in terms of leads that we're getting. So I'll let Steve, because it's primarily around supply chain and dedicate, I'll let Steve give you a little bit more color on that, Steve?

J. Steven Sensing -- President, Global Supply Chain Solutions

Yes. Allison, we did see higher-than-expected leads generated from the campaign. Typically, these sales cycles in our business are anywhere from six to 18 months. So we have seen about a 50% uptick over our expectation in Q4 and expect that really to impact us in the back half of '21. So exciting interest really across the board, across dedicated and all of our supply chain solutions services as well.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

I guess it is a key part of our strategy is really accelerating growth in supply chain and dedicated. We want to get in that high single-digit range. And maybe one to even above that. And really, this is a key part of that, right, getting the campaign to get the awareness out there. And then the investments that we're making in RyderShare and e-fulfillment are other important pieces of it bit. But that's where we're putting our efforts and our money as we get into now 2021.

Allison Poliniak -- Wells Fargo -- Analyst

Great. Thanks for the color.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Thanks, Allison. We'll take our next question from Jordan Alliger from Goldman Sachs. Please go ahead.

Jordan Alliger -- Goldman Sachs -- Analyst

Yes. Hi, morning. A question for you on the DTS business. You mentioned some drag to margin relative to long-term targets due to, I guess, strategic investments. Presumably, I'm assuming that's technology and software investments that are impacting that. I'm just sort of wondering, a, is that the case? And then b, when we get past 2021, does that temper and your expectation is we move back toward that longer-term target range?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

I guess the quick answer is yes. The investments are in technology. So if you think about RyderShare is really shared between dedicated and supply chain, so they're paying for some of that. The investments in the ad campaign also being paid partially by dedicated. And then investments in really helping to accelerate the growth.

When we're coming from a year in dedicated, we didn't get the growth we wanted. So we're putting more investment in sales and marketing there, too. So yes, they are kind of to get us back up to the run rate we need to be where you can get our -- where we can see our margins come back within our target range.

Jordan Alliger -- Goldman Sachs -- Analyst

Thank you.

Operator

We'll go ahead and take our next question from Justin Long from Stephens. Please go ahead.

Justin Long -- Stephens -- Analyst

Thanks and good morning. So I was wondering if you could share your expectation for the ROC spread this year based on the guidance you just provided. And then on rental, circling back to that, you talked about the 10% growth in the fleet. But any color you can provide around what you're assuming for the progression of the freight market from here and how that could impact utilization?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Sure. Let me take the first one. As we mentioned on the call, our -- we're estimating this year if we're going to approach our 11% ROE, which, as you know, our target is to -- our interim target was 11%. We want to get to 15%. So we feel good about that. We feel good about the trajectory. As you know, a good portion of that is just the fall off of the additional depreciation from those units that where we changed the residual value and they're really taking a lot of depreciation here in the final couple of years.

So as those units roll off, we're getting a nice tailwind from that. As we go into next year, we talked about $220 million. So that's going to give us a big boost. In addition to that, rental, really improving as we go into next year. Utilization, we're seeing that. We're seeing the rental fleet gained some traction back and we're going to grow at 10%. So those are the two big contributors. Maintenance cost is another.

Our maintenance cost initiative, we're expecting another $30 million of maintenance cost savings, so we'll be well on our way to the full $100 million that we announced as a target a few years ago. By the time we're done with this year, we still got probably another $20 million left. So I think all of those things really contribute and get us to that 11%, and we feel good about that 11% is for the full year of 2021. So as we go into 2022, we're really at a good run rate as we enter 2022 with an additional $100 million, by the way, of tailwind as long as UBS holds up an additional $100 million of tailwind from depreciation.

Justin Long -- Stephens -- Analyst

Okay. And on the rental piece, just following up on that. Any more color you can provide on what you're assuming for the freight market and utilization this year?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Sure. Let me -- John, you want to take that one?

John J. Diez -- President, Fleet Management Solutions

Sure. So yes, on the rental side, just to provide a little bit of color, we do expect obviously the freight environment to continue to get stronger. We have seen in Q4 and into Q1 good activity on the e-commerce side. So we're planning for growth, specifically around those asset classes that are benefiting from those momentum and macro factors.

So you can expect utilization for the full year to get back in alignment with historical levels of mid- to high 70s for the rental fleet. You should expect year-over-year improvements in each of the first three quarters, now that we get past COVID and get back in alignment in Q4 as we saw at the end of 2020. So the fleet will start kicking in really in the second half of this year as the units arrive for growth, and we should be well positioned for Q4.

Justin Long -- Stephens -- Analyst

Very helpful. I appreciate the time.

John J. Diez -- President, Fleet Management Solutions

Thanks, Justin.

Operator

Our next question from Brian Ossenbeck from JPMorgan. Please go ahead.

Brian Ossenbeck -- JPMorgan -- Analyst

Hey, good morning. Thanks for taking the questions.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Good morning, Brian.

Brian Ossenbeck -- JPMorgan -- Analyst

So I guess two quick follow-up here on e-commerce. You can log it a little bit more about what that mix of the business is now. Clearly, you've got some rental activity that's probably positioned for that. Did you see an uptick in the fourth quarter where you had the huge volume from the peak season and then the follow-on into returns? Maybe you can just move in an update on the e-fulfillment strategy you guys have been working on? And then just had a quick clarification on UBS.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Okay. Let me try to hit the first one. On the e-commerce, it sounds like you were asking more around how it impacted our rental business, so I'll let John add a little color on that, but we -- yes, go ahead.

Brian Ossenbeck -- JPMorgan -- Analyst

Yes, the rental and then other things you're doing on fulfillment from the supply chain side or however else it's impacting in the portfolio.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Okay. So first, on the rental side, I think John will give you a little more comfort. We definitely have seen a big increase overall in activity from e-commerce in our rental business. So John, I'll let you talk a little bit about what we saw in the fourth quarter.

John J. Diez -- President, Fleet Management Solutions

Yes. We definitely saw a tremendous pickup year-over-year in those light-duty classes from e-commerce. We're talking significant double-digit increases year-on-year. Candidly, in some of those classes, we ran out of vehicles to meet the market demand. So we're investing in those classes going into next year. We've seen that continue. January performance is a little bit better than normal. And seasonally, we had planned for that. But we are seeing continued strong demand on that e-commerce side, specifically around our light-duty truck classes.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

So let me now let Steve talk a little bit about the e fulfillments. As you know, we have two components. We have the Ryder Last Mile, which is the big and bulky delivery, final mile delivery. And then we have our e-fulfillment network, which is more us providing e-fulfillment capabilities that go beyond just big and bulk you really handle parcel and anything else. Go ahead, Steve.

J. Steven Sensing -- President, Global Supply Chain Solutions

Yes. Thanks, Robert. Yes, as you look at those two businesses combined, the small package e-fulfillment and the big and bulky business, we are approaching about $400 million of gross revenue there, so up here over the last couple of years. Let me talk about small package first. So the e-fulfillment, we expanded. One of our locations now have over one million square feet. Customers in those locations year-over-year saw triple-digit increases in volumes.

And we're continuing to make investments in that business to really make it easier for our customers to do business with us by creating a proprietary order management system, and we'll be rolling that out here in the back half of the year. And then in big and bulky, again, a very strong quarter. As people continue to be comfortable with companies like us delivering products for their home versus going and picking it up in store.

And we are continuing to make investments there in our customer-facing self-service portal to make it easier to do business with us. So seeing strong growth there. Pipeline is strong as well and expect good returns here at the end of the year.

Brian Ossenbeck -- JPMorgan -- Analyst

Okay. Great. And then just a clarification on the tailwinds of the D&A as it rolls off. It looks like, just going back to the second quarter, is about $250 million tailwind for 2021 to get some down about $30 million. So a little bit of a decline. Can you just give us a sense as to how set those are at this point? And what are sort of the moving factors? I'm assuming it's the resuite size. So gains would have an impact there as well?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

That's a good question. Let me hand that over to Scott so he can clarify that for you.

Scott Parker -- Executive Vice President and Chief Financial Officer

Brian, just to clarify back to the chart that we did in the second quarter, the total was $520 million. Of that, there was $30 million that we had taken charges in the first and second quarter for valuation allowances of $30 million. So when we get the $220 million change year-over-year, that's really for policy and accelerated. In the second half of 2020, between the third and fourth quarter, we had $13 million of gains in the third quarter and $17 million, $18 million in the fourth quarter.

So if you look at the net for 2020 between the valuation allowance we took in the beginning of the year and the gains in the second half of the year, net-net, that was a 0. So really, we're still seeing the $220 million benefit from policy and accelerated. Plus the piece that Robert mentioned about kind of expectations for gains going forward in 2021.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

So that turns -- the $220 million then turns into a $100 million in 2022. So you get $100 million benefit in 2022, assuming the UBS environment stays as it is.

Brian Ossenbeck -- JPMorgan -- Analyst

Okay. And that's the primary factor, whether or not that could go up or down as that's the truck price, obviously.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Correct. Okay.

Brian Ossenbeck -- JPMorgan -- Analyst

Okay. Thank you for that. I appreciate it.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

All right, Brian. Thank you.

Operator

And we'll go ahead and take our next question from David Ross from Stifel. Please go ahead.

David Ross -- Stifel -- Analyst

Yes. Good morning, gentlemen.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Good morning, David.

David Ross -- Stifel -- Analyst

The M&A environment, you guys have been growing a lot organically recently, and M&A has been a little bit on pause. Now that things are smoothen out from a financial standpoint and trends seem to go in the right direction, how do you see Ryder in terms of acquisitive growth over the next couple of years?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes. David, yes, that's a good question. We -- that's one of the reasons we're happy to be back within our target range for our leverage because I think that opens up our ability to do some more acquisitions here over the -- in the future. So as you know, we're continuing to -- we continue to look for opportunities to expand our e-commerce capabilities.

So whether that's new capabilities around e-commerce or increased density maybe in certain markets and we get more leverage. We're looking at supply chain verticals, maybe some verticals that we're not in today that we might be looking out for, new products and services that we can offer our customers and also, obviously, we continue to look at maybe even some roll-ups of FMS businesses.

So good news is that as we go forward, I think we have more capacity to do some acquisitions. I don't expect it to be the main driver of our strategy. We -- I still think the best way to grow is organically. We're going to continue to look for that. But where we see opportunities that allow us to either pick up new capabilities or enter new markets, we're going to look at those.

David Ross -- Stifel -- Analyst

And then just a quick update on Ryder Mexico and the growth opportunities down there?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Ryder Mexico continues to be a big opportunity. First of all, it's a very well-performing operation and a good opportunity for us, especially as we get more nearshoring opportunity. So I'll let Steve give you an update on that. But I mean, that's the big story there is that it operates very well, good returns. And we're seeing continued growth opportunities there with multinationals that are continuing to open up in Mexico. Obviously, now with COVID, it's been a little bit slower. But Steve, is there anything else we need to add to that?

J. Steven Sensing -- President, Global Supply Chain Solutions

No. I think just as you said, the majority of the growth there typically feeds into the U.S., right, in support of a lot of OEMs here. So good, solid business, great performing business for us and continue to focus on that.

David Ross -- Stifel -- Analyst

Make sense. Thank you.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Thanks, David.

Operator

Take our next question from Scott Group from Wolfe Research. Please go ahead.

Scott Group -- Wolfe Research -- Analyst

Hey. Thanks for the follow-up guys. So I want to ask on the residual side. How much you think used prices would need to raise -- rise from current levels to think about sort of reraising the policy assumptions? And then longer term, so for new trucks you're buying today, are you doing anything different with your residual assumptions given the potential, call it, by the end of the decade for things like electric or maybe even autonomous trucks do you think that impacts longer-term residuals for stuff you're buying today?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes. Well, a couple of things. I guess, the question around what would need to happen for -- you're saying for us to raise our policy residuals? Was that the question?

Scott Group -- Wolfe Research -- Analyst

Yes.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes. Given what we've been through, I don't see us jumping to do that quickly. I think what we're looking at -- we think our policy residuals are in a good place right now, especially where we're seeing the market. As we mentioned on the call, from the truck side, we're currently selling above those policy residuals. On the tractor side in the fourth quarter, we were still slightly below, but getting pretty close.

So we're in a pretty good spot in terms of getting there by -- we talk about mid-2022. So I think from that standpoint, I think those residuals are in a good place. The accelerated depreciation residuals are lower. We're still continuing to depreciate those vehicles. Those vehicles we're going to sell between now and 2022. We're continuing to depreciate those to lower levels.

That's just the trade-off between appreciation and gains, and we think it's prudent. And where we're at right now to continue with those levels the way they are, given the uncertainty that remains in the market. Scott, is there anything else that you wanted to add to that?

Scott Parker -- Executive Vice President and Chief Financial Officer

No, I think you're right. So I think on the policy side, it's something we continue to monitor and look at. But as you mentioned, we look at those factors. In the near term, we're kind of looking to kind of the near term. And then as we kind of see the consistency of the pricing and some stability in that pricing, then that would be factored into kind of our discussions around policy on a go-forward basis past 2022.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

And then your other question on the new units that were signing. Remember, our holding periods are six years, seven years. So I still think out in those time frames, we're still not in an environment where we're going to have massive adoption of -- especially on the heavier duty stuff of alternative fuel vehicles. But we are monitoring that closely, and we're making adjustments where appropriate, bringing them down further. But as you know, we've already lowered our residuals pretty significantly across all of our classes.

Scott Group -- Wolfe Research -- Analyst

Okay. Helpful. Thank you, guys.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Okay. Thank you, Scott.

Operator

We'll go ahead and take our final question from Brian Ossenbeck from JPMorgan. Please go ahead.

Brian Ossenbeck -- JPMorgan -- Analyst

Hey. Thank you for a follow-up. I just wanted to ask about the Ryder Ventures fund that you've launched last quarter, rather. So what was the -- I guess, what was the idea behind putting some capital behind there versus doing what you had before, maybe a little bit of internal development and partnerships. So what's been the reaction, I guess, from the free tax community? And is this something you put money to work with already? Or is it going to be a longer slower process?

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Yes, that's been an evolution for us. We started looking at a lot of these disruptive technologies back -- probably four years ago now. We first started -- we first started COO, our truck sharing app and a few of these other initiatives. And that's what we really started engaging with some of these start-ups that had -- that were developing this disruptive technology.

As we went through that, we realized, you know what, there's -- some of these companies where not only can they help us from a new product standpoint for our customers. But we're in a bit of a unique position to really be able to see which of these companies can add value to the market into our customer base. So as we went through that, we found there were certain companies that we would want to actually make some investment in and really have more of a stake as we bring them to our customer base.

So it has been really -- the announcement has been very well received and really has allowed us to see a lot more companies. We've got over 100 companies, I think, that post our announcement that have contacted us and want to talk to us about what they can -- what we can do together. So it's much more than just a venture, what I would say, a venture capital initiative. As you know, $50 million isn't going to change the world over -- we're talking about a five year period probably.

But it is a way for us to really engage with more opportunities with start ups. And then us help those start-ups really come to market as we have a pretty good understanding of how they fit into our customer base. So that's what's exciting about it. We did make our first investment for a company that works with owner operators.

The announcement went out yesterday by the company. We're excited about that. It was a small investment, but still it's an important opportunity for us to work with that company to help bring them to market. Company is called SmartHop, and we are working with them to help bring that service to more of our dedicated and supply chain customers.

Brian Ossenbeck -- JPMorgan -- Analyst

Okay. Great. I appreciate that. Thanks, Robert.

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Thank you.

Operator

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

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Okay. All right. Well, thank you, everyone. Good questions. Thank you for the questions. We're really pleased with kind of how we ended 2020 and excited about 2021. I think getting beginning to see light at the end of the tunnel with COVID and really seeing the overall freight environment and economy really continuing to move forward at a good clip.

We think it's a great time for us to continue to drive our business, pick up new customers and really prepare this company to continue to have a great leadership position in the market. So thank you all for your interest, and I look forward to talking to you guys soon at some of the conferences. [Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Bob Brunn -- Vice President, Senior Vice President Investor Relations, Corporate Strategy and New Product Strateg

Robert E. Sanchez -- Chair of the Board and Chief Executive Officer

Scott Parker -- Executive Vice President and Chief Financial Officer

J. Steven Sensing -- President, Global Supply Chain Solutions

John J. Diez -- President, Fleet Management Solutions

Stephanie Benjamin -- Truist -- Analyst

Scott Group -- Wolfe Research -- Analyst

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

Justin Long -- Stephens -- Analyst

Brian Ossenbeck -- JPMorgan -- Analyst

David Ross -- Stifel -- Analyst

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