The majority of our cyclical exposure resides within FMS in rental and used vehicle sales. Improved freight conditions should increase demand for these businesses. In rental, we intend to grow the fleet as we approach the cyclical upturn expected in the second half of 2024 to capture this incremental revenue and margin opportunity. In used vehicle sales, we continue to leverage our expanded retail sales network in order to maximize proceeds with the potential to generate used vehicle gains above normalized levels. An additional opportunity on the horizon for FMS is the potential for prebuy activity ahead of the 2027 EPA engine technology changes. The industry is generally expecting some level of pre-buy activity given the expected impact on upfront cost and maintenance cost implications.
Based on what we see today, prebuy activity could begin as soon as late 2025, as we have historically seen higher levels of fleet growth a couple of years ahead of the change. We also would expect used vehicle pricing to be supported by demand for the old emissions technology, increased engine complexity and cost generally favor the outsourcing decision, which would benefit lease sales activity. In dedicated, improved driver availability and lower recruiting and turnover costs benefited 2023 earnings but have been a headwind for new sales and revenue growth. As the freight cycle strengthens and the driver availability becomes more challenging, we expect to see incremental sales opportunities and improved revenue growth in DTS as private fleets seek solutions to address this pain point.
In supply chain, weaker volumes in our omnichannel retail vertical were a headwind to revenue and earnings during 2023. We continue to believe in the long-term growth prospects for our e-commerce fulfillment and last mile delivery of big and bulky goods and have expanded our footprint to support this business. We expect supply chain results to benefit as omnichannel volumes recover and the incremental footprint is leveraged. We’ve been pleased with the overall businesses outperformance during this down cycle and have appropriately positioned all 3 business segments to benefit from the cycle upturn. Turning to Page 21. Ryder is delivering value to our shareholders with more to come. Since implementing our balanced growth strategy, we have generated strong returns during each phase of the cycle.
We achieved higher highs during the 2022 up cycle and generated significantly higher returns during the 2023 down cycle relative to prior downturns. In 2024, we expect ROE to outperform prior cycles despite trough conditions in used vehicle sales and rental. We continue to see significant opportunity for profitable growth supported by secular trends, our operating expertise and ongoing momentum from our multiyear initiatives. We remain committed to investing in products, capabilities and technology that will deliver value to our customers and our shareholders. Before we go to questions, I’d like to remind everyone that we’re planning an Investor Day for June 13 in New York City. So please mark your calendars. We’re planning a half-day event that would include a leadership luncheon and a solution showcase where in-person attendees can learn more about the innovative technologies and services that are driving Ryder’s profitable growth.
More details will be forthcoming regarding the events and required registration. That concludes our prepared remarks. Please note, we expect to file our 10-K in the next few days. We had a lot of material to cover today. So please limit yourself to one question each. If you have additional questions you’re welcome to get back in the queue and we’ll take as many as we can. At this time, I’ll turn it over to the operator.
Operator: [Operator Instructions] And we’ll go first to Jordan Alliger with Goldman Sachs.
Jordan Alliger: Just a couple of things. One, on the supply chain business, you mentioned, I think, various price actions to get margin back to targeted levels in 2024. Can you maybe give a little bit more color on sort of your plans in that segment? And was it sort of pricing getting a little bit off that led it to be somewhat below margin target in the fourth quarter?
Robert Sanchez: Yeah. No, I’ll let Steve give you a little more color on that. But no, I think most of the actions that we need to take have been taken. We have a little bit of headwind from some of our e-commerce and last mile business is probably not new news to most people in the industry has been a little softer. But other than that, the contractual businesses are still performing well.
Steve Sensing: Yeah, Jordan. I would really put it in three buckets as you look end of the year. It’s — we had some one-timers earlier in the year that will not repeat themselves with the bankruptcy, and we already have established rate increases for underperforming accounts. We’ve got the acquisition, which is a big piece. And then as Robert said, the omnichannel volumes across the board, whether it be last mile e-com or even in our high tech business, we’re going to rebound here hopefully in the back half of the year, but we’ve seen some softness there.
Jordan Alliger: Great. And then just sort of a second question. With regards to Cardinal, that was helpful color. I guess the question is, excluding Cardinal, I don’t know if you could give some sense for this, but excluding Cardinal, would you say that the DTS operating revenue and EBT margin in particular for 2024 would be sort of at or around targeted levels, excluding the impact from Cardinal?
Robert Sanchez: Well, I would tell you the bottom line, yes. On the top line, we’d still be a little soft, primarily driven by the fact that we’re still in a pretty soft freight environment, but we would expect that to start to pick up as the freight environment picks up. So the acquisition, though, is a real shot in the arm to that business because it really increases the scale and the density of that business and really provides us opportunities to really capitalize on some significant synergies that we’re going to be working on this year to integrate, and we should really see the bulk of that in 2025.
Jordan Alliger: Great. Thank you.
Robert Sanchez: Okay. Thanks you.
Operator: [Operator Instructions] We’ll go next to Scott Group with Wolfe Research.
Scott Group: Hey, thanks. Good morning.
Robert Sanchez: Good morning, Scott.
Scott Group: So any color on how to think about first half versus second half from an earnings standpoint? And then I was looking at the earnings bridge you gave us a year ago. And FMS contractual is supposed to add $0.10 to earnings and FCS and dedicated were supposed to add about $1 to earnings. And this year, FMS is supposed to add $1 in SCS and dedicated $1.50. So I just want to understand what’s driving much better contractual earnings in ’24 versus ’23? Is that a fleet comment? Is that a pricing comment, cost comment? And just any color there. Thank you.
Robert Sanchez: Yeah. I think a lot of that is the growth we’re expecting in FMS, part of that from Cardinal as we bring in the acquisition. But growth in our lease business is really the biggest driver, along with maintenance costs, I think, overall, we’ve done a great job of bringing down maintenance costs. But as it relates to the first half, second half, I’m glad you asked that question, I’ve seen some questions about our Q1 guidance. First, I want to mention that our Q1 guidance is consistent with last year and pre-COVID seasonality decline from Q4 to Q1. And think about Q4 of ’23 versus Q1 of ’24, and you go back and you look at Q4 of ’22 to Q1 of ’23, generally in line and also in line with the pre-COVID, during the COVID years, you did have an anomaly because used vehicle pricing has been declining from these astronomical levels.
So Q4 sometimes was that — I’m sorry, Q1 was in a larger percentage than would normally be due to the — as a result of the normal seasonality. So it’s very consistent with where we would expect to be at this point in the cycle with rental and used vehicle sales now continuing to decline and really bottoming out. We are expecting some pickup in rental and used vehicle sales in the second half of the year. If you look at the top end of our range, if you look at the bottom end of our range, that assumes no decline — I’m sorry, no pickup in — or uptick in demand for rental and used trucks. So I think we’ve given you the full range of where we think things could end up I think based on where we are in the cycle and where the spot market is, we are getting long in this downturn.
I think we’re now almost two years, just definitely longer than what most of these cycles go. So I think it’s reasonable to expect in the second half some type of a modest pickup. We’re not even on the high end, expecting a significant figure, but just a modest pickup in rental and used vehicle demand. But I do want to clarify that the range does contemplate no pickup in the second half of rental and used vehicles at the bottom end.
Scott Group: Okay. That’s helpful. And then if I could just ask one more, that appendix slide on the residuals. So it looks like the tractor price is sort of like now like right at the range for the residual assumptions. So do we need to consider any residual value adjustments? What is this — if not, what does this mean for gains going forward? Just any thoughts here. Thank you.
Robert Sanchez: Yeah. So if you recall that for tractors, we have a range. And that range is because during downturns, we do have lower residual values for that downturn. Obviously, we’re in a downturn. So we’re — the residual values are really at the lower end of that mark. So yes, as you go into this year, we’re expecting that decline to level off at some point and then start to come back. So where we sit right now, we feel comfortable that we’ve got the residuals where they need to be during this downturn and would not expect any additional changes there. Again, what we’re expecting is to see a continued decline through the first half and then some type of modest pickup in the second half.
Scott Group: Very helpful. Thank you, Robert.
Robert Sanchez: Thank you, Scott.
Operator: We’ll go next to Jeff Kauffman with Vertical Research Partners.
Jeff Kauffman: Thank you very much. First of all, congratulations — strange year. Second of all, I just want to make sure I’m understanding what you’re talking about with fleet and units. So you’re picking up about 2,900 vehicles through Cardinal, but your net change in vehicles by the end of ’24, there’s only about 700 more vehicles in DTS. What happens to those other 2,100, 2,200 Cardinal vehicles that you’re bringing in?
