Ryder System, Inc. (R) Earnings Call Transcript & Summary

Get started so we can stay on time here. Very pleased to be joined by Ryder for our next presentation. We have Robert Sanchez joining us from the company as well as Bob Brunn. Very pleased to have both of you with us today. So thanks for joining. Probably going to turn it over to you to kind of maybe give a couple of minute overview, the lay of the land. There's been a lot of news over the last couple of quarters, so we can kind of talk a little bit about that, and then we'll jump into Q&A. Certainly, I want it to be interactive, so any questions that folks have, just raise your hand, and we'll get you the mic. So thanks again, Robert, for joining us. Really appreciate it, and I'll turn it over to you.

Sure. Great. Thank you. I'll give you a 2-minute overview of the company. We -- Ryder is a transportation and logistics outsourcing company. We've been in business for over 86 years. We're just under $9 billion of total revenue. We have about 40,000 employees. We're primarily North America based. And we're really organized into 3 business segments: our fleet management business, which is the outsourcing of a truck, so you can think of that as a truck leasing and rental business; supply chain solutions business, which is a logistics outsourcing business, about 25% of the revenues of the company; and a dedicated transportation solutions business, which is the outsourcing of the truck and the driver, and that's about 15% of the revenues of the company. Our strategy has really been around growing the business as secular trends that make what we do more difficult for companies to do on their own, they're more likely to outsource. So really taking advantage of those trends and really try to target companies that don't currently outsource to outsource to us. Large portion of the market is still do-it-yourselfers, whether it's buying and maintaining of a truck, hiring their own truck drivers and creating their own private fleets or running their own logistics operations. So we've had some good success over the last several years in really being able to grow each of our businesses after long periods of time where it was a very mature business without a lot of growth. So we're excited about that. Over the last couple of years, we've had record lease fleet growth of about 10,000 units each year. So 20,000 unit growth over the last 2 years after -- it's our eighth consecutive year of lease fleet growth after over a decade of not growing it at all. So all of the growth has been very good. The challenge that we've had over the last several years has been the decline in the used truck market, which we are the largest independent retailer of used trucks in the country. So every truck that we sign for a lease or rental, we sell at the end of its life. And as the truck prices really peaked in '20, came down through 2017 and then had a run back up in '18 through the middle of '19 where things started to get a little bit better for us, and then took another step down in the second half of '19. So we're now kind of in an unprecedented period of decline in the used truck market. So in the third quarter, when we saw this happen, we made the decision to lower the residual values for our entire fleet, which is obviously a big endeavor for us and create a lot of headwind in the earnings for us. It is not a 1-quarter issue because you -- each quarter, as you have to depreciate whatever that change in residual is, you depreciate over the remaining balance -- or the remaining life of the vehicle. So the bad news is that it does take us a while to get back to more normalized depreciation. The good news is that, each quarter, the depreciation impact is less. So we had an impact in the second half of last year of about $290 million, $295 million of additional depreciation that this year becomes about $125 million, $130 million of additional depreciation. So you start to have some tailwind each year from that depreciation. We feel good about where we've set the residuals. We think they're at -- certainly for the next year, we're setting them at historically low levels. And even going forward, we've set them at a new normal that's much lower than the prior 20-year average. So the issue now is just working our way through that and making sure we're signing up to new business that's very profitable. We've raised prices on our leases starting several years ago. So the new business that's coming in is more profitable than the business going out. We have 2 years, those deals signed in 2012 and '13. They are less profitable and aren't coming in at the returns we expected. So those trucks are getting out of the fleet here in the next year, 1.5 years, and we expect profitability to improve meaningfully over the next several years. So this year, we're -- we gave guidance of $1 to -- $1.10 to $1.50 on this most recent call, versus the $1.09 that we ended 2019 with. Most of that is driven by this improvement in the depreciation, less headwind, if you will. And partially offset primarily by rental softening. We're expecting rental market to be a little softer this year. That's a cyclical business. So it will be a little softer this year, and you'll see it then improve, hopefully, as we get into 2021. So the -- I guess the key takeaways are that this is a very strong business. We're going through a period here from an accounting standpoint of adjusting our residuals to what is the new normal in used trucks. We still see this as an incredible value prop for customers who are looking to get out of the truck-buying business and really look for somebody that can handle that better than they can. We have a network of 800 truck maintenance shops that we maintain all these trucks out of. And the maintaining of trucks has got significantly more complicated over the last 8 to 10 years, and we're also providing that value for our customers. On the logistics side, I don't need to tell you, those of you that follow transportation, logistics outsourcing has become much more attractive for companies. We're well into that game. We're one of the best, largest providers of logistics services in North America. We've been growing that business very nicely, and we expect that growth rate to continue in the next several years, both in our logistics and our dedicated operation. We are making investments in some of the disruptive technologies that are out there around the alternative fuel vehicles, whether electric trucks or natural gas trucks, from a few years ago. We launched the first peer-to-peer truck sharing app called COOP by Ryder. We now are in 3 states, several markets -- across all the markets in those states. And it's really been a pretty exciting journey for us. We're seeing some good uptake in those markets. And we think that could be a long-term additional value prop for our company. Another area we're also investing is in technology and logistics. We've got a product called RyderShare that we use to provide our customers visibility and collaboration across their entire supply chain. So what that means is if you're a big company that's outsourced to Ryder and you get on RyderShare, we can track your products from end-to-end, from when it leaves the supplier, till it gets to your end customer, through our tool. Not only do we track it, which a lot of other companies do, but we also provide collaboration opportunities for if a driver is going to be late, for example, on a delivery, they can enter information into RyderShare and everybody that's in that system can see it. So it's pretty unique from that standpoint. We're excited about it. We've rolled it out to about 38 locations this year, about 9 customers, and we expect to accelerate that growth as we get into 2020.

Great. Well, that's a -- it's a great overview and a bunch of stuff we want to dig into. So probably the first place I'd like to start would be on the used truck market. So it's been a very rough go, as you noted, since the middle of last year. And there's a cyclical component to it, I'm guessing, just given where sort of the truckload market has been, but there also seems to be something more than that. Particularly, in the fourth quarter, there was a somewhat unexpected bankruptcy of a relatively large fleet. But can you talk to some of the pieces that have sort of gotten us to this point that you think have driven sort of the big step down we've seen in used truck pricing?

Yes. I think, like any market, the used truck market is a supply and demand story, right? So if you think about what generates demand for used trucks, it's the transport business, right? It's how freight movements don't go in. Most of our buyers are owner operators. The owner-operator market has been -- those things have been under some pressure here in the last couple of years. So you've seen that sort of take a step down and now somewhat stabilize. But overall, freight. So if you talk to the trucking companies, right now, we're in a bit of a freight recession in terms of just the number of trucking companies that are out there and the amount of freight that needs to be moved. There's an imbalance there. So rates are low, which means it -- which makes it less attractive for owner-operators to jump into the market. So on the demand side, things are soft. On the supply side, things are high. Inventories are high. Why are they high? Because a lot of trucks are built in the last 2 years. So a good chunk of those trucks had trade-ins. Well, those trade-ins all have the used truck market. So we have an oversupply of used trucks and demand is a little bit soft. So that's why I think we're in the situation we're in. We believe, as do some of the analysts that really track and try to forecast the used truck market, we believe that prices are going to continue to decline through about the middle of the year and then start to pick up in the tail end of the year. That's sort of our view based on what we think is going to happen with supply. We know what supply is going to be because we know how many trucks were built 5 to 7 years ago and how many can hit the market. And our view of demand, as you look at the transport business, a lot of folks are predicting, things continue to be soft and then towards the tail end of the year pickup. So you're going to have 2 things happen. You're going to have demand pickup for trucks. And you have supply start to wean a bit as fewer trucks start hitting the market and fewer -- there's going to be a lot less trucks built this year. And that means less trades, less trucks coming into the used truck market.

Are you willing to venture a guess in the Class 8 production numbers this year?

Now we're assuming what most folks are saying, probably 30% to 35% down.

Got it. And just for a data point, year-over-year decline in values, how much lower are used truck values today than they were last year?

Yes. We're down -- we're clearly down double digits from last year. One of the things that [indiscernible] for the fleet that we have on our third quarter call, you guys can go on and see it. But we showed a graph that shows Class 8 tractor, used truck pricing for the last 20 years. You see it's a cyclical business. But we showed them where we were in the third quarter. We said there's a point below that, that we're setting our long-term decisions. So we're not assuming the market is going to come back long term. We're assuming there's a new normal, which is lower. In addition to that, we said that those trucks are coming in over the next 18 months. Those trucks we're assuming are going to come in this more trough type market. And so we picked a number that was significant. It was kind of historically a low number. And we assume that's what we're going to see for the next 18 months or so. So that's where we've modeled it out. We've modeled it out that it's going to come down even lower than where it is now. It will be there for a while, and then it'll start picking up in the back half of the year.

Okay, got it. That's helpful. I wanted to ask about the rental business. And obviously, that does sort of follow the traditional cycle a little bit more from a truckload perspective. We've maybe heard anecdotes of modest improvement, or maybe less bad is the right phrase, from the truckload carriers about how maybe early bid season has been going, how quickly should we assume? Or how does that rental business react to those types of changes? Have you seen any differences in the demand on the rental side?

Yes. Rental is a little bit -- it does correlate somewhat to the truckload business, but it is -- if you think about it, surge capacity. So we're at the end of this -- of the whip, if you will, on that. So we have seen it soften. We're expecting it to continue to be soft this year because a lot of -- it's basically a supply of trucks in the market. A lot of trucks that were built in 2018 and '19 have hit the ground, and there's just less need for those -- that rental surge capacity that there was just a year ago. So I would expect that to be normal cyclical downturn in that space. I think -- what you hear from some of the truckload, we obviously hear some of the same things, is clearly, with -- you mentioned the bankruptcies of several carriers and some of the smaller guys falling out. That's kind of how the market corrects, right? You start to get capacity out of the market. We're seeing that. We've seen that over the last 6 months. There may be a little bit more to go, but eventually, you get back into a balance of supply and demand, which is when that pricing starts to stiffen up for our used trucks. And even on the rental side, you'll start to see things pick up.

[indiscernible] discussion. If you think about the age of your freight -- the age of the trucks in your freight, there is a -- if you think today's truck has a lot of content, safety systems, better bearings, and all that. And so as you think about, relative to a truck maybe trading more about 6 years ago. Certainly, there should be better than -- should be kind of trading better. Why isn't that? Are you trading more of those older trucks?

Right. We're -- we hold our trucks about 7 years. We're not like -- a lot of trucking companies will turn their trucks because the models they run, they turn them every 3 to 5 years, we're leasing most of our trucks to private fleets. So they're running less miles than a truckload carry will. So what we're selling today is the 2013s, model year 2013 and '14. So there's less of a bells and whistles on those units than there are in some of the newer ones. But it is a different segment of the market that we sell to. If you think about a brand-new truck is going to cost you $130,000, $140,000 tractor, the tractor we're selling, we sell them for $20,000 to 25,000. And a tractor that's maybe 3 to 5 years old is going to sell for $50,000, $60,000. So the buyer of our tractor is typically owner-operator. They're going to buy the truck, they're going to run it short distances, maybe [indiscernible] type operation, and then they're going to handle the maintenance themselves. So they're really looking for the lowest price truck that they're going to get. So we haven't seen that yet, that premium, if you will, for as these other -- as more of these vehicles age, though, I would expect, at some point, you start to see a premium in those trucks.

So you mentioned lease fleet growth being quite large. I guess, how do we think about that going forward? You had a 2-year run, where it's been pretty solid. What's the trajectory of that business over the next couple of years?

I think -- look, I think the year -- we had 2 consecutive years of around 10,000 units of lease growth. The most we've had ever before that was 6,800, I think it was, a few years prior to that. It was great because we added a lot of good business that we feel really good about. These leases were priced at much lower residual values, and we're expecting really good returns on those. The challenge, though, I think, is as we look this year, a lot less trucks are going to be built this year by the OEMs, about 30, 35. So that's going to put pressure on our growth. In addition to that, I'm going to continue it on price because I think there's -- what we've seen over the last 5 years is that there is a different level of volatility in that used truck market that we hadn't seen before, that because of that risk, I'm expecting I can get a bigger premium for that. So we're targeting a higher return than we have historically on these leases. And I think as I do that, I'm going to see, maybe, some of the growth also go away. So I think, going forward, we said we're expecting a more moderate growth level where you can have a better balance of earnings growth and free cash flow. We've been -- as we've grown 10,000 units each year, we've had a pretty significant negative free cash flow, which is we find the market gets a little bit jittery with. So as a public company, I think that balanced growth of maybe, call it, 3,000 to 5,000 unit growth with some earnings growth and positive free cash flow may be a better combination, if you will, for everybody.

And what do the returns look like in that sort of scenario, where it's a little bit more balanced?

Well, over time, obviously, we expect returns to -- we talked about our return on equity targets of 11% to 15%. Now the reason we got that 11% at the bottom end of the range is because we're currently at 2%. So I need to get to my cost of capital first, which I think is about 11%, and then be able to move up to that 15%. I think this is clearly, if you think about once we get past this depreciation, this is a business that could do certainly mid-teens type of returns over this level. Yes, it's not that 15% is a peak. I think 15% is certainly a sustainable over-the-cycle type of return in this business.

Got it. Wanted to talk a little bit about the dedicated side of the business and get your sort of update on how -- that's obviously a steadier piece of the business, but how do you think about it from -- it can be a little bit lumpy. So how do you think about sort of the pipeline on the dedicated side?

The dedicated side is really -- the value prop for the dedicated side is the fact that we can not only take care of the vehicle, we can also hire drivers. We have 10,000 truck drivers. We have a great driver recruiting network. We have training and we keep them with the company. So as the driver market really became very difficult, and if you think about '17, '18 and '19, we saw a lot of people moving, wanting dedicated. As it got a little bit easier in '19, we saw some people say, "You know what? Let me keep trying to run my private fleet the way it is." I think that is a temporary softening because if you think about all the stuff going on now with the drug testing, with insurance, you got more and more complexity being added to that private fleet type operation. We really are very confident that growth rate picks back up. So we are adding some additional sales resources, but I'd expect us to get back to our target growth rate of high single digits in that business here starting next year.

What's the runway for dedicated? I always wonder sort of what the opportunity set is for it. I mean, as trucking is a difficult business, and so people whose business it is not oftentimes find value in this, but you have kind of these ebbs and flows. So what is sort of that opportunity set that you see there?

Yes, it's actually a very -- from that standpoint, I think if you look across our businesses, that is a business where the complexity around that is not going to get any easier because it doesn't matter who's in the White House, people are concerned about the safety of these Class 8 tractors and having them on the road. So as long as that continues to be complicated, and the hiring and retaining the truck drivers is, you're going to see that continue to be, I think, a very attractive and growing business. We have the added benefit of 15,000 lease customers who already leased a truck from us, but they provide their own drivers. So upselling those, that's been a big part of our growth over the last 3-year compounded growth rate, and Dedicated has been double digits. So if you look at that, where is that coming from? That's coming from customers who've already outsourced their truck and they say, "You know what, I need to just go and take the driver, just do the whole thing." So we think there's an opportunity, maybe about 20% of our fleet on the lease side that has an opportunity to upsell in Dedicated. They're big enough and they have enough complexity to do that. So a lot of our focus is really around that.

Okay. Got it. That makes sense. And then, I guess, I wanted to talk a little bit about logistics and sort of understanding where you think sort of the better opportunities are coming from. There's a lot of discussion in the market. The contract logistics side, there's this last mile, there's a lot of different sort of ways to think about it. So what are the most attractive sort of segments for you as it stands right now?

I think what's attracting -- what really attracts customers to Ryder is we really provide them multiple services, right? We can do dedicated services for them, we can do warehouse management. We operate about 55 million square feet of warehouse space. We can do transportation management. We can act as a traffic department. We manage about $5 billion of freight for large companies. We do final mile. We can do the Ryder Last Mile, which is the home delivery of big and bulky. We're a leader and actually third largest in the market. And we're also building out [indiscernible] where we can actually allow the customers that want to go direct to consumer [indiscernible] come through our network. So it's really the ability to provide these integrated services and then have the technology that really brings them all together, that's where we strive this year. So I think -- I guess the difference also from other companies is that we've made the strategic decision to be very North America focused. So our business is really U.S., Mexico, Canada, we primarily focus on companies that are doing either manufacturing in North America or distribution to their end customer in North America. And we think that market is still very large. So our focus is that, and the value that we bring is our ability to provide really strong execution around each of those -- each of the services.

On the final mile side, I guess, some players have had varying degrees of success doing that profitably and being able to sort of scale it up. And we've recently had a player come out of the market deciding it just didn't make sense, they couldn't operate it at the scale that they're running at. So what makes that business successful? What's sort of the -- what are the pieces that you need to make that business successful?

And we were -- we thought long and hard before we jumped in. We have been in that business many years ago with our own employees doing deliveries for large retailers. And it is a very -- it could be a very difficult business to get the productivity, [indiscernible] are you making the delivery safely? Are you -- is the product getting there in good condition? And are you doing it efficiently, where you're in and you get it done and you move on to the next delivery. So the employee model, I think there's been discussions going around the employee model versus the carrier-type model. Employee model is very challenging just to get that level of productivity. The carrier model is what has worked. It is really what we have in our company. It's primarily run through third-party carriers, and Ryder provides the technology and the customer interface in order to make those deliveries. So we select the carriers for each market. We have the relationship with the national customers and then we work with those carriers to make sure that they're driving those -- they're making those deliveries efficiently. The technology allows the customer, let's say, you're dropping off -- they're dropping off a piece of furniture at your house, you can rate that driver, how they -- you can track the driver, you can communicate with them, then you can rate them how they did. So their carriers are very attuned to making sure that you're going to give them a good rating, so that's how they're going to retain business with us. So it creates this nice ecosystem of efficiency, the best -- the most efficient carriers get more of the work, and it works out really well. There are some states that are kind of moving away from that. Those states, I think, will just be another level of pricing that will be made -- that will be forced into those states. And I think then you will go with an employee model, which will just be a more expensive model, I think, for the companies.

Before we get -- you're just thinking like AB5, is that what you're telling -- okay, California, got it. Okay. Yes, I think there's a question over here.

I was just wondering. I'm sure there's a high level of frustration in the stock price, right? So many years ago, when Ryder was very capital intensive [indiscernible] the Board made a decision to centralize them. Are we close to an inflection point right now with the challenges that we see and the reversal of the stock price? Or [indiscernible] you think of what we need to do? And can we find a partner, for example, to resolve some of the financial investment, leasing and stick to our core strength of maintenance, drivers, et cetera, et cetera. Can you give us a view on the strategic -- or existential issues that are being discussed [indiscernible]

Yes. I guess the first thing is, I think, management team and the Board is in sync that the challenges that we've had with the stock over the last several years has really been almost uniquely driven by this used truck market. There's been this unprecedented decline in used truck pricing that we've seen that has really been much more stubborn than what we would ever expect, and it has lasted longer. It's like it's been deeper and longer than we've ever seen. So the question then becomes, all right, so that's the issue. What do we do? Do we say, hey, let's just do something dramatically different? Or do we address that risk with the things that we're doing and then look for what are the things that we need to do going forward to make the company less susceptible to fluctuations or less dependent on the used truck side of the business in order to hit our target earnings? That's really the avenue we're going down. But to answer your question, we always review different options, strategic options out there. And clearly, we're seeing what's going on with the stock just in the last few days. That just -- there's no explanation for it. So as a public company, we kind of look at that. But over time, I would expect things to kind of get to a more normalized level. And certainly, we would expect, over the next 12 months, that you're going to start to see the benefits of some of the things that we're doing and start to see the earnings come back, and the stock should reflect that.

Let me give you an explanation as to why the stock [indiscernible]. I mean, when capital intensity goes up and returns [indiscernible] when you overlay the cyclical component [indiscernible] playing the secular issue, that investors choose to manage the share price. So the longer-term question is capital intensity and your business, can you dial [indiscernible] this broader logistics infrastructure?