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

All right. Good morning, everyone. I'm Scott Group, Transport Analyst at Wolfe Research. Welcome to Day 3 of our 13th Annual Global Transportation and Industrials Conference. We've had 2 jampacked days. We had all the airlines, rails, trucks, multi industry. We've got another half day to go today. We've got 3 -- start 4 companies on the transport side. We're going to be starting in just a minute or so with Ryder Systems. We've got Old Dominion, and then we're doing a truckload panel with the CEOs of both Knight and Werner. And then on the industrial side, we've got 3M. We've got Johnson Controls. We've got Vertiv. So another good bunch of sessions today, also got some one-on-ones with Cummins and Dover as well today. So I hope everyone has enjoyed the content. We've -- just as a reminder, we're all on GoToWebinar. If you have any questions, feel free to type them in, and I'll make sure that we get to them. I'm really happy to have Scott Parker, CFO of Ryder, here with us today. Scott is going to kick us off with a couple of opening comments, and then we'll get right into questions. So Scott, thanks for being here. I hope you're doing well. I'll pass it to you.

Thank you, Scott. Good morning, everyone, and thanks for joining us today. Let me start by saying I hope that you and your families are safe and healthy during this difficult time. I wanted to start with a quick overview of our business. So as you may know, Ryder is the leading provider of outsourced transportation and logistics solutions for our commercial customers. Last year, our nearly 40,000 employees generated about $8.9 billion in revenue. We managed to maintain over 290,000 vehicles through our network of over 800 maintenance service shops and managed over 55 million square feet of warehouse space. The majority of our revenue is supported by multiyear contracts. We're organizing the 3 business segments: Supply Chain Solutions, Dedicated Transportation Solutions and Fleet Management Solutions. In our Supply Chain Solutions, we provide a wide range of logistics services in our key verticals of consumer and packaged goods, retail, automotive, technology, health care and industrials. These services include warehouse management, inbound and outbound distribution, transportation management and dedicated transportation. We have logistic operations in Mexico and Canada, where we execute over 30,000 cross-border freight movements a month, highlighting our near-shoring capabilities. We've expanded our offerings and supply chains to include e-commerce fulfillment and last mile delivery of big and bulky products. And we're also making investments in technologies that will change the logistics landscape with a unique visibility and collaboration tool delivered by our digital platform called Ryder Share. In our Dedicated Transportation Solutions, our customers outsource not only their truck fleet, but also their drivers and services around their driver. We employ over 10,000 commercial truck drivers. And our ability to recruit and retain drivers through our dedicated driver recruiting network is how we drive value for customers in this segment. In Fleet Management Solutions, we provide vehicles, maintenance and related services. Over 2/3 of this segment revenue is in contractual lease and maintenance agreements with an average term of over 6 years. We also provide short-term truck capacity through our commercial fleet rent or commercial rental fleet. Our customer is typically a business that needs a private fleet of trucks to move products to their customers. We purchased trucks at a discount due to our volumes, provide guaranteed maintenance to improve our customers' uptime and lower their costs, and then sell the vehicles after their initial life with Ryder primarily through our network of around 60 retail used truck centers. All 3 of our business segments operate in large addressable markets where the services that Ryder provides are largely performed by companies themselves, do-it-yourselfers, if you will. This is a large non-outsourced market provides us with a significant opportunity for profitable growth. Sector trends continue to favor outsourcing decisions. These decisions include dynamic supply chain, including increased interest in near-sourcing, near-shoring and the growth of e-commerce. Trends also include driver shortages as well as cost and complexity of vehicles under maintenance. As long as it remains challenging for customers to perform their own transportation and logistics services, we expect to see increased rates of outsourcing. In the third quarter of last year, as a result of weaker used vehicle market, we lowered our residual value estimates on our entire fleet of tractors and trucks. The increased depreciation resulting from this change lowered our earnings particularly in 2019 and 2020. However, we believe this change better positioned our company for the future. We are focused on initiatives to increase the returns of our business. These include accelerating the growth of our high-return supply chain and dedicated businesses. We are moderating our top line growth targets on our more capital-intensive top line ChoiceLease, which we believe will provide more balanced growth and free cash flow generation. We continue to implement meaningful price increases in ChoiceLease as well. We are also expanding our capacity to sell used trucks in the retail market where we get a better return. We are driving efficiencies and cost savings through our multiyear maintenance cost initiatives. We continue to invest in sales and marketing resources in our DTS and SCS businesses to accelerate growth. And we are pruning underperforming accounts and assets, including the discontinuation of our lease liability extension program, which will reduce our costs in 2020 and lower future exposure. We are also staying on top of disruptive trends in the industry and afforded partnerships with startups and traditional OEMs in the electric and autonomous vehicle sectors, and we also have created our own start-up company inside Ryder called COOP by Ryder. That is a peer-to-peer marketplace sharing commercial truck platform similar to Turo, the car sharing company. This product is gaining traction in multiple markets in the United States. And finally, our liquidity position remains strong with approximately $1.8 billion in available committed liquidity, including approximately $800 million in available cash as earlier this month, following the execution of our $400 million bond offering. We believe we are well-positioned to support operations, fund the remaining $300 million of debt maturity after 2020 and expect to continue to pay our dividend. With that, Scott, I'll turn it back to you.

Okay. Fantastic. So I've got a bunch of questions, but if you have any, make sure to type them in. We'll get to them. And Scott, I may surprise you, but the first question will not be about used truck pricing just yet. So -- but we've been starting just with everybody on the demand environment. So maybe we'll start on the rental side. So can you give us an update on the rental trend that you're seeing this quarter? I know April utilization was in the low 50s, so down around 200 -- 2,000 basis points year-over-year. Are you seeing signs of that rental utilization start to improve as the quarter is progressing?

Yes. Scott, as you know, our kind -- our practice is not to kind of provide updated guidance after our earnings call. But I would say reiterate what we talked about on the call, which is we expected April to kind of be the low point with the country being shut down. And our expectation is as the country starts to open up, that we would see an improvement in the rental business just based on increased activity in the economy.

And just remind us, what are you doing with the rental fleet right now and maybe help us think about sort of end market exposure here in terms of what -- where -- or maybe of the drop in utilization, which of the end markets have been hit the hardest for you.

Yes. So I could just go back to those that may be new or more familiar -- and less familiar with Ryder. We started, as you know, kind of de-fleeting based on expectations for coming into 2020 that demand was going to be softer. So we had started those efforts. We continue to execute on those during the first quarter of 2020. So if you look at it on a year-over-year basis, end-of-period, where the fleet was down about 10% and about 5% sequentially. So again, kind of the impact of COVID, we have -- with the expectation for demand to be lower than what we anticipated, we are continuing to de-fleet the portfolio, Scott. And our expectation, we don't know where that will go as we're kind of still early in the process. But we are continuing to de-fleet the rental business to rightsize it with the demand. Now from an industry point of view, look, we have a pretty broad, diversified industries. And with the economy kind of at a standstill, I would say that you're kind of seeing that across the board. So I think, generally, the pieces that will kind of come back, I think -- maybe a different way to answer it is things will come back as you start to see some of the restaurants kind of opening up, you're going to have to have some of that activity. You're seeing a lot of a little bit of movement around that. You're going to continue to see movement in regards to kind of the grocery places with kind of stocking kind of shelves. So those are areas where you kind of start to see the initial kind of pickup as small businesses need to start moving goods and services -- would be a positive for us and the economy.

And then just remind us sort of the exposure to sort of special events, things like sporting events, concerts, things like that?

Yes. Clearly, the holiday seasons, 4th of July, those type of things, sporting events are big consumers of the rental capacity. So those areas will probably take a little bit longer in regards to coming back versus some of the shorter-term impacts. It would really be the kind of the opening up of small businesses and the movement of goods.

Okay. And then -- so longer term, anything changing with your views on how big you want the rental fleet to be as a percentage of the leasing fleet? I know you sort of targeted sort of more of a steady percentage over time. But just given the continued volatility we see in rental, did you change that view?

I think we always kind of look at it. But as you mentioned, it's historically been in that 20% to 25% of our kind of ChoiceLease business in regards to providing kind of the alternatives to our customers and the flexibility around that as well as provide the ability to kind of take rental customers and potentially pull them into a lease customer. So I think we'll continue to look at that, Scott, as we go forward, but that has been consistent for a fair amount of time. So again, with this environment, we'll have to relook at. But at this time, I think that's still a pretty good kind of boxing of the size of the rental business.

Okay. Sounds good. All right. Let's now turn to the Leasing side. So maybe just talk about the trends that you're seeing either on new leases, early terminations, extensions. What will you typically see in the downturn? What are you guys seeing right now?

Yes. If you kind of go back to '08, '09 kind of downturn, clearly, from a different perspective, one, from an extension point of view, that is an area where both the customer coming and wanting to extend their units just given some of the uncertainty. Clearly, I think that is -- it is one where it is a tool for both customer and us to kind of push those out to get to a more certain area. Early terminations, clearly, during the last downturn, you'd see an uptick in that, where you have some customers that do have challenges during a downturn. As you recall in some of the conversations on the call, it just happened kind of late in kind of March, so we kind of didn't see much movement. I think it's probably fair to expect that you might see some of that same trend kind of occur in the second quarter as customers kind of start to feel the impact of that. But historically, it has not been a significant impact on the ChoiceLease business, Scott. And so that's the best information we have right now.

So what are the implications on margins if we see an increase in extension? Does that have an impact on maintenance costs or something that creates a margin issue? Or do you not really care? I guess, do you care if there's someone signing a new lease versus an extension? What's the margin...

Well, again, in today's environment, clearly, on new CapEx as well as that is an outlay today. I would say that, generally, we're kind of mindful of potentially we'd like to sign up a new lease given the long-term nature of that. But I think if you're kind of in a little bit more challenging environment, you're really trying to make sure that the customer as well as us, we're making the right decision for both parties around that decision. And -- but I think, generally, extensions are usually around kind of timing issues in regards to taking a unit. As you know, the running -- it depends on where that asset is. The longer it's out there, you're going to have a little bit more running costs. But you won't have the capital kind of impact of that new investment. So I think on par, given the current environment, we think those are good decisions to make.

And did I hear that -- so you're saying that through the first quarter, you saw very little in terms of terminations. But logically, you'll see some uptick in that in the second quarter?

I think it's -- based on historical trends, I think that's a fair expectation.

And what do you do with those trucks when you get those terminations?

If we're taking back assets just like we're doing on the rental side, if they're at a stage where there's still additional useful life in that, we will redeploy them and use the used equipment for sales to some of our customers that are looking for new trucks. Some of them that are later in stage, some of those may go to the used truck centers to be sold. So it depends on where they are in life, what we do. But our priority is to redeploy those to kind of solve other customer requirements.

Okay. And talk about the pricing strategy. It sounds like we're starting to push price more aggressively as we focus more on returns. So mid-single-digit pricing. Do we know -- I mean, there's very little new sales activity, right? So do we know -- is this -- can we -- can the market take 5% pricing? Or because there's no real activity, it's tough to know if that's the right price?

Yes. I think clearly, I'll go back to if you look at kind of 2019, so we did push through pricing in 2019. We continue to -- the market kind of for that kind of increase given the environment that we're in. Clearly, we have a total cost of ownership sales tool that our sales force is out talking with customers around. And given that total cost of ownership, it's still beneficial to lease, in our opinion. So based on that, it has been. You're right, when you talked about the increases that we pushed through in 2020, it's a little bit too early to kind of see on that just given the environment. But we do believe that it's the right decision to push pricing up just given the current environment as well as the residual nature of what we've seen in the last few years. And as we go through that, we're always looking at the competitive dynamics and what the impacts of that are. So I think right now, mid-single-digit kind of increases that we're pushing through, we think, is representative of kind of the right market pricing for our product.

And your sense just from conversations with customer that that's a realistic kind of pricing increase. And is this something that you think could become an annual sort of 5% price increase? Or is that in -- think about longer term...

I think the -- with any pricing decisions, I think it's all -- I don't think we can kind of give a long-term forecast for that. I think it is based on the dynamics -- competitive dynamics of the market, continue to make sure that we're providing value to our end customers around the products that we're selling to them. And right now, we feel that based on all those, that we’re kind of still attractive to providing customers a value. But I'm not going to comment. I don't think -- what's the sustainability of that, Scott.

Okay. So on the supply chain side, you guys gave us good sensitivity on the exposure to the auto plants. As they start to reopen this week, does the supply chain start to see the benefit of that right away? And should we think that if you were producing 10 and now you're producing 6 versus 0, like the sensitivity is sort of one-for-one versus what production rates are -- is that the best thing to do?

I think some of our contracts in that, I think, clearly, getting the plants back up and running is positive. I think I wouldn't kind of think about it as a linear equation. Clearly, ramping up initially, you get some economies of scale once you kind of get up to a kind of a consistent run rate, which is kind of the normal environment. So I think in the start-up, it takes a little bit longer to kind of get to those efficiencies. But we're happy that things are opening up for kind of the auto sector, and we're there to support them kind of on that ramp up.

Okay. Let's now get to the used truck issues. So you waited a pretty good long time there, Scott.

I was talking with Bob a couple of weeks ago. I don't know what these meetings are going to be like when used truck pricing starts going up, what people are going to talk about, how much more they can go, probably.

So what are you seeing? Are you seeing any signs of used prices bottom? And is there some case to be made that no one's -- we're not making any new trucks this year. Fuel has gone a lot lower. So maybe there's less of a premium on new trucks anyway. So I guess, 2 parts. Are you seeing a bottom in used truck? And is there some case that by the back half of the year, we could start seeing some uplift in used truck pricing?

Yes. If -- so if you kind of think about -- I'll give the context, just make sure others that may have not listened to the phone call, but look, back in third quarter of last year, when we kind of did our residual change on the accelerated side, which is activity that we expected to sell units through kind of mid-2021. We have kind of marked down below our kind of policy depreciation. And at the time, we said those were at pretty low levels relative to history. In the first quarter, as you recall, we took another impact on accelerated depreciation based on the change in what the outlook was because of COVID. So as we were coming into the year, both what we were seeing and what the industry was seeing was that some of the excess kind of supply of inventory, given the rebound in expectations for freight that, that would be kind of come into equilibrium as we enter the second half of 2020. I would -- and then based on what's happening, I don't think that's a good expectation, Scott, that it's going to come back in the end of this year. So I think right now, most of the outlook has clearly been pushed out into 2021. I'm not -- since we're kind of early stages. I don't know when the timing is in '21, but that's kind of the current tone is just going to get pushed out into 2021. So based on that, we took that assumption of having some of that potential price uplift in the second half out of our forecast and our outlook. And we also took an expectation that we expected pricing to -- because of some of the oversupply and not knowing exactly what the economic rebound was going to be. We also expected that pricing could continue to decline from where we were in first quarter. So that's when we booked an additional $8 million of depreciation. And so those are based on assumptions. And if things get a little bit better or get little bit worse, can adjust that as we go through the remainder of the year. But that was kind of our expectation for kind of where we see used prices kind of through the rest of 2020.

Okay. So first quarter, you did additional accelerated depreciation. It was an incremental $80 million headwind from what you said entering the year. But you also -- there was a comment that we're going to look at longer-term policy assumptions on the second quarter. So I guess my question is what do you need to see to not change, not lower the policy assumptions again this quarter? And relative to the $80 million of accelerated depreciation, is there any way to sort of sensitize what the next -- seemingly potential next headwind and policy assumption could be in the second quarter? If you think I'm understanding this issue correctly.

Yes. So just so everybody understands, so on the accelerated and really for near-term sales, those sales that we expect between kind of now and mid-2021. Our policy depreciation is really for longer term where we see residuals for assets that will be coming off starting in late 2021 through the -- mid 2025, '24, '25 time frame. So when we do that, we take into a lot of factors, Scott, in regards to doing that evaluation. Clearly, some of the historical trends, plus kind of what we're seeing in the near term, but we also have built into our practices to also look out kind of in the future, to kind of see what expectations there are for the next couple of years. So it's a longer-term view. So we try to adjust for qualitatively. We can make adjustments for kind of situations like where we are today. But it really is something that we're right in the middle of kind of working through. It's a pretty complex process to do these evaluations. So we will kind of -- as I mentioned, we'd give an update in the second quarter. The only point that I would -- in our 10-K, we do provide a sensitivity, hypothetical sensitivity around residuals. And for that one, it's kind of a requirement to give some type of sensitivity. So if you look in our 10-K, there is a sensitivity in the residual section, around a 10% hypothetical impact on our residual values. And if you look at that, the impact of that over the life of the portfolio as of the end of the year was around $330 million. It was about 100 -- a little bit over $100 million in year 1. And then, as you know, it kind of tails off as the kind of portfolio. You have to take a bigger hit on those assets that have less time to depreciate those, and newer assets you put on are going to be depreciated over a longer period of time. So that's just a hypothetical sensitivity, but it gives you at least some kind of perspective around kind of from a policy point of view, you can pick your own kind of point. But that's something that is in our 10-K.

So that's helpful. Can you just maybe -- one last follow-up here. Where are current used prices relative to your long-term policy assumptions now? So if I think about like where is the line? Where is the x if you go back to that chart from a couple of quarters ago?

Yes. Well, we clearly -- I was -- when we go back to that, remember, we had the x on the line, which was kind of policy. We said that the accelerated debt time frame was kind of at kind of historical kind of lows. What we mentioned on the first quarter call was the additional $80 million we put on put us below trough levels, right, in regards to the chart that you saw. So from just a context point of view, that kind of can give you a little bit of context of where we were in the third quarter versus where we are kind of currently.

Yes. I understand that for the accelerate. But what about for car versus the long-term residuals? Is the current price, would you say, below the long-term residual assumption now as well?

Well, maybe we'd kind of clarify. I mean, the pricing was below -- when we did policy was below kind of where we had set policy back then. So the answer is, I think, yes, pricing today is there. But what I would go back just to kind of go back to what we had done prior to kind of the impact of COVID in the second half of March or the last few weeks of March, we were, at that point in time, kind of tracking pretty close to what we had kind of forecasted for those pricing, right. We mentioned that tractors were a little bit better than what we expected in the first quarter and trucks were a little bit worse than what we were expecting. So those were some of the trends that we were seeing. And so I think that is -- now we have to take all those inputs. And as we kind of think about policy, as you mentioned, it is much more of a longer-term view. But we -- based on kind of the levels we're at, that's something that we need to kind of work through.

Okay. We just have a couple of minutes left. There's 2 more sort of themes I want to talk about. One is on CapEx and free cash flow. So we're going to have record free cash flow this year. Help me think about what's a normalized CapEx number to think about for next year. I -- it seems like even if we go to a normalized CapEx number next year, we should still have pretty good free cash flow. And so I want to just the moving parts.

Yes. I won't put it -- I won't say for next year, but I think in general, for our portfolio, just based on kind of the percent of the portfolio that kind of turns over. It's a kind of a normalized level for kind of the lease side is probably in that $1.3 billion to $1.4 billion level. And the rental, as we said, this year was kind of down a little bit versus normalized levels. But if you look historically, you asked me the other question, so I think these are again using historical not to kind of give you exact for the future, but historically, rental has been around 400 on a normalized basis. But as I mentioned, that one, based on the size of the fleet and other factors could impact that. But that's kind of a directional level based on historically kind of what we would see.

And those are gross numbers?

Yes.

So I guess if we're going to not see a lot of fleet growth, it sounds like maybe there's less of an emphasis on fleet growth going forward. And CapEx, if it's not kind of much above, if it's up to around $2 billion, like there should still be in a decent free cash flow next year. So this isn't a one-and-done of free cash flow this year.

Well, I think, again, it's all -- I'd say, based on those numbers, I think that's a fair assessment. I think, again, we'll kind of see where kind of -- where the growth comes in on the ChoiceLease business, but I think that's a fair assessment of -- at those levels of CapEx, the other kind of key components of that, as you know, is going to be kind of proceeds as well as kind of working capital items so. But yes, generally, I think that's fair.

Okay. And then last question. We're running out of time. You guys are now breaking out segment EBITDA levels. I think it sort of generated discussions about the supply chain business and potential to spin this off. Maybe just a minute on your thoughts on potential to create some value by spinning out supply chain?

Well, first, I'll just address, and again, I -- the -- Bob, myself, [ Calin ] and Robert, we get a lot of feedback from investors. If you look at the last couple of quarters, based on that feedback, we have provided information that people have requested. So if you remember, last year, we did put out kind of a vintage chart around kind of pricing to give people context of what's happening with the portfolio. We also kind of increased our disclosures, and you kind of saw some of the information we provided around depreciation. Another topic, Scott, that we were hearing, especially kind of in the first quarter, was really just trying to understand the kind of the EBITDA and segment profitability and a little bit more detail. So that's really why we provided the disclosure. We are anticipating adding some select balance sheet disclosures in the second quarter for our segments. And the purpose for us doing that was really more to allow our investors and yourselves to really understand the different pieces of the business. But overall, it was not intended for kind of providing any information relative to our portfolio as a whole. I mean, we believe the business and the business segments are all kind of interlinked and provide overall -- our overall customer value proposition to solve all their needs in regards to transportation and logistics business. But it does allow individuals and investors to kind of really see what the businesses, how they're performing and the trends that they're performing on.

Got you. Okay. All right. We're going to have to wrap there. Thank you so much, Scott. Really appreciate it. I hope you're doing well.

Thank you, Scott. Have a good day.

We've got Old Dominion up next. I'm going to switch over to that one. I'll be there in about 60 seconds.