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

Hi. Good morning, everybody. I'm Emily McLaughlin. I work on RBC's machinery and business services team. And it's our pleasure to have Ryder participating in our industrials conference again this year. From the company, we have Robert Sanchez, the CEO. So welcome to the conference, Robert. Thanks so much for joining us. [Operator Instructions] With that, Robert, I know you had some prepared remarks. I'll turn it over to you and you can kick us off here, and then we can dive into some Q&A.

Awesome. Thank you, Emily. I just want to give everybody just the first -- for those of you who may not be familiar, so just a quick overview of who Ryder is and kind of what's going on with the company. So Ryder has been around for almost 90 years. We're in the transportation and logistics outsourcing business. We're primarily a North America business. What that means that in North America, we're the -- one of the leading truck leasing and rental companies. We're one of the leading dedicated transportation companies, and we're also one of the leading contract logistics companies. The good news is that Ryder, over the last several years, has really benefited from secular trends that favor outsourcing, whether it's the truck technology and the changing complexities around maintaining trucks, the hiring of commercial truck drivers and the challenges around that, or the dynamic supply chain activity that has transpired over the last decade. And now obviously with COVID, we're seeing an acceleration of some of that. We think reshoring is going to be happening as a result of not just COVID but maybe some of the trade disputes that have happened over the last several years. We think that's a big benefit to a company like Ryder that's a North American logistics company. We see e-commerce as a big opportunity for Ryder also, and we're seeing an acceleration in that space. Ryder entered the big and bulky final-mile delivery business a couple of years ago with an acquisition we made. We're very pleased with that acquisition and seeing nice growth there and good returns. So we're excited about the opportunities to grow. Plus we're investing in things like e-fulfillment, which we would provide for companies that want to go direct-to-consumer. We provide the infrastructure for them to be able to do that through a fulfillment center -- centers that we've set up. So I think it's a good opportunity, and we think secular trends will continue to favor growth in our business. We are making investments in these areas as well as we've -- we're making investments in areas that can give us a competitive advantage. We recently announced the rollout of RyderShare, which is not only a visibility tool which a lot of companies have for transportation and freight but also provides collaboration. So for companies that outsource their logistics to Ryder, they have a tool they can use that not only see where their product is but also can communicate with drivers and their customers through this tool. We've had very good feedback from customers as we rolled this out. Recently, there's even been some articles in the Wall Street Journal of customers giving testimonial on that product. So we're excited about the opportunities there. We've recently modified our growth strategy to moderate the growth in our more asset-intensive truck leasing and rental business and really accelerate the growth in our higher-return, less asset-intensive supply chain dedicated business. We think that this type of strategy is going to allow us to have nice earnings growth along with free cash flow over the cycle. We're targeting a 15% return on equity over the cycle for Ryder. It means some years will be above and some years will be slightly below but really a 15% over the cycle. And we have a road map to get there, which we shared on the last call that really a good chunk of that return to 15% is going to come from getting the depreciation, the additional depreciation we're taking on used trucks, getting that behind us and then getting rental to a more normalized level along with several initiatives that we have, including maintenance cost reduction and improved pricing in our leases. So that's where we're at, and those are the things that we have going on.

Great. Thanks for that overview, and there's certainly a lot to talk about this morning. But maybe a good place to start is just around the freight environment. Rates have obviously rebounded and capacity is tighter. So if I can get your thoughts on how you view the backdrop, how it's developing and what it means for Ryder.

Yes. We -- well, we don't comment within the quarter, but I can take you back to where we ended the second quarter. We talked about really April being the worst month in terms of our business and clearly the environment that we saw as everything was shut down. We had seen sequential improvements clearly in May and June and certainly expected some of those improvements to continue into the third quarter. Ryder generally plays in the same freight environment that you see other folks are playing in. So as the demand for freight movement improves, that usually is good news for Ryder both in our rental business and our logistics and over time even in our leasing business and also for our used truck market. As the demand for freight moves improves, there's typically a demand for not only new trucks but used trucks and that can help our company.

Great. And I guess we can talk about used trucks then for a minute. So there have been a number of changes in the last couple of quarters to residual value estimates, policy depreciation, accelerated depreciation, what's still happening with these truck prices. If you could just walk us through the assumptions behind some of these changes and what impact COVID had on these, that might be helpful.

Sure. I'm looking quarter-to-date. We don't have to talk about used trucks. This has been a persistent problem and headwind for us over the last several years. We've made the adjustments, as we've seen, based on the market that we're seeing. This has been now -- where market's really been down from the peak back in 2015. But I can tell you that based on the changes that we've made over the last year, our residual values in the short term -- just at a high level, our accelerated depreciation or residual values for vehicles that we expect to sell in the next 2 years are at historically low levels. So they are at the lowest that you've seen in the last 20 years in terms of actual sales that we've done for trucks and tractors. Beyond those 2 years, we've also lowered them now to the lower -- I would call it the lower end or the lower quartile, in some cases quintile, of what we've seen historical pricing at. So as an example, in our truck pricing, the residuals that we've set for vehicles in the long -- so the 2 years and beyond, pricing has been at or above that 19 of the last 20 years. So I'd say that's last -- you only got 5% where it's been below of the years. On the tractor side, pricing has been at or above the residual that we've set for those longer term. 17 of the last 20 years, only 3 years has it been below. So we feel -- certainly based on history and what we're -- the way we understand the market, we feel that we're in a good place in terms of where they're set. Now what we've got to see is the market -- what the market does here over the next several quarters. What we saw in the second quarter was even though we were in a very difficult freight environment, a very difficult economic landscape, used vehicle volumes really held up pretty nicely. So we were pretty pleased by what we saw in terms of activity. We saw people still coming out and looking for used trucks, people are wanting to get into the market or saw as an opportunity to make a career change and getting into -- whether it's the tractors or the straight trucks for e-commerce. So that's a good sign because if you get to -- if the volume holds up, that's the first thing you need to eventually start to see price pick up. So our expectation is that certainly, it may take a while for pricing to come back. But as volumes pick up, as the volume continues to pick up, if pricing starts to come up, what you're going to see from Ryder is you'll see us start to generate some gains. If you see Ryder generating gains, that means that pricing is moving in the right direction, that we're kind of working our way at it.

Okay. And where are residual value estimates being set on new leases signed today relative to where the residual values are on trucks and tractors expected to be sold the next few years?

Sure. Well, generally, they're in line with our policy. So they're in line with our longer-term estimates from an accounting standpoint. So as I mentioned, it's consistent with what I talked about as it relates to the last 20 years. So they're being set up for trucks where we've been above that number, 19 of the last 20. And for tractors, we've been 17 of the last 20.

Okay. Let's -- enough of used truck talk for now, I suppose. So let's shift gears for a minute to commercial rental. That clearly had been particularly hard hit by the pandemic. But in your mind, what does the slope of the recovery look like for that part of the business?

Yes. That's going to be driven by the demand on the freight side. And as the capacity of the existing equipment that's out there starts to get used up, you'll see customers start to come and start using our rental fleet. So the good news is that we -- I mean the bad news is we saw rental utilization go to historically low levels in April. As you might imagine, nobody needed an extra truck in April. But we did see it start moving in the right direction in May and June. And we talked about expecting that to continue into the third quarter, maybe not getting to target levels yet but certainly moving back in that direction as the economies across the country start to ramp back up and need the equipment for either seasonal or cyclical upticks.

Okay. And can you just talk about how far you are along in rightsizing that rental fleet? And I guess the dynamic between demand improving and the fleet come down for Ryder, how do those 2 work together?

Yes. I think -- again, it depends on how quickly the demand improves but we felt -- we were very pleased that we -- our truck rental fleet was down about 19% year-over-year in the second quarter. 7% of that, I think we brought down in the second quarter sequentially. So we've done a good job, I think, of not only moving some of those into the used truck market and getting them out but really more importantly, leasing vehicles out of our rental fleet. That's an important part of our strategy as we try to rightsize our fleet. We take -- rather than go out and buy a new truck for a lease customer, we're going to lease them a vehicle that they can pick from our rental fleet. So we have a lot of that activity happening over the last several months, and that's allowing us -- or certainly in the second quarter and now into this year -- into this quarter. That's allowing us to bring that fleet down. So I would expect to have the fleet nearly -- again, it's hard to say depending on what happens with demand but with some just reasonable assumptions around demand. By the time we get to the fourth quarter, we should be pretty close to where we need to be in terms of the fleet rightsizing.

Okay. And then on the leasing side, can you discuss any trends on new lease sales activity? I think in the second quarter, you talked about that's slowing down a little bit. Just how those discussions are shaping up with prospects and new customers.

Yes. Again, I can't get into what's going on in the quarter but I can tell you as we got into the third quarter -- second quarter was tough because in order for lease to really -- for companies to be willing to sign up to long-term commitments, they have to have the demand, number one, of the truck. And then they have to have some confidence in the outlook and some visibility into the future to be willing to sign up to a 6- to 7-year lease. So clearly, with COVID, there was a lot of uncertainty. I think some of that is beginning to get a little bit better. So that should help. You got an election year coming now. So that's going to create a little bit more uncertainty. So I think it's certainly not going to be -- I wouldn't expect it to be a strong lease environment here over the next couple of quarters as there's still a lot of uncertainty in the environment. I think companies -- and you may see companies taking a wait-and-see attitude about when they make either capital investments or when they sign up to longer-term leases.

Okay. And it sounds like in the last few quarters, you've been successful pushing through mid-single-digit price improvement on these new leases. Is this a level that's sustainable? Or is it also capturing some catch-up in terms of accounts up to acceptable levels as the leases come to terms? How are you thinking about pricing? And maybe also talk about how you're using data analytics more to help enhance the pricing model.

Sure. Well, a couple of things. It's -- yes, we have been putting -- producing some price increases in the last couple of years, and we've been able to get them. This year, it's been a little tougher to understand what the acceptance is because we're -- there's not a lot of new truck leases activity. Eventually, we're leasing a lot of trucks out of the rental fleet. But for new capital, we certainly have raised the bar on pricing. We are -- I think that's a great question. We are also doing a lot more work now around data analytics and understanding specific dynamics and cost for certain applications, certain industries, certain customers and really being more surgical about how we price certain types of business, where if we price it to the average, you might price it one way. But if you really look at the performance of that customer or the performance of that application, it may need to be higher or lower. So based on our data analytics capability, some of the databases that we put together, we now have the ability to really be more surgical about that, and we're beginning to get that baked into our prices. So I think that's going to be an opportunity for us going forward again of improving our precision, if you will, around how we price and overall being able to improve returns.

Okay. And maybe stepping back a bit and looking at the whole business, can you discuss some of the secular trends you mentioned or new opportunities you're seeing or expect to see following this period of COVID-19 disruption? You mentioned nearshoring, onshoring. If you could just talk about the interest level and if it translates to any new business yet. Just any thoughts you have on that.

Yes. I think the 2 big ones coming out of COVID that we're seeing are really, obviously, the acceleration of e-commerce. So we saw it in our final-mile, big and bulky business as more people get comfortable buying just about everything online and we need -- they need somebody beyond the parcel companies that aren't taking the larger products to do that, and we think Ryder is really well positioned to do. And I think that's going to do nothing but grow from here. And then the interesting thing is this reshoring idea. I've heard it from several customers. I've also heard it in the marketplace as companies, certainly, as they think about where to put their next either assembly plant or production plant. You're seeing people now looking more towards North America as opposed to Asia. And I think that's a big positive for companies like Ryder because I've been with the company long enough that I saw when a lot of that business went to Asia from -- if you think about furniture manufacturing in North Carolina, when that left and really went offshore, there was a lot of business that we had not only in logistics but also in our leasing business where we were leasing not just to those furniture companies but their suppliers. And all that movement basically went to Asia, and we lost the opportunity to be able to bid on that business and participate. With that stuff -- if that stuff starts to come back, you'll see us now have a bigger market to be able to tap into not only with the customer itself that's bringing back but their suppliers that will also be moving into North America. And again, we have a very strong capability in -- and a great business in Mexico. We support a lot of big Fortune 500 companies. We support their manufacturing in Mexico, and then the movement of that product into the U.S. for consumption and have a lot of expertise in that, and we think we can bring that to a lot of customers who now who may be -- and prospects who may be looking to make more of those moves.