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

On the rental side, yes. So yes. So again, to your point, we are monitoring that. And we've been on the process of getting the fleet size commensurate with the demand. So we'll -- that's all being taken into consideration based on some of the trends you're talking about.

Got it. Obviously, I think one of the big focus areas is the kind of used truck market and kind of the depreciation benchmarking that you guys have done. Clearly, you guys took some big cuts during the 2Q quarter. Can you just remind us kind of where you are right now with that? Kind of do you feel comfortable given your current trends in the used truck market? Do you expect the used truck market to actually tighten up in the coming months with how tight the supply environment is? And what's the 3- to 5-year view there? I mean do you see continued trends you've seen in the used truck market of just steady decline over the last several years? Does that continue? Or do you think that there are factors that can get it to inflect in either direction?

Yes. So Ravi, let me just kind of try to answer both those questions. So I think if you look at the action we took in the third quarter of last year, it was predominantly to lower the residual values on our tractors. And when we did that, we -- based on our internal analysis and third party, the expectation based on some of the trends you were talking about with lower production coming into 2020, that the supply-demand imbalance in inventories in the used vehicle market would kind of come into equilibrium in the second half of 2020. And then we were tracking -- as we mentioned on the fourth quarter earnings call, we were tracking very well in line with those expectations we had for -- as of the third quarter. As we came into 2020 then, in the first quarter, based on the [ early ] impacts, the -- we mentioned that, that recovery in 2020 would be kind of -- we had some price increase that was expected because of that imbalance, and we adjusted our depreciation for that. As we went into the second quarter, 2 things that we looked at. One is we -- our estimate at that time based on the facts that we had at the time was that the used vehicle market would take another year to kind of recover, so not second half of 2020 but second half of 2021, which would be units that we would be selling through mid of 2022. So we marked those units in the portfolio, and we mentioned that kind of in our Q filing, that the levels that we're depreciating our trucks and tractors are at levels we have not seen in the last 20 years. And the expectation was that the recovery would be 2 years from now, so at the mid of 2022. On the policy side, in the second quarter, we did make an adjustment for our trucks because of some of the impacts of COVID. The truck assumptions we made in the third quarter of last year, we trued up. So it was primarily a truck adjustment in the second quarter. And when you look at the actions we did on those, if you look at policy, which is kind of a longer-term view of what we expect to sell those units for in kind of second half 2022 and beyond, for trucks, the levels that we set for policy or our expectations for residuals have been that the actual performance or the market has been above the levels we've set 19 out of the last 20 years. So we feel that those are at pretty low levels on the policy side. And then on the truck side -- or tractor side, the same analogy is that the policy that we've set for those, we've been -- the market has been above -- at or above those levels 17 out of the last 20 years. That's one way to look at it. The other way is that we need truck pricing for -- to come back to levels we saw in late 2019, early 2020. And on the tractor side, we need levels for policy to be at the 2018, 2019 levels, which, if you kind of look at the chart we put out there, is kind of -- is a level that is reasonable from our perspective.

Got it. That's great color. I think the 20-year comments are really telling, and I think that's reflective of what's happened in the industry. Do you feel like these trends are cyclical? Or are they structural? I mean has something fundamentally changed in the truck market where used trucks are just not going to go back to the level they used to be? Or kind of is that -- just sitting here, whether it's a very short-term bubble and things will correct at some point?

I think the viewpoint right now is that these are kind of more -- this is more cyclical. And the -- as we mentioned, the nuance is, if you kind of go back to what I mentioned, pre-COVID, things were tracking in line with some of those expectations that were cyclical. And then COVID kind of -- from our perspective, we just pushed out the time for that recovery. And if things come in better, Ravi, than what we kind of have estimated, I think that was a question we got on the call, if things come in better in the short term than what we are booking to, then we would start to show kind of gains on our sales of used vehicles.

Got it. I want to switch gears a little bit and kind of talk about what the future holds for us because you have one of the largest truck fleets in the country. And obviously, there's been a lot of talk in recent months about the future of truck technology. I know that we've had this conversation several times going back several years, but it looks like there's a lot of momentum building and a lot of those technologies look like they are kind of ready to come to market within the next few quarters to a few years. So can you just remind us how you view truck electrification and autonomous kind of over time? What early steps are you taking to be involved in that space? And what kind of role do you see Ryder playing in kind of propagating that technology through the industry?

Yes, Ravi. So I think when you kind of think about it, we'll break it down in 2. But overall, we want to be on the forefront of kind of the technology changes so that we can support our customer base and make sure that we are able to evaluate and provide insights around these new technologies coming in. We have -- as we mentioned, we have partnered with both start-ups as well as the traditional OEMs, so we get the broadest view of kind of the -- both on the electric side as well as on the autonomous side. Let me just take electric first and then we'll go to autonomous. On the electric side, right now, the primary focus is really on the lighter-duty applications in the marketplace that have kind of come. We have been a conduit for getting those products tested in different applications within kind of our portfolio, which gives us a lot of insight around the attributes of the electric vehicle. And the good part about that is -- you know we're more of a medium- to heavy-duty truck leasing company. So having some of this visibility, we're less penetrated in the lighter duty. So that is a growth opportunity for Ryder as we continue to support both the start-ups and OEMs in regards to that -- those applications. On the autonomous side, clearly we're doing the same thing with regards to our partnerships that we have. And we also believe some of the capabilities we currently have are very applicable to the autonomous opportunity. If you kind of think about the different areas, one is we're a big asset manager. Between owning and leasing and servicing vehicles, we do over 300,000 vehicles. Between our dedicated business and our final mile, we have the sophistication around the autonomous routes that would be there. Our maintenance capabilities provide us another strong capability for where autonomous is going. And then the last piece would be -- is really around kind of data and kind of visibility, which is really the RyderShare tool that we launched in the second quarter, which really -- we've gotten great feedback from our customers to be able to leverage that technology both on visibility and tracking but also gather that data to use that for continued improvements in the kind of the logistic value chain.

Got it. That's great color. Maybe one follow-up there kind of on the electric side. And I know that you've been working with a number of OEM and start-up partners. Do you have a view on hydrogen versus BEV as kind of your electric parts for the future? Or kind of are you pretty agnostic at this point?

Yes. I think we're -- as we talked about, we're really trying to look out for our customers in different applications, and we want to be kind of involved in all the technologies and evaluating those for the different applications that our customers are using them for.

Got it. And then maybe kind of just last on this topic, kind of just going off of what you said last, what are your customers telling you? I mean are you hearing uptake in the requests for like ESG and kind of electrification and autonomous from your customers? Are they coming to you saying, hey, we need a solution in a few years or what can you do for us? And kind of maybe some color there. Kind of is that super early innings? Has that picked up recently? Kind of any color there would be helpful.

I think to your point, there's a lot of interest and there's a lot of discussions around it from our customer base. And as you know, the number of units in the production are not at the levels that's kind of big application yet. But there -- clearly, every customer -- most customers are asking, trying to understand and understands Ryder's role in kind of how this is going, and how it applies to them is, for sure, a topic of conversation.

Understood. We have a few minutes left. [Operator Instructions] We do have one question here already, which I'll read out to you now. "How well penetrated is Ryder within the account base across the portfolio? And looking across these existing accounts, what might the untapped opportunity there be?" So basically, kind of what is the cross-selling potential for you guys over time?

Yes. Well, I think as we talk about consistently, if you look at kind of the -- our dedicated business, about 1/3 of our dedicated business is an upsell from an FMS lease customer. So first, they outsource their private fleet, then we upsell them in regards to our dedicated solution, which is both the truck and the driver and managing their routes. So that is something that clearly has been a big element of the business model for both FMS and the dedicated side. I think as we kind of continue to see the evolution of kind of the supply chain, all of our capabilities that we bring between our supply chain business and dedicated and fleet, we can provide a full suite of products to our customers. So it is something that we are continuing to drive and push as well as kind of as customers ask for additional capabilities, we're there to provide those for them.

Got it. Maybe we can end with kind of where we started out and looking at some of the kind of permanent changes to supply chains and the role you guys play as a result of this. Obviously, kind of with e-commerce and with the COVID disruptions, again it's no surprise that shippers are looking to outsource more. At the same time, we've seen a number of the giants, whether it's retailers or e-tailers, look to in-source some more, build out their own in-house fleets, bring some operations in-house. How do you think about that over time? A, can you remind us what's your customer split between SMBs versus large shippers or large operators from a volume or revenue basis? And second, does it matter to you guys at all whether the market kind of consolidates towards some of these giants over time versus being more fragmented with SMBs?

Yes, Ravi, I think in general, we -- a lot of our supply chain customers are large enterprises, Fortune 500 companies that we support. And if you think about the market opportunity, it's a big market for supply chain and kind of the outsourcing opportunity. So clearly, you're going to have some customers that may do that. But we've had long-standing relationships with these large companies, and we're a valuable part of the execution of their businesses. And we continue to see opportunities to grow our supply chain business. And I think that's kind of what kind of we at Ryder are kind of focused on, is continuing to provide -- when we talked about investing in technology and tools to help our customers, continuing to support them through the kind of current environment and provide them longer-term value creation and solutions for their supply chain and logistics needs.

Got it. I think that's a great place to wrap up. Scott, Bob, thanks so much for your time, and we'll speak next on the 3Q call. Thank you.