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

Great. Thanks, and good afternoon, everybody. It's Chris Wetherbee from Citi Transportation Research. We are back -- continuing with the transportation angle of the Industrials conference this afternoon. Coming back after lunch. So hopefully, everybody got a little bit of a bite to eat and kind of rested up here, ready to go for the second half of the day. We're really excited because we're joined now by Robert Sanchez, who's the Chairman and Chief Executive Officer of Ryder. Robert has joined us a number of years at the conference, and we were talking before, and continue to be jealous that he's in Miami, and I'm not. They usually just have to commute a fairly short distance to the conference. But he's enjoying the weather. We're kind of struggling here. But Robert, thanks so much for joining us. I appreciate it.

Thank you, Chris. And I'd tell you, I didn't think you could make my commute any easier than, Miami Beach, but you actually did this year because I'm at home. But listen, I appreciate the opportunity. I'll just say a couple of words on Ryder for those who are listening that may not be familiar with Ryder. We're a Fortune 500 company, just over $8 billion of revenue. We've been in business for almost 90 years. We are a transportation and logistics outsourcing company, which means we provide every service from the renting of a truck to the leasing of a large fleet of trucks to the running of a private fleet and a dedicated operation for a customer to broad supply chain, logistics services, such as running warehouses, transportation networks, we can manage all of that for a customer. So as a result, everything we do, the customer can do on their -- our customers can do on their own. Our customers, we have 15,000 commercial customers who have contracts with us. And our job is to do these things more efficiently than they can do on their own. And the good news, that everything we do has gotten a lot harder for customers to do on their own. And that has given us an opportunity to really grow our business pretty nicely over the last several years. We have a large addressable market since most of our market -- most of our -- the markets that we play in have not outsourced a significant amount yet. So we got a lot that we can do. And we've shown that we can tap into that space over the last few years. Our goals right now are really to improve our return on equity to a 15% return on equity over the cycle, and we believe we're well on our way to doing that. We have a road map to get there. And we rolled out a capital allocation strategy back at the end of '19, which is really focused on creating a more balanced earnings and free cash flow model, which we feel really good about. We had record free cash flow in 2020 of $1.6 billion. We're shooting for another solid free cash flow year this year of $400 million to $700 million. And we think that we could get that earnings growth and free cash flow really working in the right direction, which will give us opportunities to do more acquisitions and to the extent we need to also do some share buybacks. So that's where we're at.

Fantastic. Good stuff. Great overview. I'm going to kick off here, and then my partner, James Monigan is going to jump in with some additional questions. But maybe a great way to start, we've been hearing a lot about sort of the current environment that we're in right now. There's a lot of demand out there. There's no doubt about that, and you've seen that kind of across the freight market over the course of the last several months. I guess the other piece though that we've been hearing, obviously, is that there's been some temporary disruption because of weather. And then there's also congestion, things like port congestion and rail sort of terminal congestion that's having somewhat of a cascading effect throughout the supply chain. I was wondering if maybe you could kind of kick off and talk a little bit about what you're seeing in the market currently. What does demand look like? Sort of what is that sort of availability of CASE look like? And are there pinch points in the chain?

Yes. We really entered this year, I think, with a very strong demand environment. Freight environment has been solid at the end of the year and beginning into this year. Overall demand for the movement of product is still high even with the COVID impact. You still got people buying a lot of stuff, and that stuff needs to move, which is good for companies like Ryder. So the environment has been good. You do -- obviously, weather has an impact always, and the last few days, the last few weeks have been a little tough and probably will be for the next couple weeks or so. That impact in our business is really somewhat limited because most of our business is contractual. So truck leases, people still pay their leases even if the trucks may not be moving as much for a few days. Supply chain contracts are generally -- there's a fixed and variable component to them. So there's not a big impact -- as big an impact. There'll be some, but not as big. Where we might see it short term is rental, the truck rental business is short term when things stop, we could slow down a little bit. But on the flip side of it, when things jump back in, it's usually a really good thing for rental because people have to catch up, and companies have to catch up on demand and need additional equipment. So overall, obviously, we're seeing some of the impact of what's happened right now in Texas and some of the weather issues that are happening. But I don't see it as a major issue for the quarter. I think it's something that passes, and we'll move on. And in terms of the semiconductor shortage impact, for example, in the auto business, we've seen some sporadic shutting down of lines in certain vehicle types. But again, we built -- all the stuff that we knew, we certainly built it into our forecast and again, see that as a temporary thing probably through the second quarter and then picking back up in the second half of the year. Some of these companies even said their goal is to try to make up any lost production that happens in the second half of the year when the semiconductor issue, hopefully, is behind them.

Okay. And then maybe one final -- one other question for me, and I'll turn it over to James. I guess from a short-term rental perspective, that's one area that has historically been a little bit more of a sort of indicator of how things were going, sort of on the cutting edge with sort of the economy, I guess, coming out of the fourth quarter, when presumably, that business was probably relatively busy, given all the activity that was going on, how do we think about sort of the first quarter from a seasonal standpoint? Is it behaving the way that you expected? Are things a little tighter than you'd expected?

Yes. It's behaving the way we would expect it. The first quarter is seasonally always down from the third -- from the fourth quarter because third quarter going into the fourth quarter seasonally is strong. But things really start to pick up. Things will be slow in the -- typically slower in the first quarter and then pick up in the second quarter and then head into the season. So yes, it's behaving the way we would expect it to behave. And we feel good about where we're going this year. We think demand, primarily driven by e-commerce, for rental trucks is going to be good. We're making some investments there to grow the rental fleet to be able to take advantage of some of that. That business, as we've seen over the last several years, has been much more dependable, more of a secular trend as opposed to a cyclical seasonal trend. So we're looking to get more of that business than we have in the last few years.

Okay.

So you just talked about rental, but I wanted to ask a question about lease fleet. I think you're expecting the lease fleet to decline over 2021, but you're actually expecting higher basically sales across 2021. So basically, what sort of demand outlook is that really built on in terms of like reopening if reopening gets pushed out more? Like how to think about that?

Yes. That's a good question. We're looking for a moderate economic environment. So 3%, 4% GDP-type growth. It's really -- we are expecting the fleet to decline, primarily driven by weaker sales that we had this year with the COVID and even going into the beginning of this year. I think the combination of COVID and the fact we've been up-pricing our leases to get better returns has moderated that growth some, which is fine. I think we're good with that. The way we expect things to work out is we expect the fleet to start growing sequentially at the back half -- back end of the year and then, as we go into '22, start to see more of that moderate growth, which is more of our long-term target for our fleet management business. So we think we can grow that fleet probably maybe 3,000 units, 4,000 units, which would be a good clip for us, still provide for good free cash flow for the business and make sure we're getting good returns in that business also.

You mentioned your pricing initiatives, and you have been sort of more focused on price than necessarily the volume growth in leasing. So how much of a headwind did that really like create? So like if we're thinking about 2021 and sort of the growth that you're seeing, like essentially, ex pricing and sort of to make it comparable to what you've done in previous years, like how much of a handicap, if any, should we really be assigning to what your cashing?

Yes. It's -- that's a good question. But it's hard to tell, still, right? It's really still hard to tell how much of this is the impacts of COVID, the economy versus what our pricing is doing. But we are monitoring that closely. And we do -- I do feel very comfortable that we could get to that mid, call it, 3,000 to 4,000 unit lease fleet growth with good returns and good pricing. And that's really the path that we're on. So right now, there's a little bit of price discovery that's going on in the middle of the pandemic that made it a little tough to gauge what's what. But as we get into the second half of this year, I think you'll start to see that growth start to begin to pull through and still at the good pricing that we're putting out.

You mentioned conversations with the customers. What are those actually particularly like at the moment in terms of sort of like interest in expanding the fleet and how far they're willing to look out, right? Like essentially, how much of a pipeline and forward view and leasing can you build with the customer at the moment?

Yes. The pipeline has gotten stronger for sure as -- towards the end of last year. We started to see more customers willing to make longer-term commitments because it's typically a sign of confidence in the economy. I think most companies are beginning to look beyond the summer and look beyond the pandemic and what life will be like when things start to come back. And I think that's a good sign because I think people are all kind of eager, like, "Let's get this thing behind us, and let's sign up." So we are seeing customers willing to sign up to longer-term contracts and the leases, and we're beginning to see that improvement now. So again, there's a lead time between when you get the -- you start having the discussion, you get the deal signed and the unit comes in. That's what gives -- it's got more of our growth coming in the back half of the year than in the front half. Where we are seeing -- we're having a lot of discussions in and we are seeing the pipeline really take off is in our supply chain and dedicated business. I think COVID has really created a moment in time where companies have really had to look at their supply chains, look at the flexibility of the supply chain, the reliability of the supply chain. And those reviews have led to more outsourcing and more outsourcing discussions. And that's what we're seeing right now in our business. We're seeing it on the broader supply chain side and even on the dedicated fleet side, where companies saw that they might have been running their own private fleet. And that was great when their demand was relatively stable, but when things went to something very low and then shot back up, they realize they need a little bit more flexibility, and that's something Ryder can provide them. So we're seeing more companies start looking at those options also. So disruption, complexity, anything that makes providing that function more difficult is typically good for outsourcing. And we're seeing that the COVID has had that impact on supply chain and transportation.

Let me just jump in here for a second and maybe ask an industry-specific question. So when you think about that dynamic, are there any industries that jumped out as being sort of more active than others? We've obviously seen a lot of strength on the retail side. I think there's optimism around industrial for '21. Is that something you're starting to see pick up?

Yes. I think industrial would be a big one. We're seeing industrial type companies, whether they're manufacturing or other types of industrial businesses, distribution, which are really looking at, "How do I make my supply chain more flexible? How do I make my supply -- how do I grow my supply chain?" in many cases. Some of them have been slammed with demand that they can't meet and are really looking for companies like Ryder. And then on the e-commerce side, I mean, e-commerce is just -- it's just on fire. I mean there's just -- it got accelerated really with what's happened -- with what happened with COVID. And people are now making much bigger bets around, "This thing is here to stay. How do I position my company to be able to compete?" And that's where our e-commerce initiatives are really helping our customers and providing a solution for them that they can leverage. So for example, our e-fulfillment solution is really for companies that want -- don't want to have to be beholden to e-retailers, and they want to have a way of going direct to consumers. So they could come to a company like Ryder to handle the e-fulfillment side. So we could actually physically move their product to the end -- to their end consumer. We have distribution centers that we've opened up across the nation that allow us to stage their product, and then we can quickly manage that delivery to the home in a very short period of time. So we're excited about that. The big and bulky final mile business taking off also as people have gotten much more comfortable in ordering everything online, not just the stuff that is handled by parcel companies, but furniture, appliances. Fitness equipment was very popular in 2020. So I think that's going to continue, and that's an area that we really are focused on also.

Got it. Maybe one follow-up question on the final mile piece. There's a decent amount of fragmentation across the final mile business. Is M&A something that you guys would actively pursue in the not-too-distant future? There's a lot of room to grow this organically. This seems like a big opportunity with a handful of sort of larger players and a lot, a lot of smaller players.

Yes. Look, in the big and bulky space, we got into that space through an acquisition. So we're very happy with that acquisition. It's performed very well. We would still look to -- we're going to grow it organically, but we still look to where we have pockets where we may want to get more density in a region of the country. For North America, we may do an acquisition to fill that region. So roll them up into those areas. We're certainly open to doing that. And then anything that provides us new capabilities in e-fulfillment. So as an example, one of the things that we learned is, as we got into the e-fulfillment business, that we were set up to really do business with large corporations. That's typically who has been our supply chain customer, big CPG companies and automotive companies, retailers. But small- to midsized businesses, we're having a little tougher time in integrating them into our systems. So we're making investments in technology now to make it easier for us to integrate with small- to midsized start-up type e-commerce companies so that we can be their e-fulfillment arm because we think that market is pretty significant for us. So we're making those investments now should position us well to be able to grow that business going forward.

Okay. A follow-up on that. So what do you actually see this business becoming in 5 to 10 years? Is it substantially different than what you're currently offering? Do you actually -- is there a massive amount of growth that needs to occur? Like, where do you -- what's your specific, like, 5-year or even longer term [ outlook? ]

Yes. I think if you look at our strategy over time, we're right now about 60% fleet management business, 40% supply chain and dedicated. So I think just the growth rates that we've laid out, over time, you're going to see that as the supply chain and dedicated business grows quicker than the FMS business, you'll see supply chain move more to more 50-50 over time and then over time, maybe even be a little bit larger than the fleet management business. Within the supply chain and dedicated business, you're going to see the e-commerce business grow disproportionate, right? It's -- the combined, it's about $400 million today. But as we continue to grow that organically or through acquisitions, you should see that number start to be -- that segment start to be a larger percentage of the overall business.

Got it. And actually, looping back to supply chain, you walked through a lot of the tailwinds to the business in 2021 and probably 2022 as well. And it seems like it's just going to be a tremendous year. Fourth quarter was also strong. Like, essentially, are there headwinds in this business that we should be considering? Or is this something that could grow like mid- to high teens rate in 2021?

Yes. Look, the headwinds in supply chain are really -- anything that makes it a lot easier for people to do -- for companies to do on their own, right? So if there was a lot of deregulation, if the overall geopolitical environment stabilized, if everybody was happy and we all knew exactly what demand was going to be and where the supply was going to be, probably every company would do -- run their -- oh, by the way, if the labor environment was pretty stable, everyone would just run their own supply chains. But complexity is what drives outsourcing. And I think the complexity of running a supply chain is going to continue to increase. In this environment we're in now, I see more regulation coming, which typically means more complexity. Variability in demand for products is going to continue to move with e-commerce and with changing preferences by consumers. So I think that is here to stay. I think the -- what could slow it down beyond that would be execution issues, right? If we stumble on how we execute. And that's really up to us, right? We have to make sure that we're -- we continue to be the best in executing around supply chain. You hear about when there is a problem, they become big problems. And I think Ryder, we've been in this business for a long time. We know what we're doing. We know how to start up these accounts, and I've had good success in doing that. And staying disciplined around doing that, I think, is the key to success in that business. Around the dedicated side of the business, I would tell you, the biggest driver there is the driver shortage. As this company struggled to hire commercial truck drivers, they're more likely to outsource their private fleet companies like Ryder. So if all of a sudden, the driver shortage was resolved, you'd probably see dedicated being a little bit more of a challenge to grow. But we don't see -- I don't see that happening in the short term. So I think those -- more likely to have a tailwind than a headwind there.

Got it. And then you want to touch on dedicated in a second, but one more on supply chain. Just if you think about 2021, is this -- that a year where essentially your pipeline could end up resetting to like, take a step function higher and you might not necessarily see revenue growth be as high in 2021 as necessarily the growth in the pipeline and the deals which you signed in 2021 within supply chain. Would that -- is that sort of the right way to think about supply -- pipeline year than necessarily revenue year?

Well, we think this year is still going to be high single-digit, within our target range. So we expect this year, supply is going to be high single digit. Your point is we are making investments to try to continue to accelerate that. Obviously, the denominator keeps getting bigger, too. So I think that high single-digit is really a good sweet spot of growth for us going forward. And that's the number that will get us to the point where supply chain and dedicated start to become a bigger part of the overall portfolio. Could it go higher? Absolutely. I mean if e-commerce growth were to really take off and we find kind of the secret sauce for how to really grow that business, you could see it grow from there.

Got it. Now turning to dedicated. You mentioned the driver shortage, but [ the fixed side ] of that is essentially driver pay. You did give up bonuses as well last year. So like, what is sort of your outlook for the Ryder-specific sort of driver pay in 2021? And then sort of like how does that fit into like the market overall and what you're seeing?

Yes. Look, we don't -- I'm not going to say we don't have any risk to driver pay changes, but most of our contracts are dedicated contracts where we have drivers, which means that, that driver is running specifically for that account. So if there is a need to raise driver wages, we typically can go back to the customer and negotiate that with the customer before we give the increase. And it's typically tied to market wages, right? And the importance of these accounts is that, that driver who's driving for Ryder is very well-known by the customer. The driver wears the customer's logo on their uniform, they're part of the operation for that customer. So if they're -- if we're doing a good job and the driver is doing a good job, that customer wants to keep that driver. And they become part of the story. So that is -- as we may have to give some additional increases in pay for certain drivers, that is worked through with the customers also to make sure that we're -- that they're participating in that -- in their rate also.

Got it. Now actually, just in terms of dedicated pricing, essentially, given this environment, is this -- is the new business that you're signing on and bringing in just coming in at a different rate than what you've seen historically in dedicated? Like, essentially, has the pandemic caused this -- the price of that dedicated business to move up, given the complexity, at least?