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

Hi. Good afternoon, everyone. My name is Allison Poliniak, and welcome once again to the Wells Fargo Industrial and Transports Conference. We're excited to have with us today, Robert Sanchez from Ryder, the company's Chairman and CEO. Before we -- I turn it to Robert, just if anyone has any questions, please feel free to send them to me at [email protected]. Robert, thanks for joining us. Let me just turn it to you. I know you've had a few opening remarks that you wanted to make before we get started.

Thank you, Allison. Yes, I just wanted to introduce a little bit of Ryder for those of you that may not be familiar with the story. So if you can turn to the next slide, it is safe harbor language that you're all familiar with. Really 3 key -- 4 key themes I wanted to bring up before we get started with the fireside chat. First of all, Ryder is a leader in transportation and logistics outsourcing. What that means is that everything that we do, our customer can do on their own, whether it's buying a fleet of trucks and maintaining them or running a private fleet or running a logistics and supply chain network, all things that can be done in-house or be outsourced. The good news is that the market is very large because of the number of companies that have these activities and that are still doing them in-house. There's still a big opportunity to get more outsourcing and a larger percentage of the market to outsource. The secular trends that are really helping us is that everything that we do is becoming harder for companies to do on their own. Something that used to be very simple, maintaining a diesel truck has gotten much more complex with all the technology that now goes into those vehicles. Hiring of commercial truck drivers, there used to be an abundance of them in the marketplace, and now there's a big shortage that all of you are probably familiar with. And last but not least, the running of logistics and supply chains has become much more complex in a global world and much more complex, I would say, even over the last 18 months, as companies have struggled with many supply chain challenges with the changing demand and supply issues during COVID. So all of those things make what we do more complicated, more difficult, which is really good news for Ryder. And because of that, we've seen some nice growth across our businesses. Another thing I want to point out is that we have a disciplined capital allocation and balanced growth strategy that we've undertaken that will really focus on positive free cash flow and improving returns over time. Ryder has -- we've been in business for almost 90 years. We're a Fortune 500, $8.5 billion in revenue company. We have just under 40,000 employees. And we operate and maintain a fleet of about 280,000 vehicles. We also have about 60 million square feet of warehouse space that we operate for our customers. So large company, we had gone through a period of time where there wasn't a lot of growth in our business. We were actually shrinking over time. And over the last decade, spent a lot more -- had a lot more effort around growth. And that growth has been good. It's -- we've had to learn how to grow. We've added salespeople. We added marketing and has, for the most part, been a really good period for the company. However, one of the things that we did learn in that process is there are some areas where there's such thing as too much growth. Because of the capital intensity in our lease business, we had -- we grow, let's say, our lease fleet starts to grow in that 10,000, 11,000 level or the amount of capital that's required to feed that type of growth is very significant and led to a couple of years of very negative free cash flow, which I found over time is less appealing to a lot of investors and really felt that a more moderate growth strategy in that part of the business while accelerating the growth in our more higher return supply chain and dedicated business is a better balance. So that's what we're focused on. We're focused on a balanced growth strategy. That means we're going to grow our lease business, just maybe not grow it as high as we were growing it before and then really accelerating the growth in our supply chain and dedicated businesses over time. So we're in a good spot. We're able to actually pick where we want to grow more and where we want to taper off that growth. The goal of all this is generating positive free cash flow over the cycle. We want to get our return on equity over the cycle to 15%, which we believe this year will be at 12% to 13%, and that's even after having taken some pretty significant adjustments to our residual values, which has put some -- had put some pressure on our earnings. We're back to 12%, 13% ROE this year. And then really getting to that 15% probably as we go into next year. And over time, obviously, we want to be above that 15% in several years in order to balance out to 15% over the cycle. So that's what we're focused on, that's what our target is. We're excited about the opportunities in our industries, whether it's e-commerce, we're a big player in the final mile, big and bulky, delivery, which has really, really taken off certainly after COVID, and we see a lot of opportunities there. E-fulfillment is an area that we're focusing on and making investments in. And then across our supply chain verticals that are in industrial, high tech, automotive and CPG, seeing really nice growth opportunities there as more companies look to outsource different parts of that business. We're making investments in technology, which are that technology as an example, something called RyderShare is allowing us to win more business and differentiating Ryder from some of our competitors and really helping us grow and accelerate that part of the business. The goal over time is to use some of our free cash flow and some of our balance sheet capacity to invest in some acquisitions possibly in that space. That will give us new capabilities and allow us to enter new markets. So that's kind of where we're at, and that's a little bit of the background on Ryder.

Great. And I want to delve into that return. Obviously, all things ends with an improving return profile for Ryder here. A lot of progress has been made. Outside of the depreciation tailwind, can you maybe just walk us through some of the tenets of that improvement and kind of where you are in that life cycle there?

Sure. Well, clearly, we've had -- when we made those residual value changes, those aren't write-offs. You can't just write the vehicles down and be done with it. We depreciate that adjustment in residual value or the remaining life of that vehicle. So that means that if the vehicle only had a year left, I have to depreciate the entire amount over the 1 year, if it's 2 years, over 2 years. So I still have a couple of years where I've got a disproportionate amount of depreciation coming through. But every year is less. So you can look at that as it still weighs down the earnings percentage of the company, but it gives you a tailwind year-over-year. So this year, that tailwind is about $220 million. So we're seeing the benefits of that year-over-year in our earnings. Next year is going to be $100 million, so you're going to get a benefit there. So that's one piece, as you mentioned. Then there's a used vehicle market. Used vehicle market has improved with the lower residuals that we've put in place. We now are generating gains on the vehicles that we're selling. And you're seeing the improvement there. There's -- we're going to generate about $120 million in gains this year. The third piece is our lease pricing. Over the last -- beginning in 2018, we really reduced our residual assumptions on our lease prices -- on our lease pricing, and therefore, raised the lease pricing to get us a better return and have less of it dependent on that last residual cash flow. So as -- if you think about it as a book of business that has an average life -- or has a life of 5 to 7 years, we've now turned over, call it, 2.5 years of the 7 years. So I still have about half of that -- a little more than half of that to go. As I renew those leases, I'm going to renew them at a higher rate and a higher return. So that's going to bring lift to the returns of the company. Rental. Our rental business has improved significantly from last year, but there's still opportunity as the lease [indiscernible] for our rental fleet to grow and bring more earnings. We have cost actions that we've taken. Ryder spends $1 billion, call it, $1.3 billion, $1.4 billion on maintaining trucks. So every percentage that I can find to save money there is a lot of money. We're on a -- we've been on a multiyear initiative to reduce our overall maintenance cost by $100 million, and we're about $50 million into it. So there's still another $50 million to go this year and probably into next year. And don't be surprised, we'll probably add another bogey after that. And then last but not least, as we really ramp up the growth rate in our supply chain and dedicated business, which has a higher return on equity, that part of the business will also give us a lift. Once we hit a more normalized run rate, you'll start to get a lift in higher return earnings from those businesses.

That's helpful. And I would say, you certainly had a well-defined path to improve those returns. But over the past year, anything surprising come to light for you or even opened up an opportunity set for Ryder longer term that in the early stages of this, you weren't sure were possible for Ryder. Any thoughts there?

Yes. Look, I think a couple of things, #1 is, first of all, I would just say the overall snapback of the economy after the second quarter of last year, I think was a surprise for most people. I didn't expect the economy to come back as quickly as it has. We are in a really healthy environment right now in terms of our business. Demand for our services, demand for trucks is very high. The supply of trucks is limited because of the things going on. So it's a really good environment that we're currently in. And we -- and as opposed to other cycles, and I've been with the company for almost 30 years, where typically you feel this and you're already towards the tail end of that cycle, it feels like we're still in the early innings because we still have the reopening that's got to happen over the second half of this year. And then as we go into next year, I think there's still a lot of healthy growth with all the money that's being put into the economy. The other thing I'd say is as we get into 2023, we may be also then facing a pre-buy. So a lot of good stuff, I think, that we're looking at. A couple of things I would say. One is I've been pleasantly surprised that the ability to get price -- get a little bit more price in the marketplace on our lease business as companies have really had to value what we do. That's one thing. And I think that we're taking full advantage of that. And the second thing I would say is the demand for our supply chain and dedicated businesses. I think post COVID, there's been a heightened awareness of the importance of a well-functioning supply chain, a resilient supply chain, a flexible supply chain and companies that have been doing it on their own for a long time are now looking for help. And that's created a great environment for our sales team. We had a record sales quarter, first quarter, and we really feel good about the pipeline of additional business that we have.

That's great. And now just starting to turn to the business lines, Fleet Management Solutions, you touched on it a little bit in terms of balancing the investment there. How should investors think about growth in FMS longer term in terms of the capacity additions that you're willing to make in sort of balancing some of the risk with that as well?

Yes. I think a good way to look at it is, as we've stated, is our mid-single-digit growth rate for FMS, high single-digit for supply chain and dedicated. And mid-single-digit is probably -- you're probably looking at 3,000 to 5,000 unit growth in lease in any given year. And with that, we feel good about being able to provide earnings growth each year, while at the same time, also providing free cash flow because that seems to be the Goldilocks level of growth that works well for the business. We're doing that, we keep balance sheet flexibility to be able to do acquisitions in different parts of the business and to be able to buy back stock at different times if necessary to keep our leverage where it needs to be.

Great. And this question came in, it shouldn't be surprising to you. Any color on the used truck market? I know it's been a challenge for Ryder in the past. It certainly seems to be evolving.

It has come a long way. I'll tell you that. We're certainly in an environment now where demand is far outstripping supply across all the classes. The combination of the quick rebound in the economy, combined with the shortage of new trucks right now as some of the OEMs are facing those challenges has really created a great environment for the used truck market. So inventories are at low levels, we're actually below our target level. There is pricing power now on our end for that. We've been increasing pricing and -- more frequently on the used truck side. The other thing I'd tell you that I'm really happy we did is we increased our capacity to retail used trucks versus wholesaling. So we increased our retail capacity last year by 25%. And that's really helping us -- it's really paying dividends now because there's fewer trucks having to go through the wholesale and more trucks going through retail, which typically means 30% more. So that should help us in the future, too, even regardless of what type of an environment we're in. But the used truck market looks really healthy, certainly from our vantage point through this year and probably into next year. And again, it's all a matter of supply and demand. So as long as the economy continues to move in the right direction, and there isn't a magical inflow of new trucks that generate a bunch of used trucks in the marketplace, this market should stay healthy for a little bit.

Great. And let's turn to SCS, Supply Chain Solutions. An interesting growth story, no doubt. Can you maybe take a step back and just kind of walk us through the life cycle of that business, where you're seeing some of that acceleration, if any, as we go through the environment here?

Sure. Well, we're really strong players in the automotive sector and the industrial businesses and CPG, it's our Consumer Packaged Goods business and in the high-tech business, those are kind of the verticals that we play in. We also have a very strong final mile, big and bulky delivery business. So I don't need to tell you that business has really taken off. With the pandemic, we saw a big increase in demand for those services. People buying furniture online, the famous people buying a lot of fitness equipment online, people working out at home, so that business really has taken off as of last year and continues to grow at a nice clip, providing good returns for us. I would tell you on the high end of our target for supply chain businesses. So we're going to continue to look for ways to enhance that and grow organically and through acquisition. But even I would tell you across our more traditional verticals, we're seeing companies really looking for help. Industrial type companies that might have been doing this on their own before, are looking for help on running efficient supply chains and being able to better manage deliveries of their products. I'd also tell you around the driver shortage. That is really good for Ryder because as companies really struggle with hiring truck drivers, they come to people like Ryder -- companies like Ryder to help them -- for us to take that over and to run that for them. We have 10,000 -- about 10,000 commercial truck drivers who work for Ryder. We're very good at hiring and retaining drivers. And it's an area for us to really come in and help companies in areas that they're struggling with and help them take care of their customers.

Great. And then just on Dedicated Transportation Solutions. I guess why is that a good business for Ryder? And how can you leverage the existing FMS customer base to grow that business?

Sure. That's a great question. We -- there are really strong synergies between our FMS and dedicated business, and there's also synergies between dedicated and supply chain. But customers who lease from us, about 20% of those, 30% of those customers are candidates to upsell to dedicated. So I lease a fleet of trucks today, and I've had my own drivers on private fleet over time. I may want to outsource the whole thing to Ryder. So we're always working on opportunities like that. We also have 600 salespeople in our FMS business who are out there selling leases and building relationships with customers. Those same salespeople can also sell dedicated. So if you look over the last several years, over 50%, 60% of the sales in dedicated has come from our FMS leads and sales force. So there are really nice synergies between those businesses as companies move up the chain of outsourcing, they may just outsource the truck of it and over time, want to outsource the truck and the driver.

Got it. And I come from the industrial side, and I would say multi-industrials, right? A lot of businesses under one roof. So -- I would say one of the -- obviously, the understanding is these companies, in general, could probably trade at a better multiple than they do under a multi-industrial sort of valuation. We're seeing similar questions about Ryder, right, in terms of -- these companies seem to be -- could be higher on their own than under Ryder. Any thoughts about that in terms of, does it make sense to keep these all under one roof? It does seem like there seems to be some sort of leverage that each can grow off of each other. Any thoughts there?

Yes. Look, let me start off by saying we believe they're better under 1 roof. And I'll tell you why. But again, I'll also tell you the counter argument and how we're looking at that also. First of all, supply chain and dedicated represent about 12% of FMS's business, primarily their lease fleet. There's a lot of sharing of assets that goes on between FMS and dedicated and supply chain that if they were separate, it would be much more difficult, right? So I get -- a supply chain has a quick startup they have to do. And if you think about today's environment, if I had to startup with 100 trucks, and I'm a dedicated provider, I may not have 100 trucks that I can -- I can't even get them to fill that need. Ryder has those vehicles. There are vehicles that come back from a lease. There could be vehicles that were taken back for other reasons, or rental vehicle. We can redeploy those into those operations to get them up and running very quickly. So there's a lot of synergies of redeployment of idle assets across those segments, which is important. The next piece is the stuff I talked about, the collaboration sales and the ability to leverage the sales team of 600 people in FMS and our dedicated business. Our dedicated team has, I think, 15 to 20 salespeople, our FMS has 600. So leveraging that sales team to help sell, I think, is also important. If you look, as I mentioned, historically, 50% to 60% of their sales are coming from that collaboration. More recently, I'll tell you, there's also been collaboration between FMS and supply chain as some of the companies that we deal with the larger companies, whether they're customers or suppliers, introducing them to the work we do in supply chain and having supply chain that also provide dedicated transportation to them or run warehouses and logistics services also has become a more important part of the sales process. So we've got cross-sell opportunities across the divisions. Technology investments that we're making and things like RyderShare are being shared across dedicated and supply chain and maybe over time even FMS. So those are really some of the reasons why, I also think in an environment that is changing, there's a lot of disruption going on in transportation and logistics, having the different chess pieces that Ryder has, I think, positions us well to be able to mix and match it, figure out what is it that we need in order to succeed in a world that could be very different in 5 to 10 years. So we think that as FMS recovers and gets back to its normal returns, we think that the full value of Ryder can be attained and recognized in the marketplace, but we've given more disclosure. We're also talking a lot more about free cash flow, which should ultimately be the measure of value for the business. We've said that we can generate $800 million of free cash flow with no growth, and the growth would trim that back a little bit, but not much, and that should help people understand what's the real market value of this business together. So we're going to work down that path, and we -- and that's what I think is ultimately the best solution. Obviously, if that doesn't work out, and over time, we see we're not getting the value of the sum of the parts, then we're watching it, and we'll take the actions that we need to take. But we still -- we believe that this business is really valuable together. That we can get the value by -- first of all, by performing. And secondly, by making sure we have the right disclosure. And as you've seen over the last year, we're making really good progress towards getting it.

That's helpful. And the one thing I want to be sure to touch on is technology. Obviously, a growing theme within the transport space in general. You touched on it a little bit [Audio Gap] and what technology means to Ryder? How you're utilizing it? Is it the vehicles? Is it just sort of customer facing technology? Kind of expand on anything that you guys are working on at this point?

Yes, it's really across the board. I'll tell you -- the one I'll highlight for you right now just very briefly is RyderShare. That's our visibility and collaboration tool. And you can hear every logistics company has a visibility tool where you can see where the -- where your product is at all times. Ours is not only can you see it, we're really making it so you can see it, whether it's on a Ryder truck, on a third-party truck, in a warehouse, you really have end-to-end visibility, but you also have the ability to collaborate. So whether it's the driver, person in the warehouse, our customer, our customer's customer, they all see the same thing, and they can all communicate on this tool. That tool has been the deciding factor on a number of the big deals that we've won over the last several quarters. And I think is a big driver to helping us -- that's led us to the type of success we had in the first quarter on sales. So we're excited about that. We're going to continue to build that out. We have other tools like RyderDrive, which is really automating the work that our drivers do as drivers and in the cab helps them communicate with customers. So we're making investments there. We're making investments in our FMS business. So our customers -- fleet customers can do a much better job of managing their fleet, having a platform where they -- called RyderGyde, where they can go in, and they can see what their fleet is doing real time. They can communicate -- they get information on their vehicle. They can get fault codes and those types of things and help us really understand how the vehicle is operating, how it's being operated and better manage the fleet for our customers. So it's -- this used to be a business that was all about the back-end execution and just get it to work, and you can tell me you can report on it later, much more collaborative now, much more real-time visibility is required in communication with the customer, which is good. And that's the stuff -- that's where we're investing a lot of our money into.

That's great. And you touched a little bit on free cash flow profile. How do we see this evolving? Are you seeing it evolving with the sort of the outpacing growth in SCS and DTS and our FMS, how should investors think about that?

Yes. I think -- look, I think the free cash flow is really driven by the ability to grow across the businesses and grow in a moderate way in the lease business. So you're not overspending in any given year on the lease side. But the important thing to people to note is we're going to take that, what you call -- whether you call it balance sheet capacity or free cash flow. And we're going to invest it in the higher return acquisitions, primarily in supply chain and dedicated, we may do some FMS, but primarily supply chain and dedicated, that over time, shift the return profile of the business to be more heavily weighted towards those businesses while still producing strong returns in the FMS business. So that should continue to mean, Ryder is going to be managed not just for growth, but we're going to be managed for free cash flow and we're going to be managed for returns over the cycle.

That's great. Well, I know we're running out of time. I want to give you an opportunity, do you have any last remarks that you want to leave with investors here?

No, I would just say, and I'm sure they're hearing it from other companies, that we're in a very good market environment. Things are very tight around transportation. You see it in the spot rates. You see it in the driver shortage. And I think it's a good environment for us. We're taking -- we want to take advantage of this environment to make sure we get our earnings story right, that we then use the capital to invest it in the right areas of the business. We think this is -- I don't think we're in the late innings of this. I think we're probably in the early innings, given everything that still needs to happen around the reopening, the amount of capital that's being put into the economy, the labor shortage that's still out there. There is some -- there are some shoots of inflation out there because of these shortages. Still remains to be seen whether it's going to become a real problem long-term or not. Inflation, although in general, not a great thing for -- I can tell you this. And as a company that sells a lot of used trucks, inflation is not all bad for used trucks. Usually, it's a good thing for used trucks. So there is some benefit there, too, for us long term, but really just a very good environment right now. I'm excited about the future for our industry, and I'm excited about the future for the company.

Great. Well, thanks so much for your time. This has been really helpful.

Thank you, Allison.

Thanks.