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

All right. Okay. I think, everyone, we're back. Thank you so much for your patience. We had a few technical difficulties, so I'm going to skip my intro and just introduce Robert Sanchez, CEO of Ryder, who is going to make a few opening comments, and then we'll go into Q&A. Thanks.

All right. Great. Thank you, and good afternoon, everyone. Let me just give you a couple-minute background on Ryder. Ryder is a Fortune 500 transportation and logistics outsourcing company with about $8.4 billion of revenue. We have about 280,000 vehicles that we own most of them and maintain them all, primarily in North America. We operate about 63 million square feet of distribution and warehouse space for our supply chain customers. And we have just under 40,000 employees who work for Ryder. About 60% of our business, I would say, is the outsourcing of the trucks for our fleet management business. 13% of the business is the outsourcing of the truck and drivers and consider that dedicated transportation. And then 25% of the business is the outsourcing of broader supply chain activities, which could be running distribution centers or managing large transportation networks that's about 25% of our business. So we operate in very large addressable markets with secular trends that really favor more outsourcing. So in outsourcing, in general, the more difficult the activity becomes, it's usually good for the outsource provider. So the good news is that transportation and logistics over the last decade, and I would argue, probably accelerating over the last 12 to 18 months, those activities have become much more complicated, much more difficult for companies to do on their own. Therefore, we think that's a great environment for our company and opportunities to continue to grow. Our strategy is really focused on a 15% -- achieving a 15% return on equity over the freight cycle. And we accomplished that through a disciplined capital allocation strategy that has -- balances growth with returns. The way we do -- what that means for Ryder is a more moderate growth strategy for our asset-intensive fleet management business and a more accelerated growth strategy for our higher return, less asset-intensive supply chain and dedicated business. We think with that strategy, we can generate solid positive free cash flow over the cycle while achieving our 15% ROE target over that same period of time. We've made really good progress, I think, on our strategy over the last couple of years. We generated really great record free cash flow last year and are looking at generating $400 million to $700 million of free cash flow this year. We initially had targeted approaching 11% return on equity this year as we're coming out of the challenges of the used truck environment in COVID, are now expecting to achieve 12% to 13% this year and certainly be within a range of achieving our 15% ROE in 2022. So in order to make sure we continue to grow, we have some strategic investments that we're making around sales and marketing, around expanding our technology and solutions. There's one in particular called RyderShare, which is our visibility -- our freight visibility and collaboration tool, which allows our customers to see their product wherever it is in the supply chain. And we think that's really providing us a competitive advantage that's allowing us to win a lot of business in our supply chain and dedicated businesses. We had a record sales quarter, first quarter, in supply chain this first quarter and are really excited about the growth opportunities that we're seeing there. So that's where we're at. I think we're in a great place. I'll tell you this is as strong a demand environment as I've seen in the 28 years that I've been with the company.

Great. Thank you so much. Just sort of picking up on the technology, which is not necessarily where I was going to start, but the RyderShare seems pretty interesting with the visibility, et cetera. When you think about what customers want, is it this technology from you? Is that what's sort of driving the new business opportunity, the rider capabilities around technology and able to manage the supply chains?

Well, I think what -- around supply chains, what companies are looking for is expertise, right? They're looking for somebody who's done it before, who's done it in other companies that can bring best practices to their companies. Technology is one component of that. And I think we've been in this business a long time. Ryder has been in the supply chain business for decades, started in the auto sector, but really, over the last several decades, have really been in the high-tech sector, in the retail sector, in the consumer packaged goods industry and in other industrial-type businesses beyond automotive. So bringing our expertise, our ability to execute well in the supply chain is really, I think, the most important thing, especially in what's happened over the last 12 to 18 months with COVID and all the disruptions that happened in supply chain. The ability to help companies design and operate a resilient supply chain, I think, is really -- that's the key word that I've heard a lot over the last several quarters. I think RyderShare is one component, right, which is a technology that's giving you visibility and allowing a customer to react much better and much quicker to what's going on in their supply chain by having that visibility and collaboration.

Maybe just staying with the supply chain theme, given all the congestion and we read about it and hear about it every day, what are customers -- I guess question number one is, has the pipeline just accelerated for potential supply chain deals over the past few months? Or what sort of time frame? And how would you assess the overall pipeline? Is it basically a heavy demand situation right now?

Yes. We saw it really start to increase in the tail end of last year, probably in the fourth quarter, maybe third quarter going into the fourth. And then really -- the deals started really coming in, in the first quarter and the pipeline continued to grow. So I think coming out of COVID, it's probably not a surprise to anybody that companies have really had to reevaluate their supply chain and really reevaluate how they're doing things and how do they make sure that they're prepared for disruption and prepared for things that can happen as we saw last year. So that's giving us an opportunity to be able to explain what Ryder can do, our history of being able to do this for other companies. And I think our -- one of our biggest weapons beyond RyderShare is just the ability to take prospects to customers where we're actually doing this for them. And we've got a long list of clients who are really able to articulate how Ryder has been able to help them in their supply chain.

And what's driving the customer engagement? I know the resiliency you mentioned and the ability to operate it, but is it around e-fulfillment? Is it around last mile? Is it around warehousing, transportation management? What are people seeking?

Yes. I think -- look, I think some of them are companies that are changing. If you think about the retail companies that are maybe transitioning from traditional retail to more of an omnichannel or e-commerce type solution, we're seeing that as companies look to change their model. And then we have the traditional industrial companies that are -- they may be in the manufacturing sector, have just had some challenges with COVID, either they saw their demand spike or they saw their demand drop off and then spike, and they're looking for companies that can help them think through and design and then it operates. That's what Ryder can do. Not only do we design -- help them with the design, we can actually operate those supply chains for them. So as you see manufacturing come back, industrial businesses coming back post COVID, they're looking for help -- to help them set up their supply chains for the run-up in the new world.

Curious, is the complexity increasing with what you're doing in supply chain? Does it make it harder to -- if it is, does it make it harder to price things appropriately or figure that out?

Well, I wouldn't say it's increasing. It's -- there are different complexities, I think, post-COVID, right? It's much more around changing demand. With e-commerce, it's changing customer preferences and dynamics that are out there. So the good news is that a lot of these things Ryder, over the years, has experienced in one industry or another. We bought this company called MXD 3 years ago that does final mile delivery of big and bulky. We've been able to leverage the e-commerce and final mile capabilities of that business to help other companies that might be looking at how they handle final mile-type deliveries of their own product. They may or may not be big and bulky, but certainly, a lot of the infrastructure that's needed and the infrastructure that's in place can be leveraged.

Have you given the size and scope of the e-commerce component and supply chain within the business? Or I'm sure directionally, it's moving much higher. I don't know if you've given the order of magnitude.

Yes. I think in the marketplace, I believe, we currently rank third or fourth in terms of size. But we talked about the big increase that we saw last year with the COVID -- with COVID, certainly as we got into the third quarter of last year, and if you think about things like fitness equipment and furniture that people started buying for their homes, office furniture. But the great thing about that is we've seen that growth continue into this year. So I think you're seeing consumers become much more comfortable with buying things online that go beyond just parcel delivery. For things that they would otherwise maybe have gone to a store are now more comfortable buying online. So we think it's a great opportunity for us to continue to grow. We're seeing it grow [ inorganically ]. And the good news about our business maybe versus some of the other competitors is, it's -- we really are happy with the profitability of that business, too. We talked about the profitability as really on the high end of the range that we've given for our supply -- overall supply chain business. So we like the model, and you can expect us to grow that organically as well as potentially doing some additional acquisitions to grow -- to accelerate the growth.

Actually, that was my next question. If supply chain is a possible area from an acquisition standpoint, I assume it would be to either expand in services or expand with existing. Like what would be the -- how do you think about M&A or purchases in supply chain, new services, expand existing, both?

Yes. I think that's going to be a key part of our strategy to grow going forward. I mean we are targeting that high single digit growth organically but really be able to augment that even higher with some acquisitions as we get our leverage back within our target range, which we're in right now. We're now in a much better position to do some acquisitions or buy back shares eventually, if we don't find the right ones. But yes, I would expect that to be in -- either increasing our scale in Ryder Last Mile, so in the big and bulky e-commerce type space. Also, we have an e-commerce solutions business where we're -- we've got fulfillment centers across the country, where we are delivering more of -- not big and bulky but more traditional parcel-type business for companies that may want to go direct to consumer with their brand and they need somebody to do that fulfillment. We're doing that. We've got that business that we launched last year or actually 2 years ago. So maybe looking at some acquisitions there to really maybe kick start that business a little bit more and buy some additional capabilities there. And then I would say in industries that we're not currently in, the traditional logistics-type businesses, we may look to acquire new verticals through an acquisition.

Got it. All right. Great. And then sort of maybe continuing to work in this direction, flipping over to dedicated for a second. I'm assuming, given the tightness in capacity out there in trucking and what have you, that the sales activity and pipeline for Dedicated is only strengthening as well. I guess that would be the first question.

Yes. A tight driver market is good for dedicated because more companies that don't hire truck drivers for a living are going to come to companies like Ryder. So yes, we've seen a very good sales environment for dedicated. We're targeting high single digit, maybe double-digit growth for dedicated this year, and that is because of the healthy pipeline that we're seeing. Private fleets are struggling with being able to hire and retain drivers. That's not what they do for a living. So that's what we do for a living. We have over 10,000 commercial truck drivers that work for Ryder. So it's right in our sweet spot. It is tougher. It's definitely a tougher environment than it's been. But we'll take that because we think that's an area for us to add value.

There's actually a question. Are you seeing activity from private fleet conversion or existing customers wanting more trucks?

Mostly, I would say, private fleet conversion is the big one, where you're seeing companies that were going it alone and had their own private fleets are now looking for help.

Got it. And you are okay generally obtaining drivers? Or is that also a challenge even given the Ryder name and fleet?

Yes. I mean, listen, it's a more challenging environment for everybody. But this is what we do for a living. So we have a dedicated team of driver recruiters. That's all they do. They don't recruit -- they recruit drivers. They don't recruit accountants and salespeople and all the other stuff that most private fleet recruiters will do. And they can typically -- they're in all the markets in North America. We're in all the markets in North America. And we can typically find drivers where private fleets may struggle. So it is a tougher environment. We're in the same boat as everybody else, but we're much better equipped to handle it than, I think, most private fleets.

And are leasing customers coming over to dedicated?

There's always some flow of that. If you look at our dedicated sales, typically 50% to 60% of those sales come from either a customer who converts to -- from leasing to dedicated or it's a customer who may have been -- our lease salesperson might have been discussing a lease with them and ultimately sells them a full dedicated solution.

Got it. And then I know you mentioned high single-digit, low double-digit revenue. What about margin thoughts relative to long-term targets in line?

Correct. Correct. The idea is that we may be a little light of the margin on supply chain and dedicated this year as a result of some of the investments that we're making, but feel good about our ability to get to those targets beyond that.

Got it. Okay. And then thinking about the leasing business, FMS, obviously, one of the things that has been tremendous strength, probably even more than expected perhaps as the used truck markets. Maybe if you could touch a little bit on the ongoing demand trends you're seeing for used trucks and the type of pricing and your thoughts on the price trajectory. Can it hold firm for the foreseeable future?

Yes. The used truck market is really strong right now. You're [ having it ] on the used auto market. It's kind of very similar. There's a shortage of used trucks. And we've had a complete 180 swing in the last 2 years when we had a glut of used trucks a couple of years ago and now we've got a shortage. But it is a really good environment for selling used trucks, pricing has continued to increase, and we expect that to continue through the balance -- at least through the balance of the year. I would tell you an inflationary environment is good for used trucks, too, because as the price of new trucks goes up, so will -- it should help the price of used trucks. So right now we're -- our inventories are at the low end of our target range. So we're in a pretty good spot, and we're able to continue to raise price and continue to sell the volume that we need. So -- and every year, you mean -- that's what -- vehicles that come off of our lease and vehicles that come off of rental, that's where they go. So the used truck market does look very positive at least through the balance of this year and potentially as we go into next year.

And you're comfortably okay relative to the policy depreciation requirements right now or we're right at there?

We are. We talked about -- we're at or above our policy depreciation currently. And obviously, pricing continues to go up. So that's really what we need. We need to see that continue to go. But that's an important step that we took 2 years ago of really bringing down our residual values to much lower levels, at least, from a historical perspective. We're down in the bottom quartile, if you will, of historical pricing. And I think that's going to position us much better for any future downturns and allow us to have more gains but also limit the need to do any type of significant depreciation changes like we saw a couple of years ago.

Got it. And I know you had said you are doing more -- I think you're doing more with the retail versus wholesale channels. Can you maybe give an update on how that's impacting things?

Yes, that's definitely helping us, too. We spent the last couple of years really expanding our retail used truck capacity. We expanded it by about 25% between additional locations and more inside sales. And a retail truck will give 30% more than a wholesale. So every truck that we can sell to retail is really good for us. So we now have a capacity to sell 25% more retail trucks than we did before. So you're seeing the retail percentage move up in the company, and I think there's still opportunity to move up a little bit more.

Okay. Great. How about on the commercial rental side? I mean I'm assuming the demand recovery has moved along with the economy. And maybe talk a little bit about utilization. And relative to like normal utilization, where do we sit? And your thoughts on it.

Yes. Definitely, utilization and pricing both ramped up in the first quarter -- throughout the first quarter. It's usually our slowest quarter, but ended the quarter really strong going into second quarter. I think with the shortage of vehicles that are out there now, rental is doing really well. I mean we're in a very strong rental environment. So I would expect, for us, max utilization for the year or kind of the peak is in the high 70s. We'll have a few -- we could have a quarter or 2 where we touch 80. But I would expect to be on the high end of those numbers -- to be at those -- close to those peak levels for most of this year as the demand is really strong for trucks. And they're just -- the OEMs are not able to ramp up production as quickly as, I think, demand has come up. So I think the supply will be around for a little bit.

So it's basically customers who just need more trucks today because they can't get their hands on other trucks or what have you. They're coming to you to supplement. Is that basically it?

Correct. It's the same thing that's helping both the rental business and the used truck business. It's just the shortage of vehicles in a ramping economic environment, right? You saw GDP coming in really strong in the first quarter. I assume that's going to continue through the second and third. And that ramping of GDP means more stuff needs to move. And there's not enough trucks out there to move them.

Okay. And then on the full-service lease, maybe if you could touch a little bit on the demand that you're seeing there. What's the flow and where is it coming from? Again, is it customers who might be new to lease, existing customers? What are you seeing on the leasing side?

Yes. We switched our strategy really starting in end of '19 to moderate the growth in that business a little bit. We had a couple of years of lease growth in the 10,000-unit range, and that led to pretty negative free cash flow in those years of about $1 billion. And it's not -- that was a lot to invest all at once and felt going forward as a public company moderate growth in lease where you still generate positive free cash flow but still get the earnings growth [ to grow ] more in that 3,000- to 5,000-unit range seems to be more of a sweet spot for us. So that's what we've been targeting. We have raised prices beginning in 2018, and we're seeing the benefit of that because the rate on the new leases that we're signing has been up double -- not double, mid-single digit for the last couple of years. So we were up again in the first quarter in that mid-single-digit range, new leases this year versus new leases a year ago. So that's good news because that's going to help our margin and help our returns. And we expect that -- if you think about that, we started in 2018. So if you think about our entire portfolio of 6- to 7-year leases, we've only repriced a couple of years of that, 2.5 years. So we still got some runway of repricing, which I think is going to help returns over time, every year that goes by and we replace another lease. So I think that's going to be a big driver of earnings over time also to get us to that 15%. And that's a pretty sustainable -- I think it's a pretty sustainable improvement that we are just in the early innings of getting, which you're going to see in the returns.

And presumably, the customers -- I mean, they need it. I don't know what, the competitive landscape, I guess, is not preventing you from these price initiatives, but maybe talk a little bit to that. I'm assuming the customers are clearly taking it. So...

Yes, it's -- look, it's moderated our growth some, but it's okay. I think we really are focusing on the segments of customers who really value Ryder and the things we do and the service that we provide. And maybe some of the lower return-type leases, we're not chasing. And I think that's good for us. And those customers will either buy their own trucks or they may go to a competitor to get that and that's okay. So I still think we've got opportunities to continue to refine that. But there's plenty of business out there, I think, to get to that 3,000- to 5,000-unit growth rate with the improved pricing that we're seeing that really helps us recapture some of the value that we're -- that we give our customers.

So you would still anticipate the 3,000 to 5,000 units this year versus going above that in this environment? You're going to stick to those guns?

Right. This year, we may actually still be down some because -- below that range because we're -- the business has really ramped up here in the last quarter. So there's a lead time to getting those vehicles in. As we get into next year, I think it's where you'll see us maybe get to the higher end of that range, but I don't see us going much above that. I think we're going to moderate that, again, to find that balance of free cash flow earnings and returns.

Got it. And I think you had mentioned on your call that there were some issues around the chips, the automotive chips, truck chips. I mean is that -- how do you see that developing? Is that a limiting factor over the course of the year? Or do you expect things to be on target with what you need to do?

Yes. I think there could be -- there's 2 areas where that affects us. One is on the truck delivery side for FMS, for our fleet management business. So where it's a replacement vehicle, it's really a nonissue because the customer can just continue to run the unit that they're in, and we don't replace it. We maybe delay that CapEx a little bit. When it's a growth unit, it could impact us some. But we talked about CapEx for the year still coming in within the range that we originally said because we had stronger sales and stronger deliveries in the first quarter than we had originally targeted. So that's going to offset what could be some delayed CapEx in the latter half of the year. So I think we're still in pretty good shape compared to what we had originally targeted. The other area that impacts us is, we are a provider of logistic services in the auto sector, our supply chain business. So we -- that is impacting -- that will impact the returns on that supply chain business a little bit this year, but not a significant number either. I think the -- as opposed to last year, where all the auto companies were shut down for 6 weeks, this is more targeted, certain lines at certain times, and we're working our way through that with the OEM. So it will have some impact, but we don't see it as something that will move the needle much. Now the important thing is, as we get into -- once the semiconductor issue is behind us, maybe that's late this year, maybe into next year, what you'll see is automotive production -- a lot of these companies have talked about really having to ramp up production for a significant amount of time in order to make up for some of the lost days and that could create an opportunity for us going forward.

Makes sense. Got it. And then when you think about -- I know you've also been working on maintenance cost savings and lease. Can you maybe give an update on that initiative as well?

Yes. We're very pleased with the progress we've made there. A couple of years ago, we targeted finding a way to reduce our maintenance costs at Ryder by $100 million. We spent over $1 billion in maintenance costs, maintaining 280,000 vehicles. So some of that was through better buying and being smarter about how we buy parts and how we do procurement. And another piece was around really reengineering the flow of work in our shops and making sure that we're maximizing the productivity of our technicians in the shop by maybe taking some of the paperwork out of their hands and off their plate and putting it in the hands of somebody else that could do that while they really focus on our customers and fixing trucks. We've had great success with that. We have, through the end of last year, achieved about $50 million of the $100 million, and we feel really comfortable that this year, we're going to do another $30 million. So we're on track to do that for this year. So we'll have achieved over $70 million or over $80 million of the $100 million by the end of this year. And don't be surprised if we're done with this. We'll look for another certain amount of money we'll take out of maintenance costs also. I think there's still opportunity.

Got it. And then just to sort of round out. You talked about supply chain and what you're targeting there, dedicated for margins and revenue. What -- can you give just the update on FMS, your updated expectations around margin and revenue?

Yes. Remember, our target there is mid-single digit top line with high single digit bottom line. I think we're on target to achieve that this year, be a little bit -- it could potentially be a little bit light of both of them. But as we go into next year, I see us really getting to the point we hit our stride because we still do have -- even though we've been -- we've got tailwind on our depreciation as more vehicles where the big depreciation changes were made rolled off, we get a benefit to earnings. This year, that number is $220 million. Next year, it's going to be $100 million. So every time those roll off, that helps us. And this year, we're still carrying a pretty significant amount of depreciation that came from that change, right? This year, we're still looking at $270 million -- potentially $250 million, $270 million of depreciation that you can consider as a result of all those changes we made that those vehicles still have not rolled off. But they will. Those vehicles will roll off over time, and we'll get that benefit to the bottom line.

And you review these things annually, right, the residuals and policy depreciation and all that?

Yes. We review them periodically as needed. I think where we're at now, we'll continue -- we'll always look at them and we always -- we don't just look historically now, we also do a forward look of where we think pricing is going to set those residuals. But as we said on the call, we feel good right now because prices are at or above depending on the class, our policy residuals, which those are the ones that we are going to -- that really start to hit us in the middle of next year. We feel good that we're at or above those numbers and used truck pricing continues to go up. So right now, we're in a pretty good spot. And again, we have -- those are significantly lower than they were prior to the changes that we made starting in mid-2019.

Got it. All right. Well, I think we're bumping up against the time. I don't know if there's anything else you wanted to add that maybe we didn't cover. I mean it seems like things are going on the right track. The supply chain seems very interesting from here. I don't know how you're thinking about free cash flows over the cycle and allocations and what have you. I know M&A, you mentioned, might be a part of it, but maybe -- and something along those lines. Buybacks you've talked about possibly, too.

Yes. Look, we are focused on our strategy, which is to achieve that 15% return on equity over the cycle. It is a combination of moderate growth in our leasing business where you generate earnings and you make investments in good returning leases, which, as you know, we've raised prices there to do that. Generating good earnings, generating free cash flow. Using that to help accelerate the growth in our higher-return supply chain and dedicated businesses where that -- where we've got great organic growth going, but certainly, acquisitions can help augment that. Either doing that or buying back shares if we get to that point where we don't see the acquisition opportunities. We think that kind of strategy can really get great returns for the shareholders while still providing good growth opportunities for our company in a market that really -- there's secular trends that are really favoring the outsourcing of transportation and logistics, and we are really in a great spot to capitalize on those.

Great. Look, I want to thank you for your time today and really appreciate you guys all presenting at the conference. And hopefully, you have a very productive rest of the afternoon.

Great. Thank you. Thanks for having us.

Thank you.