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

Scott Group from Wolfe Research again. Happy to be joined by Robert Sanchez, Chairman and CEO from Ryder System, for our next fireside chat. It's Tuesday, May 25, at 2:25 p.m. Eastern. Robert is going to kick us off with a few opening comments, a quick state of the state, and then we'll get right into questions. And if you have any questions, make sure to type those in, and we'll get right to those. So Robert, thank you so much for being here again. Appreciate it. And I'll pass it off to you.

Great. Thanks, Scott. Well, let me just make a couple of comments just for those that may not be familiar with Ryder. We're in the transportation logistics outsourcing business, been in the business for almost 90 years. We're about $8 billion, $8.5 billion in revenue, a Fortune 500 company. We have about 40,000 employees. We maintain and mostly own about 280,000 vehicles, commercial vehicles that we maintain for customers. We operate in 3 business segments: the fleet management segment, which is about 60% of the revenues of the company. It's basically a truck leasing and rental business and organization, we've been in for a long time. We're one of 2 major players in that segment. We have a dedicated transportation business segment, which is, as you might imagine, outsourcing trucks and drivers for private fleets. That makes up about 15% of the revenues of the company. We employ total, across the business, is about 10,000 commercial truck drivers, which as you know in this environment is really in high demand and an important capability to have in this business. So we're in that business in the dedicated transportation. And then we're in the supply chain solutions business, which is the outsourcing of broad supply chain activity could be -- it could be some transportation, could be the outsourcing of a traffic and transportation function, or it could be the outsourcing of the design and operating of supply chain, things like distribution centers, also an important growing business. So we're a leader in these businesses. We play in large addressable market segments, secular trends that favor outsourcing, primarily that everything we do has gotten a lot tougher for us to do in the last decade as more regulation and more technology has come into play with trucks and with drivers, and it really provides some nice tailwinds for our business. Our strategy is really around a balanced capital allocation strategy of growth -- earnings growth with good returns and positive free cash flow over the cycle. We've really focused on this or certainly refined our focus on this over the last couple of years. I feel really good about the progress that we're making. The goal for our business is, from a shareholder standpoint, is to achieve a 15% return on equity over the cycle. We feel really good about this year. We're going to -- we expect to come in 12% to 13% ROE and really being able to get at or above that 15% as we go into 2022. Again, our goal is, over the cycle, to be at that 15%. With all the things that are going on, just the secular trends that favor what we do, one of them is e-commerce and a real focus on supply chains. So as we look to make investments in the future, you'll see us investing in capabilities around our final mile, big and bulky delivery business around e-commerce and those things that really can help us bring new solutions to our customers. So we're in the process of making some of these investments. Some of that will be organic and some of it could be through acquisition. So hopefully, that gives you an overview kind of who we are.

No, that's great. I always like to just start with everybody just with a quick sort of macro update. I know you don't get too specific about trends intra-quarter. But just directionally, what are you seeing from your businesses that are more cyclically exposed in rental and things like that as the second quarter is playing out?

Yes, I can just get back to when we were just -- when we had our earnings call a few weeks ago, the environment is very, very positive. Demand environment is very strong. There's a shortage of assets or trucks or also in terms of human assets and capital with drivers. So in that type of a tight environment, it's still very good for Ryder. Not only does it really help our truck rental business, which was, as we mentioned on the call, we expect to be at certainly at or above the target utilization levels, historical target utilization levels. But also our used truck business, which had really had a multiyear, very difficult period where prices have come way down. They're now rebounding and going the opposite direction and really strong, strong used truck market. We've been able to increase pricing. Inventories are very low, and it's very much a seller's market right now in the used truck market. I think also the fact that new truck production is somewhat slow and somewhat challenged with some of the semiconductor issues is good for the used truck market because that means that when people are looking for -- companies are looking for new trucks, if there's new truck immediately available, they're going to go to the used truck market. And this thing seems to have some legs and probably should last for some time in terms of the -- just the overall shortage of trucks.

Last year, you talked about on, the rental side, that a good amount of the business was driven by special events, things like concerts and such. How much of that rental business was tied to that? And as that comes back, I would imagine that would mean that there's room for rental demand utilization to get even better for you than what you've already been seeing. Is that a fair way to think about it?

Certainly, a portion of our business around rental was, especially on the weekend stuff, there was event-type business that has not come back yet, as you might imagine. So there is opportunities. But I got to tell you, with our rental utilization where we are, where we've been, we are getting to that kind of peak rental utilization where we do expect for the balance of the year, our trucks to really be running. Whether they're running with events or they're running with other customers who need them, utilization should be very strong for the balance of the year.

And given that, are you more focused on now trying to grow the rental fleet? Or is it about trying to get more pricing out of the existing rental fleet? Or is it so good do you think you can do both? Did we just lose Robert? [Technical Difficulty]

Can you hear me? Hello?

I hear you, Robert. Your video is coming in [ cloudy ]. I don't know if it makes sense to turn off your video, maybe just try audio.

How about now? How about -- is that better?

Yes. I think that's better, yes.

Okay. Sorry, where were we?

I was asking about the rental -- are you planning -- are you more focused on growing the rental fleet right now, pricing and pricing trends you're seeing?

Yes. Again, [ we're planning to grow ] the rental fleet about 10%. We're not really looking to move [ before ] that. I think it's more everything is focusing in on price around our more... [Technical Difficulty]

We just lost you again, Robert.

Transactional parts of the rental business. [Technical Difficulty]

We keep losing you, Robert.

All right.

Is there a way to...

Can I [indiscernible] maybe?

We can -- how about we keep trying, and then, Calene you're there and who else is on from Ryder if we need to supplement?

Scott, Jones Diez is on, if need be.

Yes, I'm on as well.

Okay. Hey, John. Hey, Calene. Okay. So maybe...

Hear me? Can you hear me?

Why don't we do this? If there's a way, Robert, for you to dial in, that will be [ perfect ]. And then maybe while you're -- until you dial in, John, why don't we turn to you, if that's okay.

[indiscernible] Go back.

Okay. And John, so congrats on your now appointment as CFO.

Appreciate that. And you were asking about [ rental ].

Yes, we were asking about rental pricing versus fleet growth expectations.

Yes. So we came into the year, and I think we shared that we would look to grow the fleet 10%. And then you saw, in the first quarter, you saw a healthy price move in the business. We expect some of that pricing action to continue through the balance of the year. As you get deeper into the second half just because of how we saw the economy picking up and we took pricing up in the second half of last year, the comps may look a little bit different. But you should expect pretty good pricing through the balance of the year. And then from a fleet perspective, we're still planning on getting to that 10% fleet growth level. We are seeing that deliveries from OEMs are a little bit choppy. So it may not come in as soon as we have expected, but we still think we could get there by the second half of the year.

Okay. And John, maybe just talk about your appointment as CFO and what potential changes, if any, we should expect from Ryder going forward?

Yes. I think Robert touched a little bit on it at the beginning. Our focus is on the capital allocation side and really managing the business with more balanced growth on the FMS side. We've done a lot of work in repricing the lease portfolio. So over the last couple of years, we've been focused on getting that business appropriately set up for the future. We still have -- we started the price uplift in 2018, so we still have a few more years to go before we replace the entire portfolio. So that's going to give us some tailwind as we look ahead. That's going to help us not only get to that 15% ROE but really get us there over the cycle that Robert talked about. From a capital allocation perspective, as we look ahead and we look at opportunities to invest in e-commerce and in the supply chain space, I think you will see us participate there, both organically and through acquisitions. So as opportunities come up, we'll look to expand our footprint in the supply chain space. So those are some of the things that I think you'll see, going forward, that will look a little bit different than what you've seen from Ryder in the past, but it's right in alignment with our strategy of getting to that 15% ROE over the cycle.

So let's talk about lease pricing for a second. So lease revenue per tractor was up [ 3% ] in the first quarter. Is this -- I mean, do you think this is a business that can start sustaining pricing increases every year, maybe mid-single-digit type pricing increases every year? Or is that sort of a onetime catch-up? Do you ultimately still think leasing pricing is more cyclical?

So Robert, I don't know if you want to jump in or do you want me to continue here? I think I see you on already. You're on mute, Robert.

All right. Can you hear me now?

That sounds good right now.

All right. Sorry about that. Yes, Scott, I think in terms of the lease price, I think that's a part of the story that's not fully understood yet by some of the investors that -- as John said, we have been repricing the book, if you will, starting in '18 with lower residuals and, more recently, with increasing the spread. So we've done about 2.5 years of that, 2.5 to 3 years. We still got 3 to 3.5 years left of every -- as each lease turns out, call it, the lower return business. I mean, it's okay return, but it's going to be replaced with a higher return business. So not only do you have the tailwind from the depreciation rollout, you actually have better return from a cash standpoint, leases coming in for the next 3 years or so. So I think that is sustainable. I don't know how much more we can actually increase the spread each year. But even if we left the spread increase where it is now, that is going to create some tailwind going forward. [Technical Difficulty]

Okay. I think we just lost Robert again. John, why don't we stick with you.

Go ahead.

Okay. So I guess on that -- Yes, we'll stick with you, John. I guess to Robert's point about sort of multiyear pricing, right, we're now getting back to some really, really healthy gains on sales. The last time we were at this level, FMS margins were 12% back in 2015. This year, we're expecting in our model, we'll see if it's right or not, but we've got 7% FMS margins at very similar gains on sales to what we saw in 2015. I guess, is it going to take that another 2, 3 years of that pricing opportunity to get back to that 12% margin? Do you think we can get there in a few years? Or is there something that's different now about the business why we can't necessarily get back to those double-digit FMS margins?

Yes. I think the big difference there, when you look at the margins, is the depreciation load that's being carried in the business today as we've done a lot of -- a lot with our residual values over the last couple of years. So you've got 2 things there. One is the accelerated depreciation. And then you've got the base depreciation that we made adjustments on residual values. If you kind of neutralize for that relative to where we were in 2015, I think you're back to those numbers. So from the health of the business, we feel really good about where the business is today relative to those periods. I think even more encouraging for us is the fact, as you heard from Robert, between what we're seeing in rental and rental accelerating now and what you're seeing on the lease portfolio on the pricing side, coupled with the maintenance initiatives that we have at play, we think we could actually perform at that level over the next couple of years.

Okay. Let's talk about used pricing. Where are used prices right now relative to your residual assumptions?

So if you go back, we had said in the second quarter last year that we needed to get pricing up 30% on tractors to get back to our policy residuals a week after in Q1 and we're past that. Obviously, we continue to see the market continue to get stronger on the used vehicle sales side as we've seen not only our inventory levels, but market inventory levels continue to decline. We expect that decline in inventory levels will only give us upward pricing pressure as we get deeper into the year. So we feel very good about where we're at today as we exited Q1. And then as we look ahead for the balance of the year, I think we're going to create a little bit more distance between ourselves and residual values that we set up.

And so with the used price now above the residual, above the policy assumptions, do you expect or do you see potential to reevaluate those policy assumptions and then generate, I guess, even bigger tailwinds from lower depreciation going forward?

Well, yes, what we've shared, Scott, is that you will see continued tailwind from depreciation roll-off in 2022 and then it gets a little bit smaller in 2023. We're not looking to make any changes in the short term on residuals that will have a meaningful impact other than what we've shared already, which is the roll-off of the depreciation load. Because if you recall, our [ pit ] is a long-term [ pit ] looking out 3, 4, 5 years out on residual values.

Right. So maybe if I could also just clarify, John, the guidance for second quarter and then the rest of the year, did that assume any further improvement in used truck pricing from what you saw in the first quarter? Or did you just assume that used truck pricing stayed at very strong levels, but kind of stayed steady?

Yes, just the way some of the accelerated depreciation rolls off, it doesn't roll off evenly throughout the year. But what we did give guidance on that was considered in our guidance is the fact that we expect gains to be at that $30 million level of each of the following next 3 quarters. So our guidance does have a pretty robust QES environment through the balance of the year.

Okay. But I mean, you were at $27 million of gains in the first quarter. So it doesn't sound like you're assuming a -- you didn't -- doesn't sound like the guidance assumed a material improvement -- further improvement in used prices from what you saw in 1Q. Is that fair?

That's fair. We do have an improvement because we did expect some lift, but yes, that's fair.

Okay. Okay. And I mean, I guess, bigger picture, how long do you think that this used pricing momentum can continue? I mean, do you think that once we start building Class A trucks again, that used pricing logically starts to move lower? Or do you think that this can last for a while?

Well, I certainly feel through 2022 -- through the end of this year, we're in good shape. And into 2022, I still think the first half, definitely, we're going to see good momentum. As we get deeper into the second half of 2022, I think things may get to a leveling off point, potentially. But right now, we're seeing with economic activity, first. Second, lack of production on new vehicle activity, second. And then just we continue to see e-commerce expansion and the need for used vehicles on that side, which is sending out inventories even more. I could see a pretty good environment lasting all of next year as well.

Okay. Someone's asking, Robert mentioned earlier that truck production is being impacted by the semi shortages. Are you starting to see any improvement in deliveries in cost of production?

It's still -- yes, the question is around OEM production and deliveries. It's still choppy. I would tell you, across the board, we're seeing impact on most OEMs, although what we are seeing, especially in the straight truck market and the lighter duty market, some of that production is coming back online. On the heavies, we haven't seen much of an impact and, certainly, the trailer productions are projected into 2022, and that's kind of a longer lead time for us. So we have seen some impact going into second quarter. I expect that supply chains will start getting better. And I would suspect that by the second half of the year, you're going to see production get back online and product moving quicker to customers and leasing providers like ourselves.

Your supply chain business has a lot of auto exposure. Is that being negatively impacted right now by the lack of production, just given chip shortages?

Yes. On the auto side, Robert shared with the team earlier that what we have seen is not the same level of impact as we saw a year ago. A year ago, we were seeing all plants being shuttered for about 6 weeks. We have seen some impact here and there, not to the same degree. If you look at our auto exposure, the impact today is not a meaningful impact in kind of the activity that we're seeing today relative to historical levels. And what we do expect, going forward, is they're going to come back online. We do believe this is not lost production, but more deferral production that will come back online as we talk to the auto guys. And they expect to be producing vehicles over the next 12 to 24 months at elevated levels as demand for new vehicles is only going to get sharper and more accelerated.

Scott, the only thing I would add to that is we did build that -- we built in an assumption on what we thought that impact was going to be in supply for the balance of the year. In the guidance that we gave, we feel pretty good about that.

Okay. All right. So Robert's back. Let's talk about CapEx. So it's up a lot this year, but it's still well, well below what you saw in 2018, 2019 levels. How should we think about CapEx next year? Do we take another step function higher? Do we kind of stay flattish? Just along these lines of more focus on capital allocation.

Yes. I think, Scott, as we go into next year, we are looking to get some lease growth next year, right? Because lease fleet is going to be flat to down this year. So there'll be some incremental CapEx for that. Plus next year, we have a little bit more of a replacement year than we've had this year. So there will be an increase in CapEx next year. But again, I think the important thing, going forward, is we're certainly looking to balance the growth, the CapEx with the free cash flow and the overall returns. So we're -- our target is not only positive free cash flow over the cycle but positive free cash flow in most years. And we may have a year or 2 where things are a little bit negative, but certainly not to the levels where you saw in '18 and '19.

Would you think next year is a year with positive free cash flow?

It's a little early to tell, Scott, I still -- we still don't know. We think it will be -- it should be based on lease growth and more replacement. Shouldn't be as positive as it was this year, but there's still some work to be done, getting all that ironed out.

Okay. And then you are getting the debt-to-equity ratio that you guys target, 250% to 300%. You're sort of safely within that range. What do you plan to do with any excess cash? Do we start thinking about buybacks? Is it more about acquisitions?

Well, I think first dibs on that is going to be acquisitions. And really, our first priority is if we can find good acquisitions within the supply chain, primarily with the supply chain, we might do some simple tuck-ins in FMS that become available. But primarily supply chain, we would do those. If we can't find them, I think once we get below the bottom end of the range, we'll start talking about maybe some discretionary repurchase to keep us within that range.

I know you've been asked a bunch in the last year or so about potentially selling or spinning out the supply chain business. The fact that you're first priority is making supply chain acquisitions, I guess, that we should assume that means it's unlikely that there's anything happening in terms of selling or spinning the supply chain business. Is that fair?

Yes. Look, I think what's important is that we're able to grow effectively and maximize the profitability of each of the businesses. So we think that they belong together now based on the fact that all the vehicles that are leased from across the divisions, the movement of assets and the cross-selling that takes place today. But regardless, I think the important thing is to be able to grow each of these businesses and maximize the returns.

Okay. Let's talk about Dedicated quickly, and what are the trends in Dedicated right now? A lot of the other public companies with Dedicated businesses have double-digit margins. When do you think you can get Dedicated to a double-digit margin?

Yes. Look, our goal is high single digit and then, over time, we can move up to double digit. We're a little bit below that right now, primarily because we're really investing in being able to get the growth rate higher on our Dedicated business. So we're investing in salespeople and marketing campaign. We're investing in additional technology, which is helping us win more business with Ryder share. So we're making those investments. We think that gets us to that high single-digit, double-digit top line growth. And then over time, as it starts to flow through, start to get to those -- what you mentioned or maybe a double-digit type EBT. We think there's also some operational efficiencies that we need to work on that could provide some opportunity for us in the future and help us get there.

And then strategically, what are you guys doing as it relates to either electric or fuel cell or autonomous trucks?

Well, we're engaged with several of these start-ups, but we're also engaged with the traditional OEMs, obviously, as a big customer of this OEMs. So I think what's important for us is making sure we're stay on the front edge of this and understanding where it's at. I think electric, as we see it evolving, is primarily going to be light duty initially, unless there's some breakthrough by one of the OEMs. We don't see that in the near term, so we think this is more of a light-duty play for the next several years. Medium-duty and heavy duty, even though there's some, I would say, limited production units that may be available this year and next year, I still think the value prop for that has a long way to go because of the cost and the infrastructure. So that's a much longer-term play. And probably several, if not many years out before you see it begin to enter the fleets that are currently running. As far as autonomous, I think we stand in a pretty good position to be an autonomous truck network owner and provider. We know how to run these assets. We know how to maintain them. We have the capabilities to do the final mile delivery with drivers. So we are working closely with the OEMs. And as those vehicles become more of a reality, we do see ourselves as having a position to play there.

And I guess, how do you think about the potential of these new technologies impacting residual value -- residual values. Like are you starting to peak in some of this into your residual value assumptions for a truck you're buying today?

We monitor that closely. But as you might imagine, Scott, a vehicle -- once a vehicle -- it hasn't even entered the new truck market yet, right? So once it enters the new truck market, it's going to be another 7, maybe plus years before it ever enters the used truck market. So you're talking about a relatively long period of time before it even begins to potentially impact the used truck market. But having said all that, we are watching that very closely for that same reason. If anything, over time, as we start to see that, you would see us further lower residual value, especially on those units in the out years once we see that happen.

Yes. I guess, I was thinking about a truck today, a new truck you're buying today that's not -- that's a diesel truck, it's not autonomous, that you're going to be selling 7 years from now. 7 years from now, we could have electric or we could have autonomous trucks. So do you think about -- the trucks you're buying today that are, call it, the legacy, the traditional trucks, right, do we -- do you have residual value concerns about those? Or just it's way too early to be thinking a lot about it?

Yes, I don't -- because well, first of all, in electric, I don't think electric could ever be in the next 7 years, a meaningful part, even if the new truck that we're -- even autonomous. Autonomous, what we've been talking about, is a very limited geography application where you could use autonomous. The majority of freight, whether it's 5 years or 10 years from now, is going to continue to run on diesel equipment and maybe newer technology diesel equipment, but it's going to be diesel equipment.

Okay. All right. I think we need to wrap there. Thank you so much, Robert. Thank you, John, for being on the line to jump in. And then, hopefully, next year will be live, so we don't have to worry about Robert's Internet connection.

Absolutely. Sorry about that, Scott.

All good. I totally understand. All good. Thank you, guys. Appreciate it. So we're going to get going in about 2 minutes with Old Dominion for our fireside chat. Thanks, everyone. Thanks, Robert.