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

Great. Good afternoon, everyone, and welcome back to the Virtual Laguna Conference. And we continue the transportation track here. Next up, we have Ryder System, and we're very happy to have with us Mr. Robert Sanchez, Chairman and CEO; John Diez, EVP and CFO; and Bob Brunn, SVP of IR and Strategy. Gentlemen, thanks so much for joining us.

Great. Well, good afternoon.

Before we kick off the content, a couple of housekeeping things. First, some disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Also for the audience, you can submit your questions for the management team via webcast, and I can pass along those questions to the management team. And with that, Robert, obviously, tons going on right now with the macro where it is, with the labor pool where it is, with obviously, the pandemic still, I guess, raising. Maybe if you can give us a sense of kind of what you're seeing out there and kind of how Ryder is kind of coping with the current environment?

Great, Ravi. Well, thank you. Thanks for having us. Just as a brief reminder for everyone, kind of Ryder's in the transportation logistics outsourcing business. So well, obviously, we're a transport company, but a little different in that the majority of what we do is we run private fleet, we provide trucks for private fleets and then we run contract logistics-type operation for companies. So everything that Ryder does, a customer can do on their own. So our job is to do it more efficiently and do it better. And clearly, as the activities that we do become more complex and more difficult, the more likely they are to be outsourced, which is a really good thing for Ryder. So with the challenges that we've had with the pandemic over the last 18 months, that has actually created a nice additional tailwind for our business on the sales side as more companies have really looked at -- see how they can make their supply chains more resilient, more flexible. That has really driven a lot of really good sales activity for our supply chain logistics business. Our business is broken out into our truck leasing and rental business, which is the outsourcing of trucks. We're one of the largest providers in that space. We maintain a fleet of about 250,000 commercial vehicles that we own most of them and lease them and rent them to customers. Then the other 35% is our supply chain-dedicated business -- I'm sorry, 25% the supply chain business where companies outsource distribution centers and transportation type activity. And then we have a 15% of our revenues come from our Dedicated business, which is the outsourcing of a private fleet. So this environment has been really positive in terms of making things more challenging for companies that are trying to run their private lease, hire truck drivers. Truck drivers are in high demand and challenging to hire, and also running supply chains. And again, really right up our sweet spot in terms of the things that we do, and we're seeing a really good environment for that.

Got it. That's a great overview. Obviously, the pandemic has been, as you mentioned, kind of massively disruptive for most companies kind of running their supply chains. Can you just give us a little bit of a maybe history lesson as to how outsourcing had been trending coming into the pandemic? What happened in the last 18 months? And kind of how you see it going from this point forward? I mean does the extent and the duration of the disruption kind of almost force more outsourcing for companies that don't do this going forward? And second, have you seen the trend or the pace of outsourcing kind of be a little bit different between the trucking business versus the SCS business versus the Dedicated business. Is there 1 of the 3 businesses that's benefiting more than the others?

Yes. Well, first of all, I would tell you, outsourcing, especially around the truck side, truck fleets, right, companies, some companies would go and buy their own trucks and do their own maintenance and some would lease from companies like Ryder. That had sort of been a very mature business until maybe 10 years ago. When truck technology started to change and the maintenance of trucks became more difficult, we really started to see a secular benefit from that added complexity around truck technology back in -- starting in 2000 -- late 2008, '09 and '10. And that really has continued. And it's more around the complexity of the truck. The outsourcing of supply chain activity also had a very similar pattern. But as it became more difficult for companies to hire truck drivers, I'd say the Dedicated part of the business really started to benefit, and maybe that's 7, 8 years ago when the driver shortage really began to become an issue. And then the overall outsourcing of supply chain activity was more on an industry basis. Certain industries like automotive were more prone to outsourcing, other industries less prone. I think over time, other -- auto has continued to outsource, but other industries have become -- have come up the curve, if you will, and have realized, you know what, this running of a supply chain is complex, and I need partners to help me. So that it was already coming along somewhat over the last few years. But I'll tell you what COVID has done is really added fuel to that fire, right? COVID made the buying -- the hiring of a truck driver much more difficult as it was the driver pool got more depleted. Managing of a supply chain, I would tell you, it started with some of the trade wars or trade spats with China several years ago when companies had to figure out, well, am I in the wrong place by being in Asia? Should I be somewhere else? We started to see a lot of activity about companies really rethinking their supply chains as a result of that. But now with COVID, really, again, it created a much more intense environment as companies have really had to rethink, where do I have my suppliers? What's the best way? How do I make my supply chain resilient to some of these things like COVID or even natural disasters that are happening across the world, geopolitical issues. So that's created an opportunity for Ryder to come in and sell our capabilities not only from a design standpoint but also from an execution and technology standpoint.

Got it. I think the #1 question that's on top of investors' minds right now is how much of this is cyclical versus structural? I mean clearly, it doesn't look like any of these headwinds or tailwinds, depending on which side of the camp you are, are going to abate anytime soon. But if you were to consult your trusty crystal ball and look out, I don't know, 18, 24 months, do you think we normalize to where we were prior to the pandemic? Or do you think this is a new normal or kind of how far in between those 2 points do you think we normalize?

Yes. There's certainly a cyclical component to this. And I would tell you, the things I just talked about, the contractual leases, Dedicated and supply chain, those are longer-term trends. I think once companies make a decision to outsource, they're not likely to re-insource it. So I think that trend will carry on for a while. I think the cyclical parts of our business, which is really the truck rental business and the used truck market, certainly, we're seeing a cyclical pickup from that. From our view, right now, based on what we're seeing with the demand for freight movement, of stuff moving around and the supply of trucks to meet that demand, we think this could be -- it could be higher for longer, right? Because you're in an environment where the economy seems to be strong. Consumers have a lot of money in their pockets still. They're talking about an infrastructure plan that's going to add more demand to the movement of product, and maybe even though that could take a few years to kick in, it's additional strengthening, if you will, on the demand side. On the supply side, well, you typically get the truck OEMs to really ramp up pretty quickly to meet the demand for trucks. There are some roadblocks and there are some constraints with the semiconductors and the raw materials. So that could mean -- from our view, that means this thing could run longer in terms of it could take us longer to get that delivery as demand continues to pick up and supply has a little bit harder time to get there. So exactly when, we don't know. But I think if you compare it to other cycles, this one feels like it's going to run longer.

Got it. There are 2 end markets in particular I want to ask you about. One is auto. You just mentioned the semiconductors issue that's kind of obviously very well telegraphed. That impacts you from both a demand perspective and a supply perspective, obviously restricting the ability to get new trucks. What are you seeing out there? What are you being told from your auto customers as well as from your truck OEMs? Is there a light at the end of the tunnel? Kind of when do you think this normalizes?

Yes. Look, I think this semiconductor issue, as you know, about 35% of our supply chain revenue is in the auto sector, supporting auto production, most of it. And so we're very closely tied into that. And I can tell you that it keeps getting pushed out, the moment at which the semiconductor issue is behind us. I think at the beginning of the year, most of our customers thought by the end of the year. Now most of them are looking well into 2022. And really, the other thing I think is concerning is there's not a lot of visibility. I don't think there's a lot of visibility as to exactly when most of them don't have it. So I think that's really the overall challenge for that industry. The good news is, and I think most of them view it this way, is this is all deferred demand because since there isn't anywhere else that consumer is going to go to buy a car, there's just not one available, they're going to buy it later. And they believe this means that you're looking at probably certainly multiple quarters, probably multiple years of strong production demand in the auto sector just to make up for the demand that's out there today. So it's a slowdown now, but good news in the future. On the truck side, since we're in the truck leasing business, what we're doing most of our customers that they can't get another truck now, we're going to run the truck they have for another year. So it doesn't really create a significant headwind. It could impact some of our growth short term but not a big issue for us. I think net-net, the pricing power that we're getting on the used truck side, especially much needed after some of the challenges we had over the last couple of years is a really positive thing for us, along with the pricing power that we're seeing in some of our rental business. So net-net, certainly a positive. If it goes on forever, it could be a little bit less of a positive, but we're still in a very good position in terms of the cycle.

I think also fair to say that the same deferred demand that you spoke of on the auto demand side probably also exists with your customers, right? They're running an older fleet and then kind of that's now older than used to be. Kind of when the supply comes back, they should be back to market.

Correct. It will be a deferred demand.

Got it. The other end market that I wanted to touch on was Dedicated. I mean clearly, we're hearing -- it seems like Dedicated is probably one of the strongest end markets anywhere within transportation and logistics. Does it feel that way? Is it the strongest Dedicated demand you've ever seen? Kind of do you feel like it's at the cusp of some kind of kind of structural or explosive growth going forward?

Yes. I think -- look, we've been growing -- we've been able to grow that Dedicated business pretty well over the last 7, 8 years, and it's really heavily driven by this shortage of truck drivers, right? Companies that are running their own private fleets are having a tough time. They're having a tough time finding the drivers, recruiting and retaining them, dealing with all the regulatory changes also in transportation, and they're looking for help. So the conversion of private fleets to Dedicated, I think, is a long-term secular trend. It started a while back. It's been accelerated with COVID, but I think will continue for many years. We are seeing it as strong as -- we're probably going to have our strongest year of Dedicated sales that we've ever had, same with supply chain. And that's because certainly, the driver shortage is intensified since last year. As more drivers continue to retire, fewer drivers are coming into the market. Some drivers during COVID found something else to do. And now we're all struggling to get more people back into the industry. So Ryder hires. I mean we have about 10,000 commercial truck drivers that work for Ryder in our Dedicated and supply chain operations. We have a very extensive driver recruiting network. So we're able to typically find drivers where our private fleet prospects and customers can't. So it's a big competitive advantage for us to find them and be able to do that. And then once they make a decision to outsource the Dedicated, most companies will continue to run Dedicated. They like the service. We're very good at this. We've been doing it for a long time. We've added new technology. We've made investments in technology, one in particular called RyderShare, where our customers now have visibility to their freight wherever it is in the network, real time. And that's really allowed us also a competitive advantage over some of our competitors and allowed us to win business that maybe historically we wouldn't have. So we feel really good about that. We're going to continue to make those investments and again, continue to invest in that part of the business.

Got it. I'm going to spend a bunch of time on your technology initiatives later on in this conversation. But maybe for now, let's dig a little bit deeper into the driver situation. Obviously, very well known in the industry. We are maybe starting to see a [ hue ] of the first few signs of a flicker of light at the end of the tunnel maybe with some of the support payments going to expiring and the jobless claims coming down. Are you seeing that as well, kind of? Is it a good thing or a bad thing? Does it help to have 18-year-old to drive trucks? Kind of what are your thoughts on what the outlook looks like for the driver situation?

Yes, to a certain extent, it's a little early to tell, but yes, all those things you mentioned are -- will help, I think, with the driver shortage issue, right? To the extent you can -- you have less options in terms of you're not going to work. Having less money given to you is going to help people get more -- I think it will help us get more folks into the workforce. This -- our ability to recruit new drivers that are coming out of high school that are going to do -- they're going to get into a trade. They're not going to go to college. Being an over-the-road driver is not an option because they can't go intrastate. So interstate with them. So we want to -- over time, I think it's a good thing. Doesn't mean that every 18-year-old should be allowed to drive a truck. But certainly, some of them can. And I think we need to find ways to encourage them to get into that, into the professional driving career because it is a well-paying career. It's a very respectable career. A lot of people have made a great living doing it. And with where wages are now, it's, in a lot of cases, much more attractive than even some of the college paths that are out there. So we're doing our best around that. And getting more women into driving, I think, is another big piece. We're seeing that already even within our own employee base, but I think that's another pool that needs to be tapped. We've done a lot around veterans that have come back to get more of them into the workforce. I think over time, immigration, I think, is another important piece to maybe solving this puzzle. There's a lot of different ways to solve it. None of them are quick fixes, though. None of them are a silver bullet. So that's why I think this driver challenge will be around for a while, which again, as I keep reminding our own employees, whatever makes what we do more difficult is really good for us because companies are more likely to outsource.

Got it. And clearly, the driver shortage is something that impacts trucking companies, but the labor issue is not restricted to the transportation industry alone and it's more broad-based. How has it been on the tech side for you guys? Have you been able to attract the talent and the labor you need there?

Yes, we've had a similar phenomenon there. There's -- people don't talk about the tech shortages, a significant shortage of technicians, both for auto and diesel. So we have about 6,000 technicians across our company. We are an employer of choice in that space. I mean we're the best of what we do in terms of maintaining trucks. So the turnover there is certainly much more limited. We have a lot of tenured employees. We were able to attract new employees again, were able to get people early in their careers and -- to become a technician. We also have a process within Ryder of growing our own. So you can come into Ryder, working at a fuel island, pumping fuel in trucks. If you have the aptitude and the desire, we can put you through a training program at Ryder and make you a technician. So we have a lot more ways of doing that. What it has done is it's made it a lot more difficult for companies that were buying their own trucks and trying to do their own maintenance. That has really been much more challenging. It's been one of the secular trends that has helped our leasing business for the last 8 to 10 years. As the trucks got more complex, private fleets really found it challenging to find technicians that knew how to operate them and were really looking to companies like Ryder to help them. And I think that continues.

Got it. Shifting gears a little bit and talking about, obviously, a big topic with Ryder obviously is used-truck pricing. And used-truck pricing has been pretty strong for the last year or so. It doesn't look like that's going to abate anytime soon. Again, how much of that do you think is structural versus cyclical? How much of this kind of gives you a better handle on being able to forecast that in the near term for your lease pricing? And just kind of any view you have on the outlook for the used truck pricing would be great.

Yes. Look, used truck prices historically have been cyclical and they'll continue to be cyclical, especially around tractors, around the Class 8 stuff. Straight trucks, it is cyclical, but much less so. So yes, we are in an up cycle. There's no doubt. I think there's still room to run here. As I mentioned, I think, stronger for longer is a good way to look at it. But there will be a downturn. So a lot of what we've focused on over the last several years is how do we make sure we're prepared for a downturn, that we've adjusted our residual values and we've done everything we can to make sure that we don't experience significant disruption in our earnings when there is a downturn. There will be a reduction in gains, I think, is an important thing over time as used truck pricing come down -- comes down. But this idea of having to take additional accelerated depreciation and policy, we want to get away from that over time. So one of the things we did is a couple of years ago, we've lowered our residual values overall for all of our fleet down to what I would call historical bottom quartile levels or lower. So on our diesel -- on our Class 8 trucks, the residual values that we're at now, the used truck pricing has only been below that value 4 of the last 22 years. So the vast majority of the time, it's above. And on straight trucks, almost every year, it's been above. So relatively conservative, I would tell you in terms of where we set it, but I think that's a good thing. In addition to that, in the second quarter, we talked about the fact that we are now taking some additional depreciation to account for even when on the tractor side in the Class 8, if pricing were to go back to those trough levels, those 4 years out of the 22, even accounting for that in our policy. So we would not have to take additional accelerated depreciation if it went down to those levels. So we're trying to create a model here where even though you will have some cyclicality in earnings from the used truck gains side, the rest of the business is much more dependable in terms of earnings power and earnings growth. And that's really -- we feel really good about where we're at there.

Got it. So maybe kind of before we shift gears and kind of talk about technology and the long term, maybe you can wrap or John can help us with understanding kind of all those puts and takes, what does the back half of the year look like? You guys just updated your full year guidance fairly significantly. But then I think the 3Q is probably sequentially going to be down or flat as well. So maybe you can kind of unpack kind of what that means for 3Q and 4Q earnings.

Yes. Look, a big part of our guidance was obviously the overall used truck market is better than we thought, rental markets better than we thought. But we're also seeing our lease portfolio performing better than we thought. So those price increases that we've been putting in our lease portfolio starting in 2018 because we lowered our residuals and we've increased the spread, it's paying dividends, and we're seeing that come through even better than we had expected. So we've built that in. I think that's the exciting thing about that. That's a more dependable, through-the-cycle type of improvement in returns. We have -- we started that price increase on lease back in 2018. So we're about halfway through a 6-year cycle. So every truck that we replace now is going to have less risk in the lease, right? Because we're going to have a lower residual assumption and a better return. So we still got 3 years of that, and we feel good about that. So that's helping us, I would tell you, in the second half of this year. So as you look at that, you say, well, what we also built in as the auto production shut down, there was going to be some auto production shutdowns as -- because of the semiconductor industry. So all that was built into the numbers. Now as we get into the year, if used truck pricing continues to be strong and gets even better, there's some upside opportunity there. Rental, I said we were kind of red line because we got every truck for the most part a good utilization in the second quarter. So we kind of built that to continue through the balance of the year. So a lot of -- I tell you, there's a lot of tailwind as we get into the second half of the year that we feel good about. The only headwind is the headwind on the auto production side and what that creates on some of our automotive business. But again, we've tried to build all that into the forecast that we provided.

Got it. [Operator Instructions] For the few minutes we have left, kind of I want to switch gears because again, there are many exciting things going on at Ryder, but one of the things I like the most and have for years, that I think you guys really are a technology leader, both in terms of the investments you make and kind of having a long-term vision. So there are 2 areas that particularly we want to focus on. One is the new tech products and initiatives you've launched as well as the role of RyderVentures. So maybe we can start with kind of explaining that a little bit more and kind of what really excites you there. And then I have a few questions on the new autonomous partnerships that you guys have with Waymo and TuSimple as well.

Yes. We started making more significant technology investments, probably going back 5 years ago. And it was really around how do we move to be much more of a digital company so that we're interacting with our customers that makes it easy. It's one of the things we realized, regardless of whether it's on the supply chain side, the Dedicated side or the fleet type, customers want more information, and they want us to provide them better information so they can better manage their business. So we made this investment and one we talk a lot about is RyderShare. And that is a visibility tool for our supply chain and Dedicated customers. It allows them to see where their freight is and where their product is throughout the supply chain. It's -- that's not unique. What makes it unique is it's also a collaboration tool. So everybody that's involved in the delivery of that load or that SKU is on the same platform, whether it's our customer, our customer's customer, our employees or any -- or the drivers or a third party that may be actually delivering the product. So when communication needs to happen on a load that maybe is not working as planned, that all takes place on this platform, but everybody knows what's going on, why it's late, where it's happening. So that real-time visibility has proven to be really helpful for our customers, and we've actually been able to win a lot of business as a result of having this technology. In addition to that, we're getting ready to roll out a capability so that not only when it's on the truck, you have visibility, but also when it's in the warehouse. So if we're running your -- if we have a contract maintenance agreement to run your warehouse. While it's in the warehouse, you're also going to know where that order is or where that product is. So full end-to-end visibility over time is really what we want to get to. And being able to provide that is a really significant improvement for what most of our customers who were doing it themselves are doing. Another area that we invested in which we saw as an opportunity to take advantage of some of the disruption going on was this COOP by Ryder. So this is an Airbnb for trucks. And we started this software, if you've got a truck that's down and you're not using it, you don't have a need for it for certain times of the week or the month, you can put them on COOP and you can rent it or lend it to somebody. It's a way to monetize an asset that otherwise would just be depreciating. So we've made really good progress there. We started this soft just as a local South Florida operation. We're now in 9 states, really looking, as we get into next year, probably expanding that more significantly across the U.S. We're finding customers that are really finding value in it and seeing it as a business opportunity to invest in a truck and have a good return on it. So that's a really exciting opportunity. We're continuing to invest in that. Then on the RyderVentures is really a commitment we made of investing $50 million in start-ups in transportation and logistics. As we started to get into working with some of these technologies to understand how they could help our customers, we realized we have a nice bird's eye view of what technology works and what doesn't as we understand our customers' needs. And some of these, it made sense for us to maybe make an investment so that we could work more closely with them and also take -- as those companies blossom and we help them get to market, that we can also participate in some of that return. And typically, these are going to be tools and companies that are providing products that we could provide to our customers. So we're in the early innings of that. We've made 4 investments in 4 different companies so far, but we still think that's a great opportunity for us going forward.

Got it. So maybe shifting gears, talk about autonomous because you guys had a couple of big headlines in the last month or so. One is the partnership with TuSimple and the AFN Network and one with Waymo. Maybe if you can touch on both of those and kind of what do you see the role that Ryder will play in the autonomous rollout and kind of when that happens moving forward?

Yes, that's a really exciting opportunity, I think, for Ryder longer term. As autonomous really comes to market and becomes more broadly used, it could be several years out certainly for that. But Ryder is very well positioned to be the owner and the operator of an autonomous truck network, where we have asset management capabilities, we own a lot of trucks. We know how to maintain them. We have final mile delivery capabilities with our Dedicated operations. We know how to run trucking. So if you think about how we get into that, it's through these partnerships. It's understanding how an autonomous truck works, understanding how to maintain it as we're doing with Waymo, understanding how to run -- how to -- where the hubs need to be as we're doing with TuSimple. So we're going to be partnering not exclusively with any of them, but certainly with each of them, along with the truck OEMs, so that over time, we are well positioned to be an owner-operator, if you will, of one of these networks that we think could over time could add some value.

Got it. And electrification, kind of what's the view or the path to the time line to electrifying some or all of your fleet?

That's a million-dollar question, right, is how long is this going to take? We believe we're as closely tied to this as anybody. And what we're seeing is light-duty delivery vans, probably near term an opportunity, maybe in the next several years. You just have to see more of those come to market. Heavy duty and medium duty, we think, is much longer term. I think it's going to take a while to get the value prop. Because the one thing we do know for sure, being in this commercial trucking business for a long time, in the business world -- as opposed to in your own personal vehicle, you might be willing to splurge and spend a little more to get the features and the type of vehicle you want. In the business world, it's all about economics. And it's all about what's going to give -- make me -- give me a competitive advantage and where can I get the best return. So we don't see that value prop really happening on heavy duty and medium duty for a while. We don't see a path yet to it. So I think that's kind of the way we see it. Lighter-duty delivery vans possible in the next few years. Heavy-duty and medium duty, I think are much further out.

Got it. On that note, I think we are out of time for the session. So Robert, John, Bob, thanks so much for joining us. Clearly, exciting times in the industry, and we will see where we go from here. Thanks so much for joining us and this ends the session.

Thank you, Ravi.