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

Thank you, operator. Good day to everyone. My name is Garrett Holland, Senior Analyst, covering transportation and logistics at Baird. We are very pleased to have Ryder System participating at our industrials conference this year. From the company, we have Robert Sanchez, Chairman and CEO; John Diez, Executive Vice President and Chief Financial Officer; and Bob Brunn, who leads investor relations, corporate strategy and new product strategy for the company. So now we'll turn it over for the company for a brief opening presentation. Thank you.

Great. Thank you, Garrett. Let me pull up some slides here so I can just walk you through a little bit of who Ryder is for those of you that might not be familiar with our story. Ryder is in the transportation and logistics outsourcing business. So we're almost $9 billion of revenue. We've been in business for almost 90 years. We're primarily in North America. We have just under 40,000 employees, actually just over 40,000 employees now. And we manage a fleet of about 280,000 vehicles. The makeup of the business is really, we operate in 3 business segments. We have our fleet management business, which is primarily a commercial truck rental and leasing business, makes up about 60% of the revenues of the company. And that's basically the outsourcing of a truck. So we're one of the largest purchasers of commercial trucks in the country. We lease those trucks or rent them to our customers, and we maintain that fleet of trucks with a network of about 800 truck maintenance shops that we operate in North America. 25% of the company is the outsourcing of broad supply chain logistics businesses. So that could be anything from a fleet of trucks that we run for a company, combined with some warehousing that we could run. We operate about 300 distribution centers for large companies in North America, to actually managing an entire transportation network. So we can act as a traffic department and a logistics department for our customers. In that business, we operate in 4 industry verticals. Automotive, we're a big provider of logistics for the automotive industry in North America. High tech, so you think about companies that produce high-tech products, we do a lot of distribution services for those companies. CPG, so consumer packaged goods and retail, food logistics, if you will. We provide a lot of outbound distribution of warehouses and transportation for those companies. And then other industrial companies we also, think about manufacturing type companies, we provide logistics services for those. And then the last piece is about 15% of the revenues of the company, which is our dedicated transportation business. That's where we run private fleet. So not only do companies outsource the truck but they outsource the truck and the driver to us. We employ about 10,000 commercial truck drivers that work in our supply chain and our dedicated businesses. So everything we do, a customer can do on their own. They can buy their own truck. They can run their own fleets or they can manage their own logistics or they can have Ryder do it for them. The good news is the more difficult that something becomes, the better it is for Ryder because companies are more likely to outsource. And everything you're hearing on the news about the difficulty around supply chain, around hiring truck drivers and managing fleets, all of that is really good news for us because we're seeing really a big increase in demand for our services as more companies look to outsource these services. So we are really benefiting from general secular trends that are making what we do more difficult. It's allowing us to grow. And clearly, in a post-pandemic world, those secular trends have been accelerated. So to talk a little bit about those. I just mentioned some of the dynamic supply chain things that are going on that are really making companies revisit their supply chain operations. That's really helping us as more companies are coming to us. We are seeing record levels of new contracts being signed in our supply chain and our dedicated businesses as more companies look for help in this more difficult environment. Disruptive technologies. So if you think about the move towards technologies that can provide cleaner air, safer roads, all of that creates more complexity around truck technology, creates more complexity around managing your own fleet and that is allowing us to get into more private fleet to folks that were buying their own trucks and doing their own maintenance. The driver shortage, the technician shortage, all the labor shortages that you're finding. Companies that otherwise might run their own fleet of trucks. If you think about a baking business, a company that's in the bakery business, that might have a fleet of trucks to deliver their bread to a customer and maybe running that fleet, may have been running that fleet for a long time, hiring their own drivers. In this environment, it's much tougher for them to find drivers. That's what we do for a living. We are able to really find drivers where others can't. And we come in and help them with an outsourced solution. So that's certainly helping us. And then anything that makes it more complex or more regulation around truck drivers, more regulations around safety and emissions also creates more complexity that helps us. So clearly, these are trends that have been accelerated with COVID, but trends that have been certainly in play for the last, I would say, 5 to 10 years, and we expect to continue into the future. So one of the things that I think those of you that may be new to Ryder, one of the things that we rolled out in the last couple of years is a more disciplined capital allocation strategy. So our strategy was really to grow our businesses across all segments. And with these secular trends in our favor, really it's going to help us grow in each of these businesses. What we've pivoted to over the last couple of years is more of a strategy where we're going to have more moderate growth, a more capital-intensive truck leasing and rental business, and then accelerated growth in our higher return, more asset-light businesses in supply chain and dedicated. We feel that, that strategy is going to give us better returns over time and also better free cash flow over the cycle. And I think that combination is really the Goldilocks, if you will, of what our investors are looking for. So the way that looks from a capital allocation standpoint is, first, obviously, we're going to invest in the organic businesses, again, moderate growth. So a lot of our capital does go to our truck leasing operation, replacement capital of about $1.8 billion to $2.1 billion. Some of that is offset, about $600 million of it is offset by used trucks that we sell at the end of their life. So if you think about the net capital, net replacement capital, it's the $1.8 billion to $2.1 billion minus the $600 million. And then we're looking for moderate growth. We're thinking 2,000 to 4,000 vehicle lease growth in our lease business. That's going to cost us about $200 million to $500 million in growth capital and then really look to invest more in our supply chain and dedicated businesses and then in some technology. So net-net, what we're looking for is probably free cash flow on any given year anywhere from $300 million to $800 million of free cash flow. Some years it could be less, depending on what happens with delays in purchases in 1 year to the next on replacement. But generally, unless we're growing more than that, that's the kind of free cash flow level we're expecting. So we're going to use that cash to invest in acquisitions, primarily in our higher return supply chain and dedicated businesses where we can bring new capabilities. So e-commerce is an area that, e-commerce fulfillment is an area that we're focused on, expanding our last-mile capability for big and bulky delivery of products to your home, another area. And then new verticals within our supply chain businesses is a key area that we're looking at. So we recently announced the acquisition of Midwest Warehousing & Distribution. That's a capability that's going to get us more customers in our consumer packaged goods logistics business, but also brings us capabilities of multiclient service offering for that part of our business. So excited about the opportunities to grow there and again, in a higher return business. And then last but not least, certainly look to return capital to shareholders through our dividend. We have a 7% dividend growth over the last 10 years, and we expect to continue to grow that over time. And then also share repurchases. We recently announced not only a normal anti-dilutive repurchase program that we do, but we also announced the discretionary share repurchase program that we're going to execute on really depending on where we see the acquisition pipeline. If there's not enough acquisition pipeline to really keep us within our target leverage range, we will also execute on a discretionary share repurchase program. So again, the combination of all those things, we think, gives us a nice growth in long-term earnings, but also a balanced positive free cash flow over the cycle. So hopefully, that gives you an overview of kind of who we are and what we're trying to get done.

Robert, that's perfect. I think it's a very good overview of what you're trying to accomplish at Ryder. With that, we'll get into some Q&A. [Operator Instructions] So if we could just pick up maybe to start on some of the demand trends you're seeing. Clearly, the sharp imbalance between the supply and demand for freight capacity has been a clear tailwind. What are you seeing? How would you characterize demand as we move through this peak season? And just generally, how would you think about demand visibility for this freight cycle as we think about '22?

Yes. Listen, we're certainly a net winner in this environment. If you think about where we're seeing benefits, the used truck market and the rental market are really benefiting from a tight truck capacity market. There's not enough trucks out there so companies are buying up all of our used trucks. The rental market, we're seeing record utilization levels in rental. So any surplus truck that's available is really being used up, which is allowing us to move price up in the used truck market where prices are up 100% from a year ago. So it doubled in the 12-month period. In our rental business, we're also seeing good pricing power to bring the prices up at really record utilization levels. But in addition to that, I would tell you, we're also seeing a real benefit on the signing of new contracts. All of the supply chain disruption is making companies revisit their supply chains and rethink how they're running them, and they're coming to companies like Ryder for help. So we're going to have record signing of new contracts this year in supply chain, record signing of new contracts in dedicated. These are multiyear contracts that typically last for decades. So we're really excited about the opportunity to continue to run those for many years. Where it's creating pressure, I would tell you, is certainly on the labor side in our supply chain and dedicated business. We are seeing wage pressures for drivers. We have 10,000 commercial drivers that work for Ryder, and we're having to have wage increases there. We are passing those through to our customers, but there's typically a lag, especially for something as sudden as what's happened over the last 12 months. But we feel we'll get most of that done by the end of the first quarter. As we get into the second quarter, really see that kick in and really expecting to be back to more of our target margins in supply chain and dedicated in the latter half of next year. So net-net, I would tell you, a real positive for our business. And making supply chain and transportation more complicated is what's happening in the environment, and that's typically good for outsourcing.

That's very helpful. And one question on a cyclical factor that often comes up in conversations with Ryder. What's your outlook for truck pricing? What are you seeing in the marketplace? And obviously, very strong appreciation, your thoughts on the sustainability there. But importantly, some of the steps you've taken from a resiliency standpoint to make these returns more durable through the cycle with changes in your residual methodology. So thoughts on truck pricing as well as some of the changes that you've made to reduce the volatility of returns.

Yes. I would tell you, an important step that we took a couple of years ago was really reducing our residual values on our fleet. Obviously, it was a lot of medicine we had to take in a short period of time. But given what we had seen in the used truck market and the drop that we saw in pricing between 2015 and 2020, it's clearly the right thing to do. So what I would tell you is, it certainly reduces the risk of the earnings for the company going forward. Really, the probability, the likelihood of having to take additional depreciation going forward is greatly reduced. And where you're really going to see the changes in the used truck pricing and volume is going to be on the gains line. So it's really more focused on that one line. So an environment like this, we're going to have significantly higher gains. We're talking about $200 million of gains this year. But then in a slower environment, you're going to have lower gains. But we don't see, as we look at where we're positioned now from a residual value standpoint, it's very difficult to see an environment where we wouldn't have some gains. You're always going to have some gains in the P&L, and that's a good place to be. I think more importantly, the way we're pricing our leases now is that we're pricing them with lower residual assumptions. So we're targeting getting to 100 to 150 basis point spread on our leases with no gains. Once you throw in the gains, you're getting gravy on top of that and getting higher returns. So the returns on the lease business, I think, is the big story going forward is, as we turn over our lease fleet each year, we're replacing it with better return business, lower risk, and you're beginning to see that really flow through the P&L. That is more of an ongoing benefit that we still got another probably 3 years left of turning over that fleet that you're going to see naturally go through the P&L regardless of what's happening with the rental and used truck market. But as we see the market today, I talked about this on the call, very strong market in terms of demand for rental and used trucks. We expect that to continue into 2022, maybe slowing down a little bit in the second half of the year. But as you look at the tight supply of trucks that are out there today, used truck market inventories are very low. The new truck production is constrained because of the semiconductor issue. So where typically new truck production would ramp up very rapidly and start eating into this issue, it's going to take us longer. So I think the used truck market and rental market are going to be stronger for longer, certainly well into 2022 and maybe some moderation in the back half. But again, really continued solid demand environment for the next several quarters.

No. That's great. And yes, clearly, very strong demand and pricing environment, and I think Ryder is well positioned to capitalize on longer-term opportunities. And you're investing a lot in the business as well. I was wondering if you could spend some time just talking about some of the technology initiatives. I know you're proud of that it really helps you capture more business in this cyclically strong environment. But if we think about the structural opportunity that a RyderShare or different technology offerings that are shared across the organization, how they strengthen your competitive position and enable you to win more business?

Yes. I failed to mention that earlier, but the record contract signing that we're having in supply chain and dedicated, certainly the environment has been very positive. But we're disproportionately winning deals. I think the #1 driver of that is RyderShare. And that is a technology that we invested in starting before the pandemic. We rolled it out and really turned out to be an extremely valuable tool during the pandemic and now post-pandemic. RyderShare is a visibility and collaboration tool where our customers can see where their order and their freight is regardless of whether it's on a Ryder truck or a third-party carrier's truck and gives them visibility, which a lot of companies provide, but we also provide collaboration. So anybody that's on that order, whether it's the driver, the dispatcher, the customer, the customer's customer or operator, can communicate on this platform. So if there's an issue with a load, there's an issue with an order, whether it's the driver or the dispatcher communicates that into the tool, everybody can see it. So rather than have to pick up the phone and call 100 people, it's all there in the tool. That has turned out to be extremely valuable for our customers. When I look at why we're winning. Our customers are telling us we're winning because of that tool, because we have a tool that other folks don't have. And then we're continuing to build on it. We're in the process right now. We just started to launch the warehousing component of it. So customers that outsource transportation and warehousing to us now will be able to see the order, whether it's on a truck or it's inside the warehouse. That now provides full broader end-to-end visibility for our customers. So we're really excited about that. We're going to continue to invest in that technology. We also have more of an innovative product called COOP, which is kind of an Airbnb for trucks. We're in the initial phases still. We're a couple of years into it. We're in 9 states now. We're going to roll that out more broadly next year. But that's really a platform where you share surplus trucks with customers that need them. It's almost like an augmentation for our rental fleet. We view that as having some really nice long-term synergies and capabilities for us as we look to, how do I expand my rental fleet without having to invest in all those trucks, take advantage of some of the trucks that are out there that people aren't using. So we feel really good about the momentum we're seeing there.

That's great. And clearly, strong growth tailwinds for supply chain, dedicated as well as FMS, but interested if you could touch on the profitability and trajectory for recovering margins. I know you're investing a lot and some start-up costs certainly for dedicated are higher in this type of environment, but help us understand the drivers for getting back to the high single-digit pretax margin targets.

The biggest driver, Garrett, to getting those margins back to high single, now we're more like mid to low single digits. Get back to high single digits, we're targeting we're going to get there by the end of next year. The biggest driver there is getting the pass-through of the higher labor wages to our customers. I'm going to tell you, the communications we've had so far have been very positive. I think most customers understand the challenge is not a Ryder challenge, it's a market challenge they're seeing in their own business. So we're getting very good reception on those. We're beginning to see those go through. As we get into the second quarter, really start to see more of it and then in the second half. So that's the biggest factor. The other piece is clearly some investments that we're making in technology, some investments that we're making in marketing. That might be a percentage point here and there. But that, I expect to begin to really pay dividends as we grow. And that's how I see us kind of getting back into that high single-digit range by the end of next year.

That's great. And I wanted to touch on the dedicated opportunity you see. Clearly, that plays to your strength from an outsourcing standpoint. What is that pipeline looking like? Can you talk a little bit about where that incremental demand is coming from? Are you able to convert more FMS customers, just thoughts overall on the dedicated growth opportunity.

Yes. Look, the dedicated business is really benefiting, if you will, right now from that driver shortage, right? Anything that makes what we do more difficult is really good for us, kind of a strange environment that we operate in, but that's the way it works. So in this environment where companies really struggle to find drivers, they're coming to Ryder. So I see that continuing. In terms of what's the secret sauce for Ryder, clearly, our base FMS business feeds a lot of that growth in the dedicated business. This year, I think about 60% of the sales in dedicated is coming from FMS. So these are customers that we're either upselling from just leasing to also outsourcing the driver in a dedicated contract or a prospect that a leasing salesperson was working and realized, not only do they need a truck lease, but they also need the full dedicated service. That's really important for Ryder because that provides much better, much higher returns overall for that account. The margin dollars on a dedicated deal are 2x to 3x the margin dollars on a lease deal with the same capital investment. So clearly, that's something that we want to continue to foster and we want to continue to encourage. And in this environment with a tight driver market, I think that's going to be really good. The other thing I think is important is, I don't see this driver market being resolved in the next 12 months. This is an ongoing structural issue that we're going to have to work through over years, unless there's a big change in immigration or something that can fix it sooner. But getting more people to want to be commercial truck drivers and to take it on as a profession as we see all these retirements that are happening is going to take a while. So I'd tell you this secular trend, I see it continuing certainly for the foreseeable future.

That's very helpful. And then on the supply chain business, just with supply chain resiliency becoming almost a Board-level mandate after this experience, interested to get your thoughts on the runway you see as companies look to partner with providers and really try to reimagine or reconstruct supply chains following just all the disruptions during the pandemic.

Yes. Listen, the pandemic was really a great opportunity for companies like ours to prove what we can do for them. So we've had a case study out there with one of our hardware companies, Do it Best. And when they got into the depth of the pandemic, we all ran out to the hardware store to buy hand sanitizer and things that we needed and masks. Their volumes doubled overnight. And we're the primary dedicated provider for them. We do most of their distribution centers. We do the transportation to their stores. And we were able to manage that spike in demand with additional trucks that we were able to bring to bear, running the trucks that we had longer, bring in third-party trucks and then most importantly using RyderShare. The visibility that we were able to provide them allowed them to double the volume going through that operation and manage it very well. And they've done testimonials on how much that helped them. If you think about what happened during COVID, the spike in the demand for at-home fitness equipment, our Ryder Last Mile business does a lot of those deliveries of those home fitness equipment. We had customers whose volumes doubled in that business. That's a multiclient environment that we run. So we're able to ramp up pretty quickly and we're able to get that. And then we announced, a few months ago, we announced our partnership with Bed Bath & Beyond. Bed Bath & Beyond is moving to more of an omnichannel. They're really transforming their supply chain to be more resilient, more omnichannel. And they've chosen Ryder as their partner to really manage these big distribution centers with a lot of automation. And we're coming in with the expertise that we have in this space and helping them get there. So those are just a few examples of how we've helped and some of the new business that we're seeing coming from this revisiting of supply chains and wanting supply chain resilience.

That's great. And I know you briefly touched on the Midwest Warehouse & Distribution deal. Just interested in your thoughts on appetite for more transactions or do you see, what are the opportunities to strengthen different verticals within the supply chain business or other parts of the organization?

Yes. Listen, we're very pleased with where we are right now because we're in a really good spot. Our leverage is down to where it needs to be. We have capacity now to do acquisitions in the supply chain dedicated space. Midwest Warehousing was one of them. Clearly, we picked up a quality company with good presence in the CPG world, also a multiclient network. We're also looking at other e-fulfillment type businesses. That's an area we really want to grow in and we're going to continue to look in that space. So this is, I would tell you, Midwest is one of, hopefully, a series of these that we're going to be doing in the coming quarters. You don't know which are the ones that are going through. We look at a lot more deals than we actually do because we want to pick the right ones. But with that discipline, I know we're going to continue to find opportunities and make those investments that are going to help us further accelerate the growth in that higher return part of our business of supply chain and dedicated and really position the company over time to have an even better return profile.

No. That's great. And we've only got a little bit of time left. But obviously, a lot of momentum across the business, revenue and then talked about the margin recovery. But just if you can help us understand the art for revenue growth and earnings. I know on the call you talked about higher for both next year. Just conviction level and confidence, the operating momentum you're seeing in your business today.

Yes. I mean, bottom line is, we expect to have a very strong earnings year this year, record earnings. We expect next year to be higher. I think as you just look at the puts and takes that we talked about, net-net, it's going to be a positive. And I think it's the tightness of the truck market, which we expect will continue into most of next year. The business that we've already signed in supply chain and dedicated that really starts to generate revenue and earnings next year. And then the earnings improvement that we're really expecting to see next year in our supply chain and dedicated businesses. I think those things all coming together really present a really nice opportunity for revenue growth certainly on the supply chain and dedicated side, on the high end of our targets and getting those margins back to where they need to be. And then still ongoing, I would tell you, strength in used trucks and rental. On the lease side, we're seeing really good sales. We will be constrained on the number of trucks, I think, next year that we can bring into the fleet. So maybe not having a lot of fleet growth necessarily next year even though we have the sales. So that may still continue to get pushed off into 2023. But that will mean decent free cash flow next year and again, good earnings growth.

Well, with that, we're out of time on the webcast session, but really appreciate the perspective. Thank you, Robert, John, Bob and everyone on the line for joining us today. We hope you have a great rest of the conference. Thank you.

Thanks, Garrett. Take care.