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

We have Ryder Systems and very happy to have with us Chairman and CEO, Robert Sanchez. Robert, thanks so much for being here.

Great. Thanks for having us.

So I think of all the companies in our coverage, you probably have the most visibility across supply chains with your different businesses and the touch points you have with different customers. So maybe a good place to start would be just what you're seeing out there, overall macro view and especially if I try to resolve some of this dichotomy between some data points that are like really bad and some data points are really good kind of what -- what are you seeing out there overall macro?

Yes. Look, I'll just give you some anecdotes or we had a customer advisory board a couple of customer adviser over the last few weeks here right, with some of the customers in our business and supply chain difference. It's a cross section of large corporations and even some smaller companies. And overall, I think what everybody is kind of coming back with is, look, the economy still seems to be doing well overall. It seems like where you're still seeing the higher still spending a lot of money and really hasn't skipped a beat, where they're seeing some slowdown is more in the lower income type products and offerings where they're seeing some softening in demand. But overall demand, the blend of the 2 is still pretty positive. From a transportation standpoint, I think there's still that imbalance of you still got more demand for freight moving, then you have trucks to do them. So overall, that's a relatively still positive environment. I think everybody is kind of preparing for some type of recession though. And assuming that if the Fed continues to do what they're doing and what they said they're going to do, at some point, things demand will slow down. And you'll see us probably go into some type of a slowdown or a recession. Hopefully, a shallow recession because we -- if we -- if the Fed brings us into the recession, you'd be able to pull us out of the recession. I think on the inflation front, you're still seeing -- overall, you saw the numbers yesterday. So you're still seeing overall inflation is still higher than what we want it to be.

Got it. We were discussing in the earlier session that unfortunately, we all have very good practice with dealing with Black Swan events and contingencies. I'm sure you guys are doing your own planning as well. So I think one of the questions a top investors' mind is kind of how your business is going to do if there is a downturn, like whether it's a shallow recession or a broader recession. So kind of how would you talk about the kind of defensiveness or the sensitivity of your segments to maybe a softer macro environment?

Sure. So I've been at the company for almost 30 years, so I've seen us go through numerous recessions and Black Swan event. But -- but I can tell you if you look at Ryder over a long period of time, the 2 areas that are most impacted during a recession is our used truck business and our rental business. The rest of the business is contractual multiyear agreements with customers that typically will continue to pay their bills. We'll continue to have margins on both the lease and on the supply chain dedicated side of all 3 of them, you may see a slowdown in some of the revenue growth, but the margin percent will still hold up because they're typically a fixed and variable type a pricing structure or cost plus where the margin still holds. So you think about those 2, okay, on the used truck pricing side, we've already built into our forecast for this year. And certainly, as we talk about -- we haven't talked much about Mexico, but the assumption is prices have been at these elevated levels. Over time, that reverts to the medium, it comes back down. That's what we've talked about -- that over time will come back down to more normalized levels. We've adjusted the residuals, not only from an accounting standpoint, but really the pricing of our leases over the last 3 years have had a much lower residual assumption, which means we're getting more in the lease payment. So our margins are better and there's less risk to them. So we expect that will play out here over the next slowdown and we'll still continue to see certainly much better returns over the cycle than what we've seen before. The other piece is on rental, our utilization levels on rental have been in the second quarter were 84%. And that's across 7 days a week and most of our business is only 5 days. So it's very high, certainly very high for a second quarter. So we expect those utilization levels will normalize in low down. You'll get some revenue drop off. Utilization will go back to like mid- 70s. So if you adjust for those 2 things, what we're saying is that this year, our forecast -- our updated forecast was about 14 -- on the high-end $14.30 a share EPS, comparable EPS. We think that $14.30, about $9.50 of it is what we call core earnings. So bring gains down to a much more normalized low level, $75 million, bring utilization down to mid- to high 70s, and you've got $9.50, what we would call core earnings, mostly contractual. And that's the earnings that we think we can continue to grow each year regardless of whether we're in a recession or in a normalized environment.

Got it. But I love that you have that core EPS number out there. I think it kind of it automatically gets rid of a lot of the kind of bare arguments about overearning and kind of puts it out there, and it's very helpful to investors so well done there. Maybe kind of -- again, you guys are not a TL. So you don't have the same kind of driver issues as the truckers do. But -- what are you seeing out there in terms of labor, both in terms of drivers as well as technicians, maintenance folks? What is that labor availability like right now kind of is that getting better or worse on the margin?

Yes. as a simple answer, I think it's leveling off some. But still, there's not enough people. We don't have enough truck drivers. We don't have enough technicians. We don't have enough warehouse workers. So we're still -- we still have a lot of open positions at Ryder in those roles. And the good news is we've got a very good recruiting network. We certainly have made the wage adjustments necessary to start slowing down some of the turnover. So we think things are leveling off and improving some. But still, I think not at a level -- not a more normalized level, what you'd expect open positions to really come down. Our employment is at what 3.5%. That's going to give you a lot more turnover than what you'd like.

Is it just challenging to attract like young people to a skill trades job? Or again, you're a great employer, you have great training. You pay pretty well. Is that not really an issue for you?

Well, it depends on the job, right? So on the technician side, so we have about 5,000 technicians that work for Ryder. And the good news we've been doing this forever. So we have programs within the company that really help. One is our veterans hiring program that we have very close programs with the U.S. military. We also grow our own. So you could come in -- if you're not a skilled labor, you come into one of our truck maintenance shops, we have 750 of them and you could start off as fueling trucks and washing trucks. You show a propensity to learn, desire to become a technician. We can bring you inside the shop. And over a multiyear period, you become a technician. So we can grow our own technicians with our own internal training program. So we feel good about our ability to really keep the technician flow going. On the driver side, historically, we've looked for drivers that already have worked for a truckload carrier, maybe have 6 months to a year of experience. So that's been a little bit more challenge as we want somebody who's already worked. We've started some pilot programs now where we have drivers taking on maybe local routes with a buddy driver who don't have that experience yet. And starting to help grow our own there because you find if you grow your own, they typically stick around longer. So we got that program. We got the military hiring program that we also leverage for drivers. But a lot of that is getting the pay right and then making sure that we're giving the driver more say in the types of routes that they're running with Ryder, they're typically home every night. 85% of our drivers are home every night. They can switch accounts if they want to go from one part of the country to the other or even within the same geography, you want to do different type of work, thinking on what you want to do. We've got a lot of jobs. We have 10,000 professional truck drivers who work for Ryder. And then on the warehouse labor side, that's probably been the toughest because that historically, there was a lot of turnover in the warehouse worker side, but it was pretty easy to replace. It's been more of a shortage there. So making those jobs more attractive where workers in the warehouse have more say in the hours that they're going to work job sharing across different workers is another. So we've used a lot of different creative ways of filling those jobs so that we can continue to attract the workers that we need there.

Got it. You are the biggest buyer of new trucks out there. Obviously, you have amazing relationships with the OEMs. What are you telling you in terms of visibility and availability of new trucks over the next 12 months?

We're still looking at lead times are 9 to 12 months on a new truck. We are seeing some improvement in deliveries, but I think we're not out of the woods yet. I think they'll all tell you that they're still trying to get everything our bottlenecks cleared up and then get caught up because there's a big catch-up that's got to be done, and we think we're out that long, those people are. So most fleets are so there's a lot of work to be done to the caught up.

Got it. if there's a lot of work to be done to get caught up, it probably implies that the new truck market is not going to collapse anytime soon and probably it means that, that gap between your [ 950 ] and the [ 1400 ] change is probably more sustainable than even you are saying this. But kind of what is your crystal ball telling you on used trucks. I mean, obviously, we know it's impossible to predict. But where do you think that flow for that curve looks like over the next few months?

Yes. I think that's a fair assessment. Obviously, the longer it takes for the new truck production to take off, the more that continues to sustain the used truck market. I think our forecast hasn't changed a whole lot from the beginning of the year. We expected used truck pricing to peak in the first, second quarter and then come down in the second half of the year, just kind of what we talked about in the second quarter, we saw happening already. So I expect that to happen. It isn't a fall off the cliff type of scenario because of what you just said. I think it's a continuous decline into next year, maybe bottoming out in the second half of next year into 2024 and then coming back up sometime in 2024. I'd expect I mean there's a lot of other firms out there that forecast this, but I think they're all kind of coming around this similar type of an attitude that you're -- it's not a drop off. It doesn't return to the same trough that we saw in '19, but does come back down to certainly much lower levels. And then over time, comes back up.

Got it. I want to switch back to the top line. You have been one of the biggest beneficiaries of a broad outsourcing trend when it comes to supply chain, transportation, logistics over the last decade, 2 decades. How would you characterize the demand for that kind of service and the pace of outsourcing over the last 2 or 3 years. And do you feel like there's been a secular shift in how customers view this function during pandemic? And kind of what is that media business?

Yes. I think if you look across our businesses, there's 3 major each business has its secular driver for the secular trend, right? So for the truck leasing business, it was really the change in engine technology. So it started in probably '04, then '07 in 2012, but it became a lot harder to maintain a truck. That meant, let me go find someone knows how to do it, we got to benefit in that. On the dedicated side, it was the driver shortage. So it became a lot harder to hire drivers and retain them. I think you'll find something help to that, Ryder can help you with that. Ultimately, around supply chain, it was a lot of different things. But it was the -- initially, it was the long supply chain complexity of supply chain, then the tariffs started to get people a little nervous about what they were going to do. And I think COVID was really the ultimate driver for companies having to refocus on how they manage their supply chain, changing the designs of their supply chain, which whenever that happens, that's an opportunity for Ryder. So we've seen the real benefits of that in our supply chain business over the last couple of years. We grew our Supply Chain Solution 47% growth in the second quarter. Year-over-year half that, about half of that was an acquisition but organically grown in the 20-plus percent. We said we can grow -- we feel pretty confident to grow that business in the low double-digit range over the cycle. And a lot of that is just companies that have said, I mean they're struggling with how much inventory I need to carry inbound into my manufacturing so a lot of these industrial automotive companies or outbound getting product to my customer and how can I -- how do I optimize that the shortage of drivers and all the different challenges that exist. So -- that's what we're here for. It's kind of what we do for a living. We're investing in technology because we realized if you want to win in this -- one thing is a secular trend, but the second thing is how do you add value so that you're the one that gets picked. So we're investing in technology. We've rolled out this RyderShare visibility tool last year across our supply chain and dedicated accounts. getting -- it's really been a driver for about 35% of the new wins that we've got has been this new technology. We just announced last week the acquisition of a company called Baton which is unusual for us. We actually bought a tech company, but this was a company we were introduced to through our venture capital fund, RyderVentures. We really got to know the folks that run this business. They had set out to build an optimization tool for truckload carriers. And as we learn more and more about it, we realize that, that optimization could be very valuable for Ryder across our dedicated customers and how do we optimize our trucks across dedicated, across transportation management. So we really are not going to task this team to build us an optimizer across our business, leveraging that core platform they had already built. So we're excited about that because we think that could be the next phase of this RyderShare tool that's really helping to differentiate our business.

Got it. I'll just follow up that. So this optimizes fairly optimizing resources and assets across the different divisions. What about the top line? So obviously, there should be significant cross-selling opportunities between the 4 segments. But you've heard some other companies in the transportation space kind of say that, hey, cross-selling is something that usually promises a lot but doesn't really deliver kind of what have you been able to achieve so far?

We like competitors think that what we're doing. We -- we do view on the supply chain side, the fact that we have end-to-end capabilities, door-to-door, if you will, now with e-commerce. So we're able to provide a customer a full solution almost every customer that we have in our supply chain business, I don't know the exact percentage has a combination of some warehousing and some transportation. So it's evident in the types of businesses that we get. So we think there's a good opportunity there. Also a big cross-selling opportunity for us in our businesses between our fleet management business and are dedicated. So we have -- we do business with about 15,000 fleets in truck leasing that lease from us. And we -- a certain percentage of those each year go from just outsourcing the truck through a lease to outsourcing the truck and the driver becomes dedicated. And over 50% of our sales in dedicated come from leads that come from our fleet management business.

Okay. So that's very real. Let's talk about e-commerce because you have significant -- what's your exposure to e-commerce?

Well, we did an acquisition this January -- December actually. We bought a company called Whiplash, which is an e-commerce fulfillment business that we're really excited about. We're adding that to the final mile business that we had, which is the big and bulky. But this e-com business is -- we had set out to try to grow this organically a couple of years ago. And really, we're challenged, we realized after buying Whiplash that we're probably going after the wrong customers, too. We were going after more of the Fortune 500 companies who we thought may want to have their own e-commerce fulfillment business on the side. And the real market for us that we found with Whiplash is more the start-up younger companies that are e-commerce-based, native digital, many of them. Some have stores but a lot of the native digital who are earlier in their life cycle, who have a great product, have good digital capabilities but have -- really don't have a fulfillment infrastructure. So they go to a company like ours now, and we can provide that service for them. We have the technology that links into them. Gives them on it. And when they get an order, it gets fulfilled through our network of warehouses. So we've been -- we bought that business. We're really excited about the team there. We've been adding locations, and those locations are getting filled up as quickly as we can add them. So really a great growth opportunity for us. We bought that business -- this year, we're looking at just under $0.5 billion maybe of revenue. That business over the next several years, we think, could be $1 billion business.

Well, nice. But also, you are like the largest or one of the largest first final mile, big and bulky delivery providers out there. That's been a little bit of a controversial space the last 12 months or so to put it in my late. What are you seeing out there in terms of the pace of normalization? And kind of when do you get back to a growth trajectory there post-pandemic?

So I think it's important to note that our business is a little different because it was an asset-light final model. So we're not doing the final -- Ryder truck is not doing the palm we're going through network of carrier partners. And I think that's a very -- that's a much efficient and optimal optimized network. We're very pleased with the growth and the returns on that. We're seeing still good growth in that business. We've seen where we've seen a slowdown in vans where you might expect home fitness equipment. We've seen a slowdown in demand for that. But a lot of that business is also like furniture delivery. Some of it is online. Some of it is omnichannel where they're going into the stores and then we're doing -- we're managing the delivery. We're seeing that business continue to be strong. We're bringing on new customers. So still feel very positive about that part of the business. And again, profitability-wise, it's well in line with the overall profitability of our supply chain business.

What is the future of that business/what is your secret sauce there? Because it's probably one of the hardest businesses in all of logistics and fulfillment to actually do right. What makes it so hard but it's also still very fragmented that like you said, like you're using a bunch of smaller providers to do it for you. Like, why can't there just be one large asset heavy players in the space? People have tried and they have failed really badly.

That's what I was going to say, we've been in the business -- we're going on 90 years as a company. So we've probably tried every day. So we did do -- back in the '90s, we did do home delivery of big and bulky products. with our employees for some of the large retailers and is a very difficult, challenging -- and it's very simple. It's a productivity issue, right? With this network of carriers of more entrepreneurial-minded carriers who are typically getting paid for each drop, they have all the incentive to be efficient to get into that to the -- get the product to the consumer in a very efficient way. And then we have the technology that also make sure the quality of delivery is there because every delivery is rated by the consumer. So you got to do it efficiently, you got to get a good rating. And that is the secret sauce, I think, to being able to do that profitably. And whereas once you have employees who are getting paid by the hour, it's just it's a different incentive and a different setup.

Okay. Got it. So you're going to -- probably going to see this, but up on you maybe 2 years ago, your stock was just synonymous with used truck pricing, and they were like one same thing. And I think you recently said at the Analyst Day that people still think of you as a rental truck company when you're so much more about supply chain solutions and warehousing and last-mile delivery and everything else. Talk about that transformation of Ryder, what does that mean for long-term growth? What does that mean for the long-term stability of earnings and kind of moving away from that hyper focus on used truck pricing as a metric.

Yes. I think you have to look at the things that we did over the last 3 or 4 years to change the business. The first thing we did want to derisk the business, which means reduce our exposure to the used truck market. And by the way, I'm still selling used trucks. So I'm going to have ups and downs, but we will get our target returns as a business without all that used truck. The used truck is gravy. So when we have strong gains, we're going to do well above what our target returns are when we're not having any gains, we're going to get our target returns. That's kind of the concept that we moved to where historically, we relied on used truck gains to get our target return of business. So that's the first thing is really the derisking of that business. The second thing is as you look at it, you say as an investor, you know what, I like the leasing business at these returns. It's good, but I also want free cash flow. So I don't want to grow too much because I don't want to have the negative $1 billion of free cash. And so we said we're going to have moderate growth in that lease at good returns. And then what I really want to grow is more asset-light supply chain dedicated business want to accelerate the growth in that. So that's the journey we've been on. So we've gone from our fleet management business -- I'm sorry, our dedicated and supply chain business represented about 40% of the business here, just a year or 2 ago. It's now 52%. So the majority of the business now from a revenue standpoint is supply chain dedicated. If you fast forward for the next 5 years, I expect that needle to keep moving, where you have more and more of the actual business will be the more asset-light supply chain dedicated. We're still going to have a very good, strong leasing and rental business. But just over time, I think it becomes more -- the supply choice just become a larger percentage of the total.

Got it. Any questions from the audience? Yes.

Talk a bit about the [indiscernible] Ryder [indiscernible] in terminal usage, but maybe you can talk a little bit on that as well as in the truck fleet itself.

It's really -- it's an exciting thing for us because about 5 years ago, we stepped back and said, all right, all this disruption you're hearing about what does it mean for Ryder, what are we going to do about I don't want to wait until I wake up 1 day and we're obsolete because nobody needs trucks anymore because everybody is kind of just some type of Star Trek episode that everything just shows up where it needs to be. So we identified really several areas that we needed to focus on One of them is this next-generation vehicle called autonomous electric truck. Another one was asset sharing, you were hearing about Uber and Airbnb and is there a play there for Ryder. And then the third one was e-commerce. And how do -- we weren't playing big in the e-commerce. So as you know, we did an acquisition to get an e-commerce space. On the asset share, we developed this app call this platform called COOP, which is a truck sharing platform. It's an Airbnb for trucks. We've now rolled that out nationally. We're really excited about the traction we're getting there. And then around EVs and AVs, we did a couple of things. Around EVs, it's really just staying ahead of the curve as to understanding where EVs are and when do they become something that our customers are going to -- we need to transition to it. We need -- we view Ryder as really being a facilitator of that transition from diesel equipment to EVs. That's going to take a long time. I view that as being a multi-decade transition. And I think Ryder is really well positioned to help fleets make that transition. I think we're early innings there. But around AVs, what we learned is most of these companies working on AV, no technology, but they don't know a lot about fleets or running transportation networks, which we do. So we have established partnerships with several of them. You've probably seen the press releases on all of them. And we're doing different things. We think Ryder is very well positioned to be the owner as much -- we can do a lot of different things, but one of them is to own an autonomous truck network, right? We have the asset management capabilities. We don't have to maintain trucks. We know how to run the final mile delivery because most of these will need that. We know that we have the control tower capabilities that we use in our supply chain business. So we are partnering with each of these to help them come to market, but also help us figure out how do we operate in this environment. And we feel pretty encouraged about where it's going. We think that technology is making really good progress. And over time, you're going to see, especially on the south, depending on the climate, but really more of the states in the South. You're going to start to see some of these autonomous truck runs, and we're excited to be a part of that because we think Ryder can play a part in that going forward. And that's a part of the market we don't play in today. We're not a truckload carrier, and this is more of a truckload carrier type operation.

I mean what the risk to me is that everything you said is absolutely true. But I think the thing that really stood out is your physical footprint like the land you have and those facilities adjacent to network -- to highways and manufacturing hubs, that's an invaluable asset.

It is where we're seeing for one of our partners that our facilities are in areas where they could be the hub for these autonomous truck networks. Not only is it a hub because of the location, but I have all the maintenance capabilities I need there. I can do the turnarounds with drivers, and I can have a driver to the final mile delivery from there. So we have -- and that's a key part of what differentiates Ryder is this network of locations is really hard to replicate. There's one other company that has one. But it's really hard to go out and start to build that overnight.

Yes. So a lot of really exciting things going on. Strategically, are you in the place you want to be? You recently exited the U.K. Any interesting new segments that you might be targeting, which is potentially M&A opportunities? Or are you -- like is it -- do you have the vehicles that you need to drive the growth network?

Yes. Well, I think we do. We we'll be out of most of the U.K. by the end of this year. So once we've done that, we are a North America company. So all our operations are in U.S., Canada and Mexico. We think there's plenty of market there for us. We think the suite of services we have really allow us to provide just about any outsourcing and transportation logistics that a customer may need. We have -- in terms of M&A, we'll continue to look at that type of e-commerce type stuff. Within e-commerce, returns in a business that we're seeing, we have some returns capability, but that's an important component. We may see us go out and look for something there. We've talked about health care logistics as an area of vertical that we want to make sure that we get in, we now have won and are running a significant health care logistics operation from one of the networks that we're excited about. So have organically been able to get into that space, and we think we can grow that. But if we find the right acquisition candidate there, -- but really, that's it, we're not really looking -- there's not any one new capability, I think that's out there that we say is really important to drive our growth. We think the growth targets we've got out there low double digit for supply chain, high single digit for dedicated and mid-single digit for our fleet management business are all organically able to achieve and acquisitions will be on top of that.

Got it. I mean it sounds like a really interesting idiosyncratic story in the coming years. So Robert, thanks so much for joining us and sharing the story with us.

Right. Thank you, Ravi.