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

Welcome to Baird. We're thrilled to have Ryder System participated at the conference this year. From the company, we have John Diez, Executive Vice President and Chief Financial Officer as well as Bob Brunn, who leads Investor Relations, Corporate Strategy and New Product Strategy. So with that, we'll turn it over to management for a few opening comments and then we'll return for Q&A. I'll turn it over to you. Thank you.

All right. Good afternoon. So let me just give you a little bit of an overview on Ryder on the first slide. I'm sorry, where is that? Okay. Sorry about that. Of course, green to advance. This is easy. So let me give you a little bit of an overview on Ryder. So Ryder is a leader in the outsourced logistics and transportation space. Everything we do our customers could do on their own, anywhere from executing their own transportation as well as operating their supply-chain networks. So for us to be successful, we've got to be really good at this. We got to execute flawlessly and also do it in an efficient manner to continue to win business. We're organized around 3 business segments: Fleet Management is the largest. It's about a $6 billion business. That's the truck leasing and rental business. Supply chain is the second large and about a $4 billion business and continues to grow. And then our Dedicated business, which is the smaller of the 3, which is our Dedicated Transportation business. And if you think about Fleet Management, that is when a customer -- a business wants to execute their own trucking and delivery of their product for themselves, they may own the equipment or they could outsource it to us. And that business does not only the financing and the procuring of that equipment, but also the maintenance activity that goes along with it. Our Dedicated business is the outsourcing of not only the truck, but the truck and the driver. So there we'll execute the full transportation delivery for our customers to direct end customer. And then our Supply Chain business, we've now made a few acquisitions. That business today provides end-to-end port-to-door logistics services, and that could be anywhere in e-commerce. They could be contract logistics or dedicated warehousing as well as running large transportation and supply chain networks for our customers. So a little bit more current with regards to Ryder. We've seen tremendous growth in all 3 business segments. From our Q3 results, we're seeing great growth in both our Supply Chain and Dedicated. And like I mentioned, all 3 businesses are growing. We've also posted record results from a bottom-line perspective. What we're seeing is continued secular trends for outsourcing to Ryder and companies like Ryder. We continue to see supply chain activity be robust as well as on the Dedicated Transportation side, where people are having a hard time finding drivers to deliver the product for themselves. Sales are at a record pace. So that gives us good momentum going into next year. 86% of our business are multiyear contracts. So a large part of what we do is secured by multiyear contractual arrangements, both on the transportation and logistics side. And then if you look at our fleet on the FMS, on the Fleet Management side, our lease fleet showed growth for the first time after COVID hit in the quarter, and we project that we're going to exit the year with a 2,000 fleet growth going into next year. On the return side, we did lift our return expectations for the year. We believe we're going to finish our return on equity of 26% to 27%, which is our primary financial metric there. And then we've seen good activity across the board on the pricing actions that we've taken. Our Supply Chain and Dedicated business that felt the impact of inflation, primarily wages and labor challenges. We've been able to reprice those contracts here in the last 12 months. And those businesses return to their target return levels. And then lastly, I'll just mention, our balance sheet is in really good shape going into what seems to be a challenging environment next year. We do have more than ample capacity to underwrite acquisitions or if we want to do some additional share buybacks with the business. So here's a little bit of the tail to take for us. On the left side, you'll see there our latest forecast, we're expecting a midpoint of EPS of $15.75. What we've done is carved up the outsized gains in both UVS and used vehicle sales and rental. There is today a tight supply of trucks, which has lifted used vehicle proceeds to record levels. And then we've seen our rental fleet also enjoy record-level utilization. So normalizing for those activities to more normal historic levels, used vehicle gains of $75 million and rental utilization in the mid- to high 70% level. We expect our core earnings to be in the $9.50 range this year. What's exciting for us is the fact that we've got a number of initiatives that we've seen good momentum around each of those initiatives, which are going to continue to lift the core earnings of the business moving forward. Our Supply Chain and Dedicated businesses, I talked about the pricing actions we've taken. We got to the high single-digit target in Q3. That will continue for the balance of the year, and we think that's going to have a nice carryover effect going into next year. Our FMS lease pricing initiative, our lease portfolio. We've been repricing those leases. They're repriced each year, a portion of them over a 7-year cycle. And we've now repriced about 55% of the portfolio. We've got contracts signed for the upcoming year for an additional 20%. So we think over time, that portfolio will get fully repriced and that will drive $125 million of full year benefit in 2026 and thereafter. And then you look there, the revenue growth we've had exciting growth, like I mentioned, across our Supply Chain and Dedicated businesses, which are on the asset-light side and good growth. Nevertheless, on the FMS side, we think that's also going to drive higher earnings from our contractual businesses going forward. And then lastly, obviously, we've done -- we completed our share repurchase program. We bought out 4 million shares this year through our accelerated share repurchase program, and we still have ample balance sheet capacity not only to do more share repurchases, but also more importantly, to add new capabilities through acquisitions for the business, which we've been active over the last 12 months, adding capabilities, primarily on the supply chain side. So with that, Garrett, that's all I had.

That's a perfect fantastic overview. With that, we'll get into Q&A. If you have a question, feel free to submit to the conference portal or otherwise, you could raise your hand, and we'll take those. Maybe I think Ryder offers a very unique perspective on what's going on with supply chains. So anxiety is very high in the marketplace about a shift in demand. Just what are you seeing as you think about this peak season, any inflection demand that may be occurring?

Okay. So from a supply chain point of view, we serve a pretty diverse slate of customers across many industry verticals from automotive to consumer packaged goods, retail, and now we've purchased 2 businesses that are more in the direct-to-consumer side of things with e-commerce and Ryder Last Mile. Across the board, we continue to see supply chains needing help and people are coming to us for our services to help them both on the warehousing and on the transportation side. I would say on the traditional verticals that we've served, does consumer packaged goods space continues to grow for us. The industrial space continues to be a big growth factor. And all of them are just looking for support as they're trying to figure out their own supply chains. And that may mean near-shoring activity, that may mean also looking to get closer to the consumer or the -- probably what we've seen more and more of now is most of our customers are now stocking more inventory in what used to be just in time now, it's become just in case. I will tell you on the e-commerce Ryder Last Mile space, that consumer-delivery model, we are seeing there the consumer being impacted to some degree, Ryder Last Mile, for example. We do a lot of health equipment and fitness equipment that we delivered to people's homes and guess what, post-COVID, not too many pieces are moving or not as many as they used to be. But we have been able to transition some of that to white goods and furniture, which we do quite a bit of. So I think that side of the business, you are starting to see housing impact -- that part of the business a little bit. We're still enjoying great growth, but it's not the growth that we had seen over the last couple of years. I think on the e-commerce side, that's a new business. We just acquired Whiplash, which is a new platform for us, which is a port-to-door platform. That's a business that supports a lot of the apparel industry, emerging brands in that space and consumer brands in that space. We've seen tremendous growth there. But we do expect, as we finish the year and into next year, we are going to see customers maybe pull back on that side of the fence a little bit. But right now, we haven't seen much slowness on that e-commerce side. So the business has been pretty robust as evidenced by the numbers. Supply chain was 49% growth with half of that coming from the acquisitions and good organic growth behind us.

And another driver I think is interesting and unique driver is the commercial rental business, touch to so many different end markets. When do you expect that utilization rate to come down and start to normalize? What are the factors that would lead you to start that defleeting process?

Yes. Right now, and for most of 2022, we've enjoyed record levels with our fleet. Today, we serve about 50,000 customers. So to your point, we get to see a broad view of the North America activity. We haven't seen any slowness. I think part of that is the fact that the supply side of trucks is constrained. Today, if you go and order a truck, it's going to get delivered 9 to 12 months out. So there's certainly supply constraints, which are propping up, I would say, some of that demand. I would think once we start seeing really consumer demand kind of peel back and we haven't seen that in broad spaces. We're going to start seeing then that utilization number come down. But the good thing for us for the short term is the fact that OEMs are still having a tough time producing new trucks. So the demand will be there at a slower clip, and we would look at that utilization as a barometer for us as well as what's happening in the freight rate markets, right? The freight rate markets continue to decline. And if they go deeper, we'll see evidence of freight slowness coming before us.

And I really appreciate the disclosures as well as the sensitivity for a decline in used truck prices. We know that meteoric rise maybe not be sustainable. We started to see some sequential weakness in the third quarter. Help us understand the outlook for used equipment pricing and how you're changing residual methodology protects you from that tail-risk decline?

Yes. So I'll touch on what's happening in the market, right? We -- coming into 2022, we're coming off historic highs last year. The first half of this year, we hit new highs. And then with that, we did project that we would see a slowness or declining pricing in the used vehicle side. We saw that in the second quarter on the tractor side. And then in the third quarter, we saw another sequential decline across really all vehicle classes, both trucks and tractors. We project that to continue. We're expecting 2023 for sequential declines every quarter with what we expect kind of around Q4 end of year time frame to be kind of the trough level and then some type of recovery back in 2024. What have we done? Really, if you look at our gains right now, we're forecasting significant gains to the tune of about $375 million, up from the $260 million level last year. So that's a significant increasing gains, which is impacting the outsized EPS for the year. We would expect that as pricing comes down next year, we're going to continue to enjoy gains, but at a much reduced level. So the barometer we gave and the sensitivity we gave on our last call was normalized gains for us. We're projecting to be $75 million annually, and you would need to see about a 35% correction or a reduction in the prices for us to get to that level. So 35% is a big change in used vehicle pricing for us. We did reduce our accounting residuals downward to historically low levels to protect ourselves through the ups and downs of the cycles and really mitigate the potential for any losses for us to post any losses on used vehicle sales. So I think we're well positioned for the next 12 months to deal with that. And we're expecting, obviously, pricing environment to change over the next 18 months.

That's helpful. On FMS, the moderate growth strategy, I think likely has validated in this cycle, and you've had great success this year. Just help us understand the pricing tailwind. You're halfway through that repricing effort. You've got more business under contract as well. You're looking at modest fleet growth through the end of this year. Just help us understand those drivers as well as maybe the free cash flow implications for next year when you talk about breakeven or sort of level of free cash.

Yes. So on the lease fleet side, we have seen since COVID, fleets have come down in size, and we've obviously experienced a fleet reduction. At the same time, we've been pushing forward with our lease-pricing initiative, which we do think early on, part of the impact was our pricing initiative. But what we've seen over the last 12 months is great acceptance on the pricing side. And as we noted on our last call, we've already signed up on our lease side, we've already signed up all the vehicles that are going to get delivered next year. There's about a 9- to 12-month lead time between signing and ordering of equipment before they get delivered. So we have a pretty good view on next year already and what's going to be coming at us. We're going to exit the year with fleet growth at about 2,000 units. We expect that growth to continue to accelerate as these vehicles come online. So as we look forward, I think 2 things are important for us is complete the portfolio and that repricing effort. We've seen good acceptance there thus far with nearly 75% of the portfolio now contracted for, 55% of that is already running in our fleet. And then I think the second piece is we continue to see good momentum for outsourcing and for support. So we do expect the fleet to continue to grow over the next coming years, even beyond 2023. With growth, obviously, lots of capital will be deployed. Our free cash flow this year will be in excess of $800 million. Some of that is the timing of the capital but some of that is the fact that we're growing at 2,000 unit clip. Ideally, for us, we would like to be more in that 3,000 to 5,000 space, I think, next year. What you can expect is used vehicle pricing moderating, which is going to take some of that cash flow from us, and then you're going to have a higher CapEx. So today, we're enjoying about $800 million to $900 million of free cash flow. We think next year with a higher replacement cycle, some growth, what we signaled is about a breakeven free cash flow number with good growth from our lease fleet.

Turning to the Dedicated side of the business, another opportunity to increase that base level of earnings over time. Help us understand where the Dedicated pipeline stands today? And how you expect pricing for these contracts to evolve in a softer-demand backdrop? Obviously, there's still inflationary pressure out there.

Yes. So from a Dedicated and Supply Chain point of view, we continue to see record levels of pipeline activity. We've enjoyed tremendous growth over the last 3 years from Dedicated post-COVID and we expect that to continue. Our -- we've enjoyed double-digit growth in that business. We expect to be at the high single-digit level and perhaps even higher than that, but certainly, high-single digits is where we expect to be. We have seen the spot rate market change on us over the last 6 months. That's coming down. Typically, when freight loosens up and drivers are easier to come by, people need less dedicated services. We have been very fortunate that we continue to see good demand for our services. So typically, we would say growth will slow down a little bit going into next year, going into that backdrop. But nevertheless, we're seeing good growth in our underlying core business, expansion opportunities with existing customers as well as landing new names in our portfolio.

I'd also be interested to hear more about the synergies across your business lines, specifically Dedicated and FMS, how much of that business is sourced from each segment? The synergies across business lines would be helpful.

Yes. Traditionally, FMS and Dedicated have enjoyed a great amount of growth synergies. Dedicated not only over the last 3 years, but even just prior to that, has endured about 50% of its growth comes from customers that lease equipment from us, find the driver market to be very difficult and want to get away from the transportation side of things and focus on their own businesses. And we've enjoyed good growth. So when I talk about the last couple of years, we've enjoyed double-digit growth. About half of that came from private fleet conversions from Fleet Management into our Dedicated product line. We have purchased over the last couple of years, some new businesses and supply chain. Ryder Last Mile is a great example of that. We use a contractor model to make that Last Mile delivery. Many of these contractors are seeking help with their own trucks. And we've enjoyed a great amount of truck rental and lease activity from that business. We've also seen our Supply Chain business, which is growing at a record level. Their logistics needs to have given us many of opportunities to really do some dedicated work with some of those brands as well as warehousing activity. So we have seen the FMS synergy that existed prior continues to deliver good results for us. And then the broader set of supply chain customers are looking for other services that are giving us a little bit of a lift as well.

The growth has definitely been strong for the Supply Chain business. What type of tailwind do you see from helping your customer base and new customers reimagine their supply chains? Obviously, there's a greater poise for more near-shoring activity. How do you expect that to play out from a timing standpoint? How big of a benefit could that be for Ryder?

Yes. We continue to see our platform the way it's set up that we can provide end-to-end solutions on the Supply Chain side to be very favorable for us. So customers that are looking at not just warehousing, but maybe looking at an end-to-end solution with transportation and distribution services as well as warehousing services plays to our strength. We are North America-focused. We have a big presence in Mexico. So clearly, as customers relook at their supply chains and are looking to nearshore more activity from Asia to Mexico, I think positions us well. I think the added capabilities candidly on the e-commerce side and being able to deliver an omni-channel solution for customers from the traditional distribution model has also given us an opportunity and a platform to really grow at a faster rate than our traditional competitors. So I would say our platform and also the capabilities that we've been able to add with acquisitions continue to support a higher growth level for us.

Yes. Interesting point. I would love you to elaborate that on that with Whiplash. Nice deal on the e-commerce fulfillment space, also recently added Dotcom Distribution. What do those deals add for you on the supply chain side? Where do you see M&A opportunities going forward for the supply chain business?

Yes. So we've been really focused on expanding our e-commerce capabilities. Traditionally, we haven't played in that space. Whiplash was the first we brought that business on, on the beginning of the year. It's given us access to a new customer base. Traditionally, we operated with big Fortune 500 companies. This is really geared at emerging brands and fast-moving items direct-to-consumer. We saw with the Dotcom acquisition recently. That was a nice also add-on to our e-commerce platform in that it's in the health and beauty space. Traditionally, in the Whiplash platform, we haven't been successful there. So this is a way to plug that in. And then those customers with our end-to-end solution now can grow nationally beyond the footprint that Dotcom brought to the table, which was just the northeast footprint. Now we can serve those customers on a national scale and really provides us good growth opportunities with that business. So e-commerce continues to be a focus. You asked about acquisition targets. Clearly, reverse logistics is something that everyone is trying to figure out. Everyone is trying to figure out how they could do it more cost effective because it's really expensive right now, and we see that clearly as an opportunity to move forward.

On the capital-allocation side, staying there. I think the buyback is more differentiated aspects of Ryder's positioning relative to the last cycle. Let's talk about the appetite to be more aggressive. I know you just exhausted your authorization here. But how does that better position you to ride through a cycle that could be pretty rough?

Yes. Look, number one, I think with the strong earnings, our financial -- our balance sheet is pretty strong right now. If you look at our leverage position, we're probably going to finish the year at about 200% or just below that. And we've targeted our leverage to be about 250%. With that, we did exhaust our asset share repurchase program, but we still have our anti-dilutive program, which is 2.5 million shares that we could buy back through that program as well as another discretionary program of 2 million. We're looking at acquisitions. We would love to deploy the capital there. But if there are no options on the acquisition front, then we would plan on executing in the fourth quarter on both the anti-dilutive as well as the discretionary program.

That's great. I'd love to hear the refinements and strategy, you think have positioned Ryder just to optimize shareholder value creation. So I think there's been notable changes in the strategy. Just to summarize those and help us understand how they position you to ride through a cycle.

Yes. So one of the key strategy points that we made was how do we derisk the business and how do we diversify the business. If you look at our traditional Fleet Management business was susceptible to the market swings, especially on the used vehicle side and on the rental side. We went out and really derisked the business by reducing residual values, both from an economic-pricing perspective back to the customers as well as from an accounting perspective to mitigate the potential for losses in the business. That has been a journey over the last couple of years. The customer acceptance of the higher pricing levels and our ability to deliver good returns even when the market is down, is showing up, and we're excited about what that can deliver. On the Supply Chain side, we said we wanted to build a more robust platform. That Supply Chain business continues to grow organically and through the acquisitions. We diversified that business away from auto. Auto used to be more than 1/3 of the business 3 years ago. It's now 1/4 of the business. So that business has also been diversified and has grown tremendously. So between Dedicated and Supply Chain, we've almost doubled that business here in the last couple of years. So that platform, I think, in and of itself is going to provide us better support looking forward and better support through the economic cycles.

We have a question from the audience about why is Ryder able to attract labor? How is the market for labor changed, easier to attract talent and what brings them to Ryder versus competitors?

Yes. I think for us, it's one, it's a road map for long-term success. They have a career path. We have more than 10,000 drivers that we employ each and every day, 85% of them are home every night. So that makes it attractive. If you think of commercial drivers, most of them are on the road for days on end. On the technician side, which we employ about 5,000 technicians, clearly, there is the ability to recruit folks and make them mechanics. We have a great track record of developing mechanics and giving a better long-term career path for those individuals. And then the warehousing side is probably the most challenged, turnover there and the lack of labor on that side makes it a challenge. But clearly, we serve great customers. We've got a great culture, and we give people opportunities to do other things beyond the warehousing side if they want to go into driving, if they want to become a mechanic or if they want to go into the management side of the house, also gives them a great opportunity. 47,000 employees today, and that continues to grow. So that's what draws them in, a good career path.

Very good. We're running off out of time. But we've talked a lot about cyclical headwinds. But just thinking longer term, you've outlined the $950 million of base earnings power. What are some of the other unappreciated levers to grow that over time? And what's the right growth algorithm to think about Ryder's business?

Well, I think the biggest trigger for us is going to be the base growth in the business. The business has been growing at double digits organically in the last couple of years, if we could continue that momentum. That's going to continue to grow the base. Our contractual base is a big part of the story where 86% of the business is contractual in nature. And if we could continue to grow the businesses as we've done, I think that's going to propel us beyond the $950 million for a while.

Look forward to it. Well, with that, we're running up on time. But want to thank John, Bob, the Ryder team for being here. Thanks for the audience for your participation, and hope you have a great rest of the conference. Thank you.