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

You'll make a lot of friends in this room, if you keep saying stuff like that.

Well, so I mean, the other thing to remember as a backdrop of all this stuff is that while I understand that a lot of you folks are trying to figure out what the next cycle is going to be and what the next sort of market shift is going to be, this industry will continue to be cyclical, more capacity and more freight and more capacity and more freight. Freight is never going to be in the right place for the capacity. There's always this dislocation. And so, if you're good at operating a trucking company and you run a full network, meaning very little deadhead to compare to what it should be. So you're sweating your assets and your drivers the right way, you have happy drivers and happy shareholders. That's not going to change over time. These other little fly by night things may come and go, but it's forever regardless of drivers in the truck and not, it's going to be a great industry forever. The other thing to remember is the worst thing for brokers and the best thing for assets guys is stasis. When there's like sort of that right amount of freight and the right amount of capacity for a while, and nothing is really shifting. That's a hard time for a broker to make money in a great time for an asset-based company to make money. Today, everybody is sort of both, although there's a lot of little brokers that are not both that can't do that power only, whereas C.H. Does a lot of power only brokerage. Coyote does a ton of power only brokers with the UPS assets and stuff. So there's the blend. But even, while it might seem right now like things are a little tough, all you need is one good hurricane. Hopefully, nobody gets hurt. And the whole thing is just perturbed and the whole thing is different and everything goes flying in the other way. So I don't know how you build that into your models. But that is a non-negligible possibility. It didn't really happen last year, but it's not going to stay like that.

We talked about this in one of the other panels that again, we had this road check week last week, which -- and it's a 1-week blip so who cares. But we did see a pretty, if you look at the data, pretty pronounced spike and all that tells you is that we're probably getting close to a point with capacity that one incremental change can really turn something, right? So -- and Jeff, is you -- just one last thought on this. Is your -- does a TMS solution in any way reduce the cyclicality of the industry over time? Or -- it's a tool that -- so the tool that the benefit to a Werner is ultimately what? Is this -- should this mean better margins for them over time? Should it mean -- what's...

Well, definitely for any of our clients, it should mean better net margin over time, or better EBITDA margin over time and better return to shareholders, right? Because first of all, some of these folks -- most of the companies that come on to our platform have been using this innovative system that's -- it's AS400 Mainframe, COBOL, and nobody has written something to replace it in decades. So -- and to some of them, it's a bit of an existential need, but it's certainly -- many of them are trying to operate off a bunch of different TMSs that they bolted on or a bunch of stuff they've written around it. So this allows them to focus their to hopefully reduce their tech spend, focus it on their secret sauce, their BI, their pricing models and those things and lets them operate all their businesses together, so that they're taking a solution to the customer. They're taking a capacity solution regardless of is it their own drivers, is it their own power? Is it their own trailer? Is it dedicated or one way? Or is it outsourced? is it brokered? And I think that idea that these large carriers are taking this solution approach and they're able to operate it behind that in a super efficient way will make a big difference to these folks over time.

John, I want to come back to you. We spent some time talking about used. We talked a little bit about rental. Let's talk about the core business, the leasing fleet. What are you guys doing from a leasing fleet perspective of fleet growth perspective, this year? Are you getting all the trucks that you want? Are you seeing opportunities to accelerate some of that fleet growth because the OEMs have extra capacity for you now? And what do you think about like long-term leasing fleet growth?

Yes. For us, from a fleet growth perspective, we just raised our expectations there. We were expecting 3,000 to 4,000 lease fleet growth. We updated that to 5,000 to 6,000. And some of that is capacity that we've been able to create ourselves. So with commercial rental softening, we're going to move some of that equipment and apply that to lease applications. We're still -- Tim mentioned the 6 to 8 months out, that's primarily on the tractor side, but most of our orders are out 9 to 11 months. So, many of our lease customers are saying, "I can't wait 9 to 11 months to get my new truck. We've got on-ground commercial rental vehicles that they can take advantage of. So we've been redeploying a good number of the commercial rental vehicles, that were serving the freight market and repositioning towards lease.

And so that 5,000 to 6,000, how much of the sort of earnings benefit of that do we see this year, how much that pushed out to next. Ultimately, what I'm trying to figure out is, right, I know it's early, but I'm just trying to think about some of the puts and takes for [indiscernible], puts and takes for you even looking out to '24.

For us the initial 3,000 to 4,000 was coming in towards the second half of the year. So you're going to see the majority of that benefit 2024. The incremental fleet that we added from rental, that's here. So that will start contributing in 2023. The quicker we put it to work and lease the quicker or benefit the lease performance there. So I would say the majority is '24 but a good amount will come in '23 based on what we're doing with rental to lease redeployment.

It strikes me, John, everyone -- pretty much anyone that almost everyone that had full year guidance for '23 lowered it in April, not everybody, but for the most part. You guys, if you kind of raised it. So are we -- are you assuming -- what do we need to feel comfortable with this guidance? Is there any -- there's a hope of a freight is going to be better in the second half of the year. Do we need that to happen for you? Or do you feel like you've got a conservative assumptions of used getting worse, rental, not getting better, where you still feel -- you feel comfortable with where we're at?

Yes. I think for us, it's just where we set expectations. Coming into the year, I think, we were a bit of a departure in that we expected a soft environment throughout the year, in a deteriorating environment throughout the year. We haven't moved off of that. So that's kind of playing out, if you will. And I think more and more accepting the fact that we may see a shallow recession here in the second half of the year. It's kind of what we have baked into our guidance. So, as we look forward, we don't see a rebound necessary to really hit that guidance. It's more kind of what we expected coming into the year.

Richard, I want to come back to you for a minute. What are the sort of biggest risks in your mind to the commercialization time lines. Like is it your own technology? Is it Paccar, you talked about partner. What's the biggest risk that we get to end of '24, and it's now end of '25?

Yes, sure. So we have -- again, on the Investor Relations website, we have a road map, and we've been executing against the road map and sort of taking off all of the stages that would get us there. So, we need to continue to go down that path. The technology is in a really good place. The thing that we need to do to launch is to complete the safety case. And in order to complete the safety case that we need to have a truck platform, a redundant truck platform. And that's kind of the thing. If you have that, we close a safety case and that sort of supports the launch, if you don't have that, that's the biggest challenge.

And between now and end of '24, what are the milestones we should be watching for you guys to make sure, we're on track for that into '24?

Yes, sure. So we -- at the end -- when we did our earnings call a couple of weeks ago, we said we'd achieve feature complete. So we had -- we outlined 3 major milestones that would get us to the commercial launch by the end of 2024. The first one being feature complete. So feature complete said that on a launch line, which is between Dallas and Houston, that the system has all of the capabilities necessary to operate on that. There's no more features that need to be added for that launch line. So after that, we move into a period of validation, continued testing. And, that will move us towards the milestone that we have for the end of this year, at the end of 2023, which is we call Aurora Driver Ready. And Aurora Driver Ready milestone means that we've closed the safety case on that launch line. As much as we can, absent the trucking platform. So, we think that we saw 95% closed on the safety case. And, if we had an autonomous enabled trucking platform, that we would have been able to launch commercially, we'd be able to have that drive down the road without a human driver. So that's kind of a key milestone at the end of the year, we said like we've done everything that we can do ourselves in order to kind of get ready to launch. And then, we would be waiting in 2024 to get the autonomous truck platform in place, you'd have some more validation and some more work to close the safety case on that actual platform, and then that would unlock the commercial launch.

Tim, near-term question, what should we be expecting near-term order flow classing?

I think, it's going to be soft for a while. We used to have a very tight relationship between spot rates and truck orders. It was kind of severed by the pandemic and the supply chain issues. And so, we've been sort of catching up. But we've had 12,000 in the most recent month. We think it's going to be in that range, kind of 10,000 to 20,000 through the end of the fourth quarter of this year, when you'll see that seasonal uptick, but not a great seasonal uptick. So we think, we're in that sort of depressed period until we see freight rates come back and drive more order activity, probably sometime next year.

And you said, you think we're down, I think it's 20% next year. But it's less severe than prior downturns?

Yes.

Is that just because we underbuilt in '20 and '21, and we're just -- there's -- we've got to continue to catch up.

Exactly. Yes.

Is there -- are we counting -- are there -- when do we start to see some prebuys, I know we've got some things coming in California, we got EPA 2027. When do we start to see some prebuys?

Yes. You hear there's actually a little bit of prebuying happening right now, ahead of the California stuff for '24. We're not even 100% sure that that's going to happen. California has ask for a little bit more time to actually -- for EPA to grant the waiver to them to actually go forward on this. There's two different sets of -- these are the low NOx standards -- there's a whole bunch of different regulations out there, right now. But the big one that we think is going to drive the prebuy is the low NOx rules, California first as the Omnibus regulations. There is some activity -- [indiscernible] the time. Well, 2024 is the plan, but it may -- it doesn't seem like it's 100%. It's a slightly different regulation than what EPA is planning for 2027. So we think that, that's essentially the tension there. We do think the national rule that goes into effect in '27 is going to raise the price of a Class 8 tractor by about $25,000. And only about 5 of that is the technology. The rest is significantly longer useful life requirements and warranty requirements in the rules. And so, that's most of the cost increase, but we think that those two things are going to drive essentially a very similar historical corollary would be EPA 07.

John, when you hear that, there could be 3 or 4 years, there could be $20,000, $25,000 increase in new truck price. What -- how do you plan for that? What do you -- how do you get ahead of that? Where you would be advising fleets got buying it a lot more in '25, '26.

Yes. I think look, longer term, the change in technology and making things more complex is good for Ryder. In the short term, I do think you're going to see a significant prebuy in '26, for all the reasons Tim just highlighted. So as we prepare for that technology change with our customers, clearly, the first generation of these technology switches typically aren't the best-performing units. So that's something that we counsel them on. And clearly, that would push to more pre-buy activity than you would typically see.

What about California end of the deck. I've been hearing from truckers, even rail, like that is like is a major deal. If it happens, when it happens, right? Tell us what's exactly supposed to be happening in California end of the decade.

Are you talking about the electrification rules, in particular?

Yes.

So the ZEV mandates are -- there -- they're very aspirational. It's very difficult for them to mandate as significant -- the proportion of trucks that are going to be purchased, but they're certainly going to try. And the EPA is going to try as well in these GHG 3 regulations, which are later in the decade. So -- the idea is really to push towards electrification. And that push is happening sort of on its own. I mean there's still -- there's a lot of development happening particularly in medium-duty applications and local stuff like school buses, and not really freight equipment at this point, but it's really just meant to sort of push that along. There's -- I think somebody earlier today referred to regulation stacking. And we've got several regulations now between the LONOX, the GHG regulations and the EV regulations that are all sort of pushing up the cost of diesel and pushing people towards those low carbon alternatives.

So what's your -- what's in your guys' numbers for what percentage of orders builds are ZEV, zero-emission vehicles 5 years from now?

Five years from now, it's still really small in Class A tractors -- we're still talking low single-digit percentage points, but we're probably getting into pretty significant numbers in medium-duty, 20%, 30% of the market, probably higher percentages in different niches like school buses and stuff. But, even parcel delivery and a lot of that local stuff is pretty good. And in the Class 8 market, there is rough use, there are yard spotters, their transit buses. So it's not going to be 0 in class 8.

John, what do you think about -- are you seeing -- where are you seeing demand for termination vehicles? Or how do you think this market evolves? Is kind of world Class 8, like they mandate in California, what do we do?

Yes. I think light duty is clearly the economics pencil out that, if you're a shipper, that electric vehicle could provide a similar economic return as a traditional vehicle. When you go up the scale to medium duty and heavy duty, I think the economics become even that much more challenged. Clearly, the Class 8 technology exists today, will need to be supported with state funding and credits to really make that economically feasible before you see any meaningful adoption. So without the support of the state funding, to support people to go ahead and buy that technology, it's going to be challenged.

Not to mention the grid challenge, where you can't even charge your car half of the time in California. I don't know how they think they're going to charge the trucks. The grid infrastructure investments are the biggest sort of bottleneck right now.

I think it was earlier today, we had someone talking about -- or maybe it was last night that they're looking at investing more in terminal infrastructure, just like what's -- is it Arizona or whatever states like just east of the border, so they could be headquartered there, based they are not based in California.

And then, invest in the Union Pacific Railroad because someone is going to have to get all the coal there to produce that electricity.

Jeff, what do you think about for years, there was this fear that margins for the -- gross margins in the truck brokerage industry would go from teens to 10% and some people would say, oh, it's going to 5%. And part of this was what Uber and Convoy were saying, right, was going to happen, and then maybe some others, I don't -- we haven't seen that play out, but what's your -- is there a long-term case for why, right, we should see higher gross margins, lower gross margins? Or we've got a long history of their around 15%, and that's where they're going to stay.

Yes. I mean I don't think we're getting back to -- if you look publicly, C.H. Margins were in the 17.5%, 17%, 16.5%, 18% margin for a long time. I don't think we're getting back there at scale. I don't think it matters. Because really what matters is the net margin. And with technology like ours and others, it becomes easier and easier to drive net margin off of smaller gross margin and thus EBITDA margin or actual real return to shareholder value. So I think that yes, those guys were out there pedaling that stuff. But again, that's over and nobody is trying to do that anymore. And again, remember what the broker is not getting paid to shuffle paper, right? They're paid to take risk. That's what anybody gets paid for. The risk they're taking is to guarantee that the truck is going to show up. They take risk over time and over space, right? So they're betting, when they do a bid. That's another thing that some of these new supposed companies are out there trying to pedal is that we should get away from annual bids. But they have never been in front of a shipper before and that shipper the guy that works at that shipper his bonus is based on hitting a budget and large shippers can't operate without a budget, right? There are many of them are public companies, and they need a budget. And they don't understand that that's what's going to drive pricing behavior. And frankly, the guy that's in charge of that budget that gets his bonus based on that budget, is big impetus is to hit his budget or maybe come a little underneath it. He's not trying to get the cheapest price. He wants the service, he wants the quality. What happens if he blows his budget out by too high, it doesn't get a bonus. If you blows it up by too low, what happens? He gets a bonus, but is budgets cut the next year, right? And so, some of these guys that try to come in the industry don't get it.

So but -- when do you think we see that inflection of higher net operating margins? Like, if you look at C.H. right, there -- they were at a 40% net operating margin. And now they're at a 30%, and it looks like they've just -- they've -- the gross margin hasn't changed, a whole lot is down a little bit, but they're just spending a lot more on right, technology, SG&A, whatever you want to call it, right? I don't think that the C.H. is right? It feels like, right, the -- everyone feels like, well, we need to spend more on technology or whatever. And for now, it's resulting in lower net operating margins. When do you think we could see the inflection to higher net operating margin?

I guess I'll answer it two ways. One is a commercial for us, right, because we're not inexpensive. We're an expensive solution, but it's way cheaper than trying to do it yourself, right? The whole idea that some put out there that they want to spend hundreds of millions of dollars a year on technology to try to look like a technology company. When they're a trucking company or a broker doesn't make a whole lot of sense, right? Their secret sauce. They're -- the way they price, how they accept freight, their interaction with their shippers or their customers and their carriers, if they're a brokerage, what they needed to actually deliver that capacity solution, that's the important part. And so, you have partially because of all the marketing that frankly was Convoy's best asset was their marketing and what Uber Freight did attracted a lot of attention to people to invest in the right technology. Those weren't the right technology. But with the right technology, I think, you will start to see that. The API connectivity of the world now, the improvements with the in-cab devices that were stuck for a very long time, where you have players like platform science out there that are in same -- or to a certain extent that are bringing new tech and new capability will make it easier to make -- to drive more profit to the bottom line. So I think, with the right a combination of all those forces, this is a time like there's never been to start driving that.

So it sounds like we've got some -- we're hopefully at -- in your mind, maybe a cyclical -- nearing a cyclical trough in the market. We've got less competitive pressure from people doing dumb things. And, if we could be smart enough and spend a little bit differently on our technology that there's a real case for the next few years in the frame recovery for the brokers to have a really good year. Few really good years.

There's a great convergence of it. I mean, the other big thing that's out there in support of John's business is there is more and more sort of coming out of the pandemic, more and more shippers have realized that they need the right dedicated private fleet and dedicated fleet platforms that their idea of not being subject to the market isn't based on brokerage or it's based on getting the right capacity dedicated. It's a really critical thing. That's a big change. And that's why, as some companies have pivoted from a lot of the big public companies and to a very, very positive outcome have shifted towards much more dedicated and much less just over-the-road willy nilly freight. And that also becomes easier and easier with the right technology to really automate and drive our margin on the bottom line.

John, maybe to that point, what's your view of the trend between -- just outsourced lease, private fleet staying private fleet, outsourced lease or going to more outsourced dedicated?

No. Look, the complexity in the marketplace from a leasing perspective, we talked about technology changes, the rising cost of equipment, a leasing solution clearly makes it better and more affordable for those private fleets. And then I think, structurally, you're still facing a driver challenge over the long haul, and people want to get out of the trucking business and look to outsource to companies like Ryder. So, when we look at the secular trends for the transportation side of our business, the trends still point to a very positive momentum going into the future.

Okay. I want to -- we're going to wrap because we're at the top of the hour. I just want to give everyone just go down line, something that we didn't touch on, that you just want to make sure that we -- that you're focused on or you think maybe we missed in our discussion today. And so, maybe I'll start with you, Richard, and we'll go.

Yes. Yes, thanks very much. No, I think we tested on a lot of stuff, like we're heads down, we're in a development phase. We are very excited by our road map and our progress in local road map. And I think, we would say there's a lot of noise in the space, there's a lot of noise around autonomy, and we feel at a -- at least we're the closest that we've ever been, irrespective of what the outside world thinks at any given time on how autonomy is doing, like we really feel like we're on a path to get this launched by the end of 2024. And then, once you've launched it, this is just a phenomenal business for us, right? We're built from day 1. It's not a science experiment we're building. We're building a company. And our product is going to enable what we call driver as a service business model. So we're going to get paid per mile. And we're going to -- because we focus on what we can do best, we're going to be asset light, and we can drive really, really high gross margins like in the sort of Software-as-a-Service like 80% plus gross margins. So you hear some of the numbers around here, and you're like, this is a technology business that's going to power all of these trucks on our side. So we're just super excited to kind of get there, get a commercial product launch, and then be able to start scaling and then help solve some of the problems that you've heard some of these other people talk about across the business.

Tim?

Very good. Maybe I'll come back to the cyclicality. I certainly agree with Jeff's comments about the industry being ever more cyclical. I would just point out that a couple of things that are currently really negative about this cycle. We're in sort of some temporary factors like this big destock that we're going through. And I think, that the freight markets eventually will kind of come back every time we destock, we restock, I'll point that out every time. And, I would actually make maybe differ a little bit and point out that I think that, the amplitude of the cycles is increasing. If you just look at spot rates, for example, I think we're very close to the bottom. And I think that elevated amplitude is going to continue partly because of demographics with the boomers retiring in the average age of a truck driver at 55 years old. That's been with us for several years. That will continue to be with us for a while. And partly, because I think the transparency that the load boards have provided, which is a relatively new phenomenon, has given both sides of the market more pricing power when things are imbalanced.

Jeff, you plug, Jason Miller, feel free.

We got stuff to a free it's great.

Anything, Jeff, you want to add?

Not really. Absolutely best industry ever to have fallen into by mistake, and I still love being here. So thanks.

John?

Yes. For us, it's more, what we've done with the business model. So we talked about cyclicality and the risk that comes along with it. We've derisked the business. We've diversified the portfolio beyond the equipment leasing and rental business. So, we're excited about the opportunities and challenges that are ahead for Ryder and being able to perform consistently through those cycles.

Awesome. I really enjoyed that, guys. Thank you so much. It was great.

Thank you.