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

Well, good morning, everyone. Welcome back for those that are just joining us. My name is Allison Poliniak. I'm the senior analyst of Transportation and Industrial Technologies here at Wells. We're excited to have Ryder as our next presenter as Chairman and CEO, Robert Sanchez is going to be speaking with us today. So Robert, for those that don't know Ryder, do you want to kind of give a brief overview of the company for folks?

Sure. Thanks, Allison, and thanks for having us here. Ryder is in the transportation and logistics outsourcing business. We're North America focused. We've been in business for 90 years, our 90th anniversary. As a company, we've about $12 billion of revenue. We have operations, as I mentioned, just in North America, U.S., Mexico, Canada. Everything we do, a company can do on their own. So [ one like ] other transports, we're not a for-hire carrier. We -- companies outsource their truck fleets to Ryder. We have a fleet management business, which includes 100 -- just under 160,000 vehicles that we own, most of them and maintain all of them here in North America with a network of about 800 truck maintenance shops. We have a dedicated transportation business, which is the outsourcing of the truck and the driver. So that's where companies outsource their private fleet to Ryder. So rather than buying their own trucks, hiring their own drivers doing their -- they outsource the whole thing to us. So we have about 11,000 professional truck drivers who work for Ryder that run that business. And then we also have a supply chain logistics outsourcing business. So that's things beyond the truck and the driver. That's the outsourcing of broader supply chain activity. Warehouses, we have just under 100 million square feet of warehouse space that we run here in North America for customers. It's about 350 different operations. We also have a significant transportation management business where companies outsource their traffic department to us. That's part of that business. And then more recently, we've acquired an e-commerce fulfillment business called RYDER ECOMMERCE by Whiplash, where we actually provide final mile e-commerce fulfillment activities for companies, and a last mile, big and bulky business also that we acquired where we actually do the delivery of larger furniture office equipment, that type of stuff to the home. So really kind of we call port-to-door type activity we do within our logistics business. As you might imagine, post COVID, that has become a very, very hot business for us because companies are looking for help in logistics and supply chain, and it's something that we're very good at. All the businesses that we're in are contractual, multi-year, I should say all, most of them with the exception of our truck rental business. Multiyear contracts with customers. Over the last 3 years, we've been in a transformation phase for our business. And the transformation has been part of this, what we now call our balanced growth strategy. So we went through many years where we were not growing a whole lot. The business was pretty mature. Then we went through a period where we were able to grow a lot because companies decided to outsource more of their truck fleets as technology changed. More of their dedicated operations, it became harder to hire truck drivers. And then as you might imagine, logistics continued complexities there. We came to the conclusion, hey, some of this may be -- there [ is such thing that's ] too much growth, especially in our capital-intensive businesses. So we just start to throttle that back and basically balance the growth -- the top line growth with bottom line growth and also with free cash flow. And the good news is we've executed well on those initiatives. We basically -- we've raised the watermark on earnings in our company over the last 3 years by doing a few things. One is we lowered the residual assumption on all the leases that we signed, that's where about 80% of our capital goes is now the assumption for that final cash flow is lower. Therefore, the probability of getting our target returns is much higher now because you don't rely as much on what's going on in the used truck market. We took out $125 million of maintenance costs from our network over the last 4 years. We spend about $1.2 billion. So you can call that it's about 10% that we were able to take out of our maintenance cost by changing the processes in our shops and buying better. And then we also raised the spread target on our leases. From on average, we were doing about 75 basis points. Now we're doing more like 150 basis points. We've got about 60% -- 60% to 80% of the portfolio already repriced, and we feel really good about where we're at there. So I'd like to tell our folks at Ryder, we're in a bit of a show-me period now with investors. Our earnings look really good. But some folks are saying [indiscernible] because the used truck market has been good. So we've tried to, wherever possible, show that, that is not just the used truck part, it's the core business, which has really improved. I think we're really excited about being able to prove that out here over the next 6 to 12 months.

That's great. And then just along those lines, right? We're clearly in a freight recession at this point, broadly. You've evolved the portfolio. There's still -- you're still on that path at this point. How is it performing relative to what you thought it would in sort of this down environment at this point?

Yes. We feel -- first of all, we feel that the freight cycle is performing similar to what we expected at the beginning of the year. We expect -- and when I say freight cycle, we're not a truckload carrier. So the way the freight cycle impacts Ryder is basically our used truck pricing. So the used truck market slows down, and our rental, specifically our tractor rental slows down. Those 2 are being impacted. Just our prices are coming down, not a secret. Our tractor rental business is slowing down. We have what we call our asset management playbook on how to handle that. One of the things on the used truck side, first of all, we expanded over the last 3 years, our retail capacity for used trucks by about 50%. So rather than have to wholesale trucks, we're retailing more of the trucks. But our price is coming down with the rest of the market in line with what we've expected to happen. We expect that to continue to come down through the balance of the year. So we feel we've got a really good handle on that. Our inventories are very low, still below what we normally carry. On the rental side, we are doing a lot of rental to lease, and that's where we take extra trucks in our rental fleet, and we lease them to customers for long-term contracts. So we are well into that process. We typically can do about 500 to 600 of those types of moves a month because we've got a big lease sales team that's out there now specifically doing that, especially in a market where new trucks capacity is still delayed. You're not getting them still for about 9 to 12 months. So it's a really good product to be able to lease that. That helps us to keep our utilization in check. So we feel really good about where we are in this moment in the cycle and where we see the cycle going.

Got it. And I guess, along with that, maybe not targeted specifically you, but does it -- when you're talking to your customers, do you sense the level of stability out there that's giving you a little bit more confidence in your visibility?

I think this is probably the most anticipated recession in the history of our country. So we're all waiting -- everybody is just kind of bracing and trying to figure out when is this thing going to happen, now, I guess the latest is probably in the third quarter. Clearly, there's less product moving around. That's why we have a freight slowdown. So I think it's not falling off a cliff. It's coming off of very high highs. So we're getting back to more normalized levels. But I think most people are just they're not -- nobody seems to be panicked. It's just things are slowing down. We're going to go through this cycle. Those of us that have been in the business for a while know that -- we've seen this movie before. It comes down. And then when it looks like it's really, really bad, it starts to come back up again.

And I guess, [indiscernible], you said one of the words that people don't like to hear lately e-commerce, Supply Chain Solutions, you talk about that business a little bit. What's the defensibility of that business for you guys? How do you envision growing that...?

We're really excited about that business because really COVID was a real shot in the arm for anybody that's doing anything for supply chain logistics. We've, over the last several years, been rounding out our portfolio. We started in that business many years ago in automotive. We're a premier automotive logistics provider, specifically for inbound manufacturing to plants. But then we got into the CPG business with a big acquisition. We're in the retail logistics business, high-tech logistics, more recently, also getting into health care. So we've got a pretty broad spectrum of customers that we go after. And we've got a broad set of solutions that we can provide a customer. One of the things that we feel is a competitive advantage for Ryder is that we're an end to end. We can do transportation. We can do distribution. We can do e-commerce. We can do final mile. So we have solutions for whatever the customer needs, all under the Ryder umbrella. That business grew almost 50% last year, 50%. Half of that was an acquisition that we did -- 2 acquisitions we did. But the other half, 22%, 23% was organic. And that was customers just looking for help. We see our pipeline really strong in that business today. We're beginning to see near-shoring benefits because we've been talking about there for the last couple of years, but we're now seeing customers that are saying, "Hey, I'm moving some operations into Mexico. We need [ health ] and we have a very strong operation in Mexico. We do a lot of border crossings for our customers, one of the larger companies that does border cross in between U.S. and Mexico." So we think that capability fits in really well with near-shoring. E-commerce now where, as I mentioned, we bought into that business, E-commerce has slowed down a little bit or is not growing as fast, but the long-term trend for e-commerce is still going to continue to grow, and we feel really good about the position that we have there being able to provide solutions there. Anything having to do with growth in the industrial economy here in North America is good for Ryder because one of the specialties that we have is inbound to manufacturing, whether it's auto or other industrial companies. We provide a lot of the capabilities in that business. And then we're making investments. We're making investments in technology. We rolled out a product called RyderShare last year that gives our customers visibility to the freight, whether it's on a Ryder truck or on a third-party truck and also even if it's in the warehouse. So if I have an order that I'm trying to track, RyderShare allows you to track that order wherever it is in the supply chain and then allows the driver, the customer and the customer's customer to all communicate on the tool. So it's really provided us a unique solution that most companies don't have. It's been a deciding factor in almost 40% of the business that we won in 2022. So to me, that was a little bit of a test of, okay, can technology make a difference in our business. We now are -- we're going in much deeper now. We bought a company, a start-up from Silicon Valley called Baton and they are becoming our product development arm now where they're going to start -- we're going to start developing our own technology really to optimize transportation, optimize freight within the Ryder network. And that's probably still 18 to 24 months out before you start to see the output of that. We've got a great team there. They're focused. We've got products that we're working on that we expect to be able to roll out and give our supply chain business a more unique solution to be able to bring to market.

Does that technology make those customers stickier than to you? Or they kind of get embedded...?

The idea is the technology once they get used to using it, it provides them a solution that adds a lot of value and makes it a little more difficult for them to go to somebody else.

And you mentioned a couple of different verticals for Supply Chain Solutions. Is there one that you're leaning into a little bit more? Like I know you talked about e-commerce and obviously, the longer-term growth opportunity there. I guess how do you maintain that balance so you don't get overweighted or [indiscernible].

Yes. We were historically overweighted in automotive. So that has changed significantly over the last several years. We went from -- I think we used to be 40% automotive. We're now 20%, 25% automotive. We broke out -- we changed kind of the configuration of our verticals to be able to show omnichannel retail, really now being a really important vertical for us. I think there's a big opportunity for us to continue to leverage that e-commerce omnichannel capability that we have. So you're going to see us focusing on that. You're going to see us continue to focus on industrial, sort of our bread and butter. So as you hear companies onshoring, near-shoring, manufacturing capabilities, that fits right into our sweet spot, and I think we're going to continue to do that. We more recently won a significant health care opportunity that we've rolled out a solution there, which has been very successful. Our goal is to now take that solution and be able to replicate that for a hospital network when I say health care. So it's the inbound of supply of products to a hospital. We're running that for BJC in St. Louis, and it's been very successful. So we have been now focused on being able to replicate that in different areas.

I guess one of the concerns or questions to come at us with this is the credit quality of the people that you're taking on the customers. Can you maybe walk through that risk and how you guys have managed that?

Sure. Well, I'll start with on the truck leasing side, it's -- there's rarely been any significant bad debt even during the Great Recession because we're buying a truck that cost over $100,000 for each customer. So we need to make sure we do a good job of credit reviews there, so we do. In our supply chain business, the vast majority of our customers are large Fortune 500 investment-grade companies. We had about 80% of our revenue there is with investment grade -- of our single customer revenues with investment-grade companies, which is the majority of it. The only non-single customers is primarily this e-commerce business and some of -- a few multi-client type operations. So the majority is investment grade. What happened in the first quarter is we did take a chance with one noninvestment-grade. It's unfortunately, I've had to talk about this as much as I had. Many of you know Bed Bath & Beyond. There's an opportunity for us to invest in some sortation equipment for high-volume retail, and we took the risk on the equipment, which we typically don't do. And it didn't work out in our favor. That is not the norm in our business. That was, I would call it more of an R&D-type investment that really didn't pan out.

Got it. Understood. And then you mentioned reshoring and onshoring a few times. When you're winning some of this, is this existing customers that you already work with? Or are they looking for these new customers looking for options [indiscernible].

Both. Initially, it was mostly customers that we work with already that are opening up new operations in Mexico. But now as we also started a marketing campaign around near-shoring, which we had not done before, we're beginning to get now more inbound from new customers. Some of them are large -- large manufacturers, others are suppliers to large manufacturers that are now seeing Ryder an opportunity to help them establish their operations in Mexico.

Got it. And dedicated is another area where you're trying to grow. Maybe walk through your thought process there. And just even new contracts, I know, obviously, things have slowed down, but are you getting a lot of interest still in terms of the dedicated...

Yes. Dedicated, we talked about on the call a little bit slowed -- that we saw a little of a slowdown in the pipeline in the first quarter, and that -- we believe that's primarily due to the drop in spot rates that customers that were otherwise going to go to dedicated because there wasn't capacity in the spot market are now back in the spot market. So aren't looking to make that transition. And the other driver hiring has become a little easier over the last couple of quarters. I think the long-term trend is there's a driver shortage will continue. It was really bad. The last couple of years has now gotten a little bit better. So companies aren't as eager to go, let me go find somebody can do this for me. It's one of the reasons companies outsourced to dedicated. So we've seen those slow down. I think the longer-term trend is there will be -- continue to be a driver shortage here. Companies will continue to look for expertise in this area of private fleets. And we think the growth opportunities there are significant. We target high single-digit top line growth in that business. We think we'll clearly be able to do that over the next several years and maybe with a little bit of tailwind to be able to do better than that. A lot of our -- 50% of our sales in dedicated come from our fleet management business or the leasing business. So we had 600 sales folks in that side of the business that as they see an opportunity to -- for a customer that not only wants should outsource the truck, but they should do the truck and the driver. They're able to upsell, if you will, the customer to dedicated. So that process continues. We've got the right incentives in place there to be able to bring that additional value to customers.

Got it. And I want to get back to final mile. I think the view on folks is really it's like, oh, it was delivering pelotons to everybody's house, and we're not doing that anymore. So that business falls apart. Could you maybe talk through that growth vertical that you see?

The first part is true. The second part, hopefully, not true. You're right. During COVID, there was just a boom in delivery of fitness equipment to people's houses, furniture, everybody went crazy buying furniture. So we got the benefit of that. We've seen that certainly come back to more normalized, I would call it, more normalized levels. We think that trend though still of people feeling comfortable buying furniture online is going to continue. And even if you don't buy it online, you still need to deliver it through a nationwide network, which is what we're providing. So we see that business, the growth rate is really coming back to more normalized levels over the next year. We -- we're really pleased to be in that business. We think we've got a nice operation there that we can leverage. And we see that business kind of like e-commerce over time, just continuing to grow even though it's having a bit of a reversion back to more a normalized level of growth.

And what should we think about for normalized growth for that business?

I think it's -- you look at e-commerce, we're probably looking at a 10% growth rate over the next several years. And that is probably somewhere around that level. I'd call it anywhere from high single digits to 10%.

A pretty strong view on it.

Yes.

And I would say you kind of touched on some of these...

Just to be clear, it's after the pullback.

After the pullback. Yes.

Once it pulls back, it will get back on the...

The trend will be back. One of the questions we get, and I -- it covers some multi-industrials as well is why do these businesses fit together for the Ryder. can you just talk -- touch on that front.

The synergies in this business are really -- they're all the outsourcing business. But really, every truck that is used by dedicated supply chain is provided by our fleet management business. 50% of the sales in dedicated come from our fleet management sales force. So there's a revenue synergy between the customer that starts in leasing and then you upsell to dedicated. The technology that is used between dedicated -- that's used by dedicated and supply chain RyderShare is a shared technology across those businesses. So we leverage the investment in that technology across those businesses, the driver recruiting network. 1/3 of supply chain is more of a truck dedicated operation. So the driver recruiting network that recruits those 11,000 drivers is really shared across those businesses. So there are important synergies across, I would say, serially across those businesses. Now could they be separate? Yes, you could say supply chain could one day be on its own. I think as we go into this period of disruption over the next decade or decades of the energy transition, the move to autonomous vehicles potentially, the continued rise in e-commerce, the investments in technology that are needed. I think having more chess pieces is good. You don't know which of those chess piece is the one you're going to need to provide a new solution to a customer. So that's what we're focused on. We're focused on executing with the portfolio that we have. I believe we're in a bit of a show-me period here with investors, that we feel very confident we're going to come out the other end very positively and get the valuation that we need for the full business. Because clearly, if we don't get the valuation over time, we will have to look at some other alternatives.

Got it. And I know you mentioned RyderShare and some of the technology around that, but it seems like you guys are much more broader. So how do you -- how do you focus your investment or your dollars on a specific technology? Is it something that benefits all 3? Or are you kind of -- I guess, what's your return and discipline around some of the technology?

Sure. So the nice thing is as an outsourced provider, we're very embedded in our customer. So we have a pretty deep understanding of what value technology can bring. So we try to be very focused on each of the businesses around what's the value that we can bring to our customer, where we can find technology cuts across customers like RyderShare, that's a real home run because then you're investing in something that you could use to bring customers even from one segment to the other. So we're going to spend. The big dollars are typically going to go with big dollar so far have been in RyderShare. I think this technology -- this optimization technology that Baton is working on, we envision that as being some that will be shared across all 3 businesses over time. But we also have investments, spot investments in each. In our truck leasing business, there's a solution called RyderGyde, basically a fleet management app for our customers where they can track everything having to do with the truck. In our dedicated, it's RyderDrive, which is an interface between our driver, our customer, their customer and Ryder. And then in supply chain, it's a broad array of technologies that we provide.

And you mentioned autonomous vehicles, there's EVs that are basically coming to fruition for truck. How are you -- I've been to some of the shows and seen some of the technology, maybe kind of talk through that and investments that you're making there?

Yes, we're really excited about that. I think long term in our fleet management business, Ryder will be a significant player in the energy transition once it comes to commercial vehicles. Our customers come to us, what do I do? When do I invest in electric? What's the technology doing? So we have a group that's solely dedicated on just having their finger on the pulse of everything that's going on in that energy transition. So I think the energy transition is not going to happen overnight. It's going to take decades. And there's going to be long periods of time where customers will have some electric trucks, maybe some hydrogen fuel cell and maybe some diesel. And somebody is going to have to be there to help that transition happen. I think Ryder is one of the players that's going to be doing that. Our rental business is a great opportunity to introduce new technology into the market. So we're partnering with several companies where we're going to be doing some of that. Our view right now is that the real opportunity is probably around more light-duty delivery vans, where the value prop is there, where a customer says, I'm going to invest little bit more upfront, but I'm going to save on fuel and operationally can meet my needs. So we are leading now with bringing those vehicles into our rental fleet and offering them for lease. On the medium and heavy duty, there are vehicles available, the value prop is much tougher. It's really going to be focused more on companies that just want to try it out [ in investment grade ], but the value proposition, the economics aren't there yet. We're going to -- we continue to work very closely with the OEMs as they continue to evolve that technology. But again, I think the important thing is this is going to take a while. We have a product that we rolled out recently called [ RyderElectric+, ] which is basically a turnkey solution for a private fleet that wants electric vehicles. And primarily, it's going to be light duty right now, delivery. But Ryder can provide not just the truck, but all the charging infrastructure, basically a turnkey solution so a customer can implement a fleet of electric trucks.

Got it. Before I go on to -- we're running out of time. Anybody have any questions, I want to make sure we get to Robert.

Yes.

In the area of energy transition, it sounds it's going to be a capital expense [indiscernible].

It's a great question. Look, I think Ryder is going to have some infrastructure required in our shops for rental. But the vast majority of that capital is going to be at our customers. Customers aren't going to want to bring their trucks to Ryder every night to charge them. They're going to want them charging it there location. So that's going to be part of that process. We're in the early, early innings of this. Light-duty charging is not that complex. It's very similar to maybe an electric car you have at home. You start getting into medium and heavy duty. That's a much more significant investment. I think the cost is still quite prohibitive when you look at -- it's not just the cost of putting it in, but the regulatory hurdles and the work you have to do to be able to get that infrastructure installed. But we are -- again, over time, we expect those prices to come down, regulatory and some of the hurdles that exist today will start to come down. If I had to guess, I think that doesn't happen in a significant way for the next possibly 4 to 5 years.

And that maybe leads to sort of the cash flow profile of Ryder. As the business continues to evolve, how does that cash flow profile evolves you as well?

Yes. So we've been clear. We went through a growth period back in -- through 2018, '19, where we were growing at -- especially our lease business, a pretty significant [ cliff. ] We had a couple of years of negative $1 billion, almost a negative free cash flow. Obviously, that spooked some investors, [ they said, ] all right, let's not do that anymore. So we're looking at more moderate growth in that business. We think what that translates to from a free cash flow standpoint is really positive free cash flow. I always say in almost every year because you might have a year or 2 where you catch up on some CapEx or we have a little bit more growth. But certainly staying away from those years of negative $1 billion of free cash. We understand the importance of being able to show. And I think over time, too, is earning your -- earning the right to grow [indiscernible]. So I think as investors see that, hey, Ryder is getting great returns on these leases. It's showing up on the P&L, showing up on the returns even when used truck prices are down. I think we may see us do a little bit more. But right now, it's the balanced growth strategy where you see positive free cash flow over the cycle and in most years.

And along with that capital deployment, you did a great acquisition of Whiplash. Are there more types out there? Like where is your focus on...?

Yes, there's always new capability, especially around supply chain business that we want to pick up. So you're going to see us continue to do those. You're going to see us continue to look at share buybacks. And obviously, dividends are an important part of our -- for some of our shareholders. So we have plenty of balance sheet capacity to do all of the above, and you're going to continue to see us execute on that.

Great. And you mentioned the return profile. You're obviously looking to improve it. Maybe walk through the sustainability of your current targets? And what -- can we see that ultimately step up over time?

Yes, and yes. So our primary metric that we've put out in the market is return on equity, right? So we're in the leasing business, a good chunk of our capital. So historically, our return on equity was in the 10% to 15% range, 10% in a bad year, 15% in a good year. We've raised that now to say it's really between 10 and the low -- I'm sorry, between 15% and the low 20s. So in a good used truck market, we're going to be in the 20s. In a bad used truck market, we're going to be in the 15% range, which used to be our high. And in a -- on average, we're going to be in the high teens. So we currently -- last year, we're at a record level, 29% return on equity. We see that coming down this year, probably to the 17%, 18%, but really not going back -- really staying in that range of 15% to the low 20s throughout the cycle.

Got it. Anything surprising you that sort of over the cycle in terms of that return target that you weren't expecting? Or did everything sort of kind of just as needed?

Yes. So far, in general, the model post transformation is really performing the way we've expected it to perform in this cycle. So we're going to continue to monitor that. Obviously, we will respond as things change. But we feel really good about where that's going. And then it's going to be a matter of once you get there, what are the additional things we can do around investments in technology that will allow us to expand the margins even further once we've been able to get through this period.

Got it. I think we're getting close to time. Any closing remarks that you want to leave us with?

No. As I mentioned, we're very excited about the progress we've made in our transformation of our business model and in our strategy. We feel really good about this year and where we're at. We feel really excited about getting through this downturn. I can't wait for this thing to go through because I think we're going to prove that we've got a different Ryder than what we had 3 years ago, and it's going to perform much better during this cycle, and we're going to get the returns we need. And hopefully, we get start to get valuations that are more aligned with that.

Sounds good. Well, thank you very much.

Okay. Thank you.