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

Great. Next up, we have Ryder Systems and CEO, Robert Sanchez. Sir, welcome back to Laguna.

Great. Thank you, Ravi.

I've been looking forward to this one because I think with your breadth of business, I think you probably have a better view of macro in the cycle compared to anybody else. So would just love to get your sense of where you see supply chains right now, where you see demand levels overall in both the industrial and in retail economy?

Yes. So -- for those of who aren't familiar, a lot of Ryder's business like 85% of our revenues are contractual multiyear outsourcing agreements, right? So outsource the lease truck from us for 6 years, and that's set agreement. You got outsourcing agreements for dedicated transportation or supply chain activity, multiyear agreement. So we're not as -- we're not as dependent on that volatility that you have in the freight market. But where we do see the impact is in our truck rental business and then our used truck business, right? We have to resell every truck we lease. So we have seen that slowdown. It definitely peaked at the beginning of last year, and that's continued to come down. We expect that to continue to come down for the balance of the year. That was our forecast even at the beginning. I think it's what we have felt so far has been primarily the shift. I think you heard your other guests talk about it. It's the shift from buying just goods to buying now more experiences and services. So everybody went to Rome, and they stop buying more stuff, and that's kind of shown up in the freight volumes. So we think that's going to -- it's going to continue to be soft. If there is another -- if there is a short and shallow general recession, then that could provide may be a little bit more pressure, but I would argue that balance of experience and goods probably has to go back to its pre-COVID levels. So the one that has probably more to lose is the experience side than the good side. So we think that's going to probably continue through the balance of the year, probably bottom out in the first part of next year and then start coming back in the second part of next year. But we have been weathering it, I think, very well. Our utilization on our truck rental business is now in the mid-70s, normally look in the mid- to high 70s, so a little bit softer than we expect, but we're leasing trucks out of our rental fleet to get that front rightsized. And then we have a much bigger used truck retail capacity than we used to. So we're still able to retail a lot of our used trucks where you're going to get more of the premium and we're working our way through that also.

I want to touch on each of those topics. But can you just remind us kind of -- again, totally get that it's a long-term contract, a very stable business, but I think your business can also be like new interest in your business can be a little bit of a macro indicator or almost a leading indicator of where things are going, especially in SCS and kind of fleet management, right? So again, are you seeing any signs of life that leads you to believe that the turn maybe close?

So on the -- from a pipeline standpoint on new business, supply chain is still very strong. Because coming out of COVID, companies are really looking at their supply chains making adjustments, and that feeds right into Ryder sweet spot. We're helping these companies with opening up new facilities or maybe rethinking their network, we're a North America-based company, so we're U.S., Mexico, Canada. So all the -- anything having to do with nearshoring and onshoring really is a benefit to us. And we're seeing that in just new -- our pipeline is actually up from last year. And last year, our revenues were up 50%. Half of it was acquisition, so mid-20% organically. And we're expecting now -- we've said long term, we're looking at that business growing in the -- certainly in the low double digits range. On the dedicated side, we're seeing some softness as we are in our ChoiceLease and our truck leasing business, that's more driven by the fact that it's gotten a lot easier to hire a truck driver today than it was a year ago. So when -- I always say what we do becomes difficult, it's good for us because more companies are likely to outsource it. So it's gotten a little bit easier to run your own private fleet, a little easier to find truck drivers. We think that's a temporary thing as the freight market has come down. You've had more drivers kind of go back to driving for companies. But the long-term secular challenge around driver shortage, I think, is going to continue. So we expect that to come back as the market comes back. And then around truck leasing, it's been more around uncertainty around what's going to happen with the freight market. So companies are a little bit more hesitant and taking a little bit longer to make a decision on signing up to a new lease or adding a new vehicle. But again, that's more of a cyclical slowdown.

Got it. Ryder has changed a lot over the years. Obviously, you've worked very hard to reduce the cyclicality of the business, the exposure to used prices kind of brought a lot more stability to the earnings which means you're probably going to enter the next up cycle kind of with a different mousetrap than you did in the previous up cycle. So how do we expect kind of each of those businesses to actually respond in the next up cycle, kind of which one would be probably stable and kind of continue to grow versus which would see maybe kind of big pickups in the next up cycle?

Yes. So I think the contractual parts of the business, whether it's supply chain dedicated or full service lease, our expectation is that through the cycle, those businesses, you're going to have a little bit of ups and downs, but they should all continue to grow. Supply chain, low double digits, dedicated high single-digit growth and our leasing business more mid-single digit. It's more capital intense. We expect that to grow a little bit slower. So I see those continuing. Rental and used trucks are the ones that will move more with the changes in the freight market on the up cycle. That's where we have an opportunity as the freight market comes back, you'll see used truck prices come back, pick up more gains, and you'll see rental. Our plan is to make sure that we're investing in rental early, so we can take more of that upside. We feel very confident in our ability now to adjust that fleet when we need to. So yes, I think that's the key is that we have changed -- as you said, we've changed the overall model, we did 3 things. Number one is we look to derisk the model where we lowered our residual assumptions on all our leases about 4, 5 years ago. So now most of our portfolio of leases has a lower residual assumption, which means that you're getting more of the -- you got less risk on that back end lease. So before we're using averages, now we're using more of a lower quartile type residual. So it's a lower risk business. We also got out of the U.K. where we weren't doing that great. We've also increased the returns of -- the expected returns of the company by raising the spread targets for our leases. It used to be 60, 70 basis points. Now it's more like 100, 150. And most of our portfolio now has been repriced with that. We also took over $100 million of cost out of our maintenance network, and those benefits are showing up on the bottom line for the company. And then the last piece is really accelerating the growth in our supply chain and dedicated businesses. So we've added a lot more, not only salespeople and marketing, but also making investments in technology to make sure we're winning more than our fair share of that business.

Got it. You've derisked the used risk significantly, but it's obviously still a big factor and kind of your numbers, though. How do you see the used truck market kind of evolving from here? Obviously, it continues to be very weak. Is there an impact from Yellow's bankruptcy as some of that capacity comes back to the market kind of -- do you see any signs of strengthening there?

Yes. We're expecting the used truck market to continue to decline through the balance of the year. The Class 8 tractor market is now back to kind of historical ranges from where I had gone to post COVID. Trucks are still a bit high, a little bit above that. But as we expect that to continue to soften go through the cycle, the Yellow impact has not been felt yet. I think it's about 20,000 vehicles are going to hit the market. There'll probably be some additional pressure from that, but we feel really good about where we're at from an inventory standpoint and our ability to retail through this. But the key takeaway for Ryder is that historically, our return on equities was between 10% and 15% through the cycle, you go back many years, that's what it was. Our new return on equity is 15% to, call it, mid-20s, and that's because of the changes that we made. So we're expecting now this year, we're going to end up at -- I think we're now targeting 17% to 19% this year in a slowing economy. A trough would be 15%. And then in a good time, when things are good, we'll be in the 20s.

Got it. Can you remind me kind of what percentage of your kind of rental and lease customers are enterprise, like large enterprise versus medium versus SMBs? I think there's been some debate about whether there's going to be an exit of capacity, supply side capacity from the marketplace, especially in kind of truckload but maybe in other segments as well. If there is an exit of capacity, kind of does that tighten the market for you? Or does it loosen the market for you?

So on our leasing -- on the leasing side of our business, the majority of our customers are small to midsized companies, right, companies that lease a fleet of trucks from us. So there is some transports, but there's -- the majority of the customers are not transports. They're companies that do something other than just drive a truck. They're using the trucks to deliver their product. So we think as capacity comes out of the market, you're going to have -- you might have more companies that will say rather than use a truckload, I would need a private fleet. If I need a private fleet, I can buy my own trucks, do all my maintenance or I can come to a Ryder and we can do that for you. So it could be an opportunity for us as more companies have to invest in a private fleet operation.

Got it. One of the questions that we post to the last few companies who have also been somewhat [indiscernible] this trend is whether a downturn is a good time to have conversations with companies about outsourcing? Whether it's the entire supply chain or their fleets? So have you seen kind of a pickup in the pipeline or a pickup in conversations with some of these prospective customers of yours kind of looking to come to you for an integrated solution in a downturn? Or do you think that's going to need an upturn to accelerate?

On the supply chain, yes. So on the supply chain, with all the disruption that happened, it's been as good as it's ever been, right? There's still a lot of companies looking for help, and we're -- what Ryder brings, as you said, is an integrated solution. We can do the warehouse. We can do the transportation management. We can do the private fleet. So we can do all the pieces and integrate them for you. We have a platform RyderShare that also gives you visibility across those. So we've seen a big pick up there. We have seen less though, around the truck leasing alone and the Dedicated alone because there's less of a [ pay ] right now. People are gravitating to what the issue is. And plus, with spot rates being down, you even have some customers that otherwise would be on a private fleet, the service level they need. They're saying, hey, you know what, rates are so low. Maybe I'll sacrifice a little bit of service and take advantage of the lower rates until they come back.

Got it. Dedicated has been one of the kind of most resilient kind of even fastest-growing parts of transportation kind of in the upturn and also in the downturn. Has that performed as you expected it? Kind of it has not been maybe more resilient or less resilient than you thought? And kind of do you think that growth in Dedicated we saw during the kind of post pandemic period is structural and will continue in the coming years?

Yes. Again, we're expecting high single-digit growth in that business. We've been hitting that we're actually a little bit above that last year. But as we go into next year, there might be a little bit more softness cyclically, just as we get through the cycle, but it's an important part of the growth story for Ryder. We've been in the Dedicated business for a long time. We've been growing that business nicely. We've got over -- between dedicated supply chain, we have over 11,000 professional drivers who work for Ryder and make those deliveries. And we see that as an important part of our growth. We're investing more in technology. I mentioned RyderShare, that's our visibility and collaboration tool. That has played a part in about 35%, 40% of the new wins that we've got built in dedicated and supply chain. So we're -- our plan is to continue to make more investments in technology. It's really something that in our business has become a differentiator. We acquired a company, start-up last year called Baton, which was a company that we were introduced to through our RyderVentures. Basically, I would say we bought 5 really smart people that were building some software for optimizing truckload. And as we got to know them, we realize this software is the market that they were going after, we're not as -- we weren't as excited about, but we thought the software they were building could be really valuable to Ryder. So we bought the company. We have them now focused on building optimization and visibility type tools for our customers, specifically for Ryder. So they're hard at work. The plan is that as we get into certainly the second half of next year to be able to start introducing some of those additional products to our customers on the dedicated and on the supply chain side.

Got it. I have a bunch of tech questions for you later on because I know that you guys are a pretty tech-forward company. But just kind of on the e-commerce side of things, kind of what are you seeing kind of in the e-commerce portion of your business kind of especially going into peak season, kind of are you seeing any signs of life there at all? Again, does that again hinge on where the consumer swings back the pendulum from service to good spending?

Yes. It's -- well, e-commerce, in general, for us from last year is down as is our final mile business. Clearly, as that switch happens, you just had fewer people buying as much as they were before. We're seeing it kind of -- we think it's kind of bottoming out here. As we get into the season, we're all expecting some of this stuff to come back. it's hard to tell, though. I think there's a lot of uncertainty right now in this peak season of how it's going to be. Is it going to be as bad as last year? Is it going to be a little bit better than last year? We're sort of prepared for either scenario. And we have the capacity within our e-commerce network to handle a pickup if that's what happens.

Got it. And just kind of going back to SCS. I think on your 2Q call, you mentioned that you saw industrial kind of offset some weakness in omnichannel kind of on the retail side. I think some other companies have kind of seen the opposite. Kind of how do you see that just the position between what industrial is seeing right now versus retail? On the one hand, it seems like retail inventories have reset a lot quicker and probably are at the cusp of inflecting higher than maybe a little more destocking in the industrial side. On the other hand, the industrial economy never quite went to a recession in the first place, right? So how do you think about: a, how the customers are positioned?; and b, how are you going to allocate your resources?

Well, as you might imagine, the devil is in the detail, right, who are the industrial companies that you're servicing and who are the retailers that you're servicing. So on the omnichannel side, which includes our e-commerce business, we have seen softness hit that sector. It was offset by other sectors, which are industrial, consumer packaged goods and automotive. So all of those were up double digits in the second quarter. And I think it really has to do with, first of all, CPG. People are still eating. People still need to move that product plus we've been winning new business in that sector. And around Industrial, I'll tell you the same thing, especially around we're seeing more business now also even from Mexico into the U.S. We've got a lot of industrial -- some of our industrial businesses there, but also the fact that we're seeing their volumes come back. If you think about inventory, somebody's got to build that inventory that is going to be restocked, and that's going to impact some of the manufacturing and industrial we have. And then automotive has been strong. Automotive has been strong, still trying to make up for all the lost manufacturing that happened over the last couple of years. So we're still seeing a lot of strength there.

What does nearshoring mean for the SCS business? I mean, obviously, there's a lot more opportunity with kind of more companies and bring their supply chains back. Kind of is that part of the double-digit growth opportunity or do you think an even accelerate?

No, absolutely. That is part of it. Because by the way, it's organic, we're also going to be doing our plans to continue to do acquisitions to help enhance that. But we made a decision years ago to not try to be global. We were in a lot of different countries and realize that there's plenty of market in the U.S. of companies that have not outsourced their supply chain that if we get really good at doing that, we're going to win and that's really beginning to play out. Because what it means is that if you move your -- if you open up a manufacturing plant or if you're a Tier 1 supplier to that plant or some type of a supplier to it, you're going to -- Ryder's going to have an opportunity now to bid on your business here in the U.S. or Mexico or Canada. So we're seeing more activity coming in on-shoring and near-shoring and our expectation is that we're going to win our fair share of that.

Got it. And on the M&A side of things, SCS primarily? Or kind of what else you are looking at?

We've talked about -- we do a lot -- we can do across all of them. But historically, it's been more -- over the last several years, it's certainly been more supply chain focused, but we may do some tuck-ins in FMS. We might do some additional tuck-ins in Dedicated also.

Got it. Again, obviously, given the macro environment kind of a lot of growth focus here kind of given the opportunities you have, but also kind of in the near term on the cost side, are there any levers you can pull kind of as you basically just ride out this recession, if you will?

Yes. We have to see -- remember, we had a multiyear initiative to take out maintenance costs out of our maintenance network, buying parts better, but also we've reengineered the processes within our shops that our technicians now spend most of their time a lot -- all of the time really turning wrenches as opposed to get in front of a computer. That's been a significant change and improvement in our business. As we go into next year, though, you're going to hear us come out with some additional targets of what we want to do, both on the maintenance cost side, but also leveraging our overheads and how we can leverage our overheads better. What we've done over the last few -- probably the last 5 years is we have a zero-based budgeting process at Ryder. And then we use those savings coming out of zero-based budgeting to invest in strategic investments for the company. So as we go through a down cycle, if we see it's going to be more extended, you may see us pull back on some of those investments so that we can benefit from some of the savings.

Got it. Maybe if I -- a quick question here. As I said earlier, you've done a really good job with reducing the cyclicality of the business, the economic sensitivity of the business, the exposure to used prices, focused on these growth opportunities, M&A in the pipeline, a lot of tech investments. You've got some recognition for that but not a ton yet on the stock price kind of -- at what point would you consider maybe strategic alternatives? Or kind of like do these businesses belong together if they're not getting the value kind of what's on the place there?

Look, we think we're better together. Because, first of all, there's cross-selling opportunities that we -- especially between our leasing business and our dedicated business, more than 50% of the sales in Dedicated come from the leasing side of the business. Then between Dedicated and supply chain, there's a lot of sharing of technology. RyderShare, I gave you an example, but also the driver recruiting network is shared across these organizations. There's a lot of process of how we run these operations, it's shared. So better together, however, you're right. If we don't get the value, we may look at some things differently. I'm a believer that we're in a show-me period here. We've been in it since we made some of these changes in how we were going to handle residuals, how we're going to price our business. And we're well into this. We're into the fourth year, fifth year now of this happening. I think we're beginning to see -- get some recognition. There's still more to come. I mean, we're -- our valuations today are still well below what they were 4 years ago when our business had a lot more risk and less profit. So I think people are beginning to notice. I'm looking at over the next 6 to 12 months, I'm expecting to continue to see some more of that recognition. And if that doesn't happen, then we'll look at some other alternatives.

Absolutely. Makes sense. I have a few tech questions for you before I want to see if there are any questions from the audience.

Just starting with the theme of sort of the derisking of the business over the last couple of years. Can you just talk a little bit about like free cash flow generation through the cycle and how maybe some of those initiatives have kind of impact the power of the free cash flow for Ryder?

Sure. So that's a great question because that was the other piece is that as we started to really rethink how we wanted to manage the portfolio, one of the challenges that we saw is once we got into really high growth for our leasing business, it was putting a lot of pressure on our free cash flow because we buy a truck today for -- it's going to cost you $120,000, $130,000, $140,000. And then you get that return over 6 years. But that year that you buy a lot of trucks, free cash flow gets impacted. So we had multiple years of negative, call it, $1 billion of free cash flow, and that spooked a lot of investors. So as we went to this more balanced growth, we said we're going to grow instead of 10,000 units a year, we're going to target more like 2,000 to 4,000, allow you to be more selective on price and also allow you to have positive free cash flow, we said now is in most years. We haven't said all years because at any given year, you might have a little bit more growth or a little bit more replacement you got to do. But overall, we're not expecting to see those multiple years of steep negative free cash flow and be able to provide more balanced free cash flow each year and certainly a strong positive free cash flow over the cycle.

How is the OEM pipeline like, has that normalized? Are you able to get the trucks...

So on the tractor side, it has -- I would say it's almost normalized. I mean it's really come in quite a bit. It used to be a year out, and now we're probably more like 4, 5 months out. And on the truck side, though, where you have a body that you have to put on, that's still way out because the body manufacturers are still -- have a big backlog. You would think that's the easier part to build in the truck, but it's really turned out to be a tougher supply chain to push through. So we're still out probably 10 to 12 months on some of these trucks or as the tractors your -- Class 8 tractors, you're up back to more normalized.

Got it. Robert, you guys have always been a very kind of tech forward, prioritizing that over many of your peers. You give example of RyderShare, but also things like COOP and kind of some other initiatives, including investing in autonomous and electric and those are the things. So a few questions there. One is, a, how do you prioritize projects kind of within the company? And b, kind of how do you make -- build versus buy decisions to kind of basically execute on these projects?

Sure. Those are 2 very important questions. So around how do we prioritize. We have a strategic plan of what we want to achieve, right? And how do we -- and really our vision as a company is we want to try to perfect supply chains. So we want to be able to give our customers visibility to help them better manage their supply chains, while we also are doing a better job of the components that we may have within the supply chain. So as we look at technology investments, we're looking at prioritizing those technologies that are going to help us do that. We think those are the ones that are going to help differentiate Ryder in the marketplace. RyderVentures, which is our venture capital fund, has really been a great avenue to getting visibility to some of the new technologies that are out there and figuring out how we can use those technologies to help our customers. Some we're investing in and bringing to our customers. Others were -- as we did with Baton, we invested a little bit and then said, boy, this is so good, we want to make them part of our company. But it's really allowed us to -- I would say it's opened our eyes to a lot more technology that is happening that we think could have a big impact. As you know, investment in transportation and logistics technology and the amount of venture capital that's gone into that over the last 5 years has been significantly greater than ever before. And we want to make sure that we're leading the way on that because what we're finding was I think RyderShare was a test case for us. Can we really win more business if you can differentiate yourself even a little bit on technology? And the answer was a resounding yes. So now we really want to continue to figure out how we can continue to that. So back to your other question on build versus buy. If you go back Ryder 10 years ago, the answer was typically buy. Warehouse management system. I'll buy the same one that other people. I just want to get better at operating it. And a lot of those you still are probably -- if they're more commoditized. But the build is really around the portions of the technology that can differentiate Ryder from the competition. So our visibility tools that we give our customers on what's going on within their supply chain, our ability to feed them data more easily than they can get from other folks and I can't -- you can't have a presentation about somebody seeing AI. So eventually, it's also how do you apply AI to all this data and all this information. So that's where we're really focused on is how we continue to evolve those tools. And then we're also looking at different solutions. You mentioned COOP, it's a truck-sharing platform that we rolled out several years ago. We continue to -- that continues to evolve. We have Torque by Ryder, which is a mobile maintenance initiative. It's separate from our truck leasing network. So this is more of a retail. You just pay by the drink, and we got -- and we have a fleet of mobile maintenance trucks that we're growing to be able to provide that service. We think that not only is a great service separately, but also provides us a good avenue to us, there's more of a move to electric. It will probably be more on a mobile service, and we'll be well positioned to address those.

Got it. Given the size of your fleet and the number of trucks you buy, kind of your thoughts on electric and autonomous are probably kind of more important body else's. So -- or do you think you're ready -- I mean, Tesla can sell you a truck that does a 500-mile range right now. I think there's a couple of hydrogen options in the works as well. Autonomy continues to kind of get closer to the finish line, if you will. What do you think is the time line for these technologies?

Right. So we have a group that's focused on just that, on electrics. Another group focused on autonomous, working with the different partners and OEMs. I think on the electric truck side, it's really light duty right now, fans that are closest, and it's not that the technology doesn't work. It's just the price point and how do you make it a value prop, unlike somebody who may want to buy an electric car because they like it. None of our customers are going to sign a lease on an electric truck because they like it. They're going to sign it when it's a value prop for them and it's going to make them more competitive in their business. And I think on the medium and heavy, we're pretty far away from that still, unless there's a change in fuel prices quadrupled or something. I think it's still a tough sell. On the light duty, even though it's still more expensive in general, from a total cost of ownership, it's closer. So we're seeing companies saying, hey, you know what, I want to get in electric, let me jump in with these vans and try it out. So we have a product that we've developed within our leasing business called RyderElectric+ and there, we're providing -- it's not -- now it's not just the truck. You're providing the truck and all the charging infrastructure, how do you put all that together, so we're giving them a full service solution on those. So we have several in our rental fleet now. We expect to see more of those as we go into next year. But it's a multi -- I think this is a multi-decade process that you go through. And initially, I think it's still in the light duty is probably where you have the most potential opportunity.

We are 0, but I did want to squeeze one more in, which is, again, the beauty of our business is that, again, you're doing all this cool stuff on technology, but I think one of the biggest secret weapons you have actually is your physical footprint, your terminal network, your warehouses and everything else. How do you monetize? I mean obviously, you've signed a lot of partnerships with a number of companies and have autonomous companies and such. But how do you leverage that? How do you get the market to recognize the value of that footprint?

Yes. I think -- look, we've used it as it's a network that was built over many years. We've been in business for 90 years. So it's hard to replicate. And what it does is it gives us access to many markets with our -- it's typically been our -- the 700 shops are primarily full service lease, but we also leverage it for our dedicated operations. We leverage it for some of the runs that we do in supply chain. That's where we do our handoffs from one driver to another in these shops. But what we've learned is, especially, like you mentioned, in an autonomous truck network, this infrastructure is really valuable because they become the hubs where you do the exchanges and also where you can do the maintenance. So that's one of the partnership. That's why we've been able to partner with so many of these technology companies who are in this because they need somebody who can provide them that infrastructure. So as that evolves, which I said 2 years ago, it was 5 years out, it's still 5 years out. I think it's getting that last 5% is going to be a little bit tougher than I think most people originally expected. But autonomy -- some form of autonomy is probably coming at some point. And I think we've got a -- that's one of the areas where we'll be able to leverage that network.

Robert, it's a really impressive growth story, a defensive one at that. So thank you for sharing with us.

Great. Thank you, Ravi.