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

Okay. Good afternoon, everyone. Welcome back to transportation and logistics portion of the program. I'm very happy to have here Robert Sanchez, Chairman and CEO of Ryder Systems, to tell us a little bit about Ryder. I think to us, the really interesting thing is how much transformation has occurred through the years for the company and increasing profitability through a cycle. And I think Robert has a few opening remarks, and then we'll get right to Q&A.

Sure. Thanks, Jordan. Well, those of you that aren't familiar with Ryder, I'll just give you the 2-minute version. Transportation logistics outsourcing business. North America based. We've been in business for over 90 years. We're about -- this year, we'll be about just under $13 billion of revenue. We are in the outsourcing of truck fleets in our fleet management business, which represents about 40% of our revenues. Outsourcing of trucks and drivers, so private fleet, which represents about 20% of our revenues. And then the last 30% is a broader supply chain logistics activity in our portfolio that was running of distribution centers, transportation networks and broader supply chain activities such as last mile delivery of big and bulky and e-commerce fulfillment business. I think the key thing to know about Ryder is that we've going through a transformation phase, we're sort of getting to the tail end of this initial phase, which was really about first derisking the business. In 2019, we realized that we were taking too much risk on the residual value of our leases. So we lowered the residual assumption on those leases to derisk it. Second thing was improving the returns. So we did 2 things. One is that we raised the spread, the target spread of our leases from, call it, 70 basis points up to 150 basis points. And we've been getting the 150 basis points in the market. So we're now 5 years into it. Next year will be the last year, if you will, of rolling over that lease portfolio into the new pricing. And we took out over $100 million of maintenance costs from our network by optimizing the operations within our truck maintenance facilities here in North America. And then last but not least is really growing -- accelerating the growth of our more asset-light supply chain dedicated businesses. If you go back 5 years, those businesses represented -- they represented 40% of our revenues in the truck leasing and asset-intensive business was 60%. That's kind of flipped now, where it's 60% of the revenues are from our dedicated supply chain business and 40% is from our truck leasing business. What we have now is just a much more profitable business that is really illustrated in looking at our earnings per share and our return on equity. This year, we're going to -- we're targeting to be about $12 a share in earnings per share, return on equity of the -- in the mid-teens, call it, 16%, 16.5%. If you go to our prior peak, our earnings per share was just under $6. That was during a peak in the freight market and our return on equity is about 13%. So our -- what should be our trough earnings year this year in terms of our used truck and rental market, we will more than double the earnings per share of what we did during the last peak. So that's where we're at today.

Thanks. That's great. And actually, maybe just to follow on that, it's certainly impressive to be a trough and being 2x your last peak. Is that primarily from that revenue shift you were talking about? Can you maybe talk to how that action happened?

Sure. Well, there's too many components. I'd say the biggest 1 is just the improved profitability and return of our truck leasing and rental business. If you think of where our capital goes, most of our capital goes to our truck leasing business and the improvement in the returns of that investment are really a big driver of the improved overall financials. But also, I think the shift, especially this year as the margins for our more asset-light businesses are beginning to return to the target levels. And then as we go into next year, we expect them to be there. They're also contributing. But I would tell you, if I had to split it, it's probably like a 60%, 70% coming from the improved returns of our truck leasing and rental business.

And when you sort of think ahead to the next cycle, whenever we actually cycle up to that point, I assume part of it will be the continued improved profitability at FMS. But can you see a shift in EBT dollars or profit dollars into SCS and DTS and those higher-return businesses taking to the next leg in the cycle? Is that how you envision it?

Yes. Look, we've identified between now and the next peak, we've identified $350 million of earnings improvement opportunity, it's about $6 a share. And there's 2 components. One is the cyclical benefits of improved returns from our used truck and rental business. That's about $200 million as we just go from where we are now to better utilization of our rental fleet and better used truck prices. And then there's $150 million. So let's call that it's mostly FMS. It's $150 million that really come from a combination of more contractual earnings improvement. That's going to be the final leg of this repricing of the lease portfolio, which happens next year. It's about $20 million. We've identified a $50 million additional maintenance cost reduction opportunity, which we have line of sight to, that we think we can achieve here over the next couple of years. And then we recently did an acquisition of Cardinal dedicated transportation. And we've got $40 million to $60 million of synergies that we have line of sight to and feel very confident in achieving, that we will achieve here over the next couple of years also. So that $150 million plus the $200 million really gives us nice earnings leverage opportunity between now and the next peak.

Got it. And so that would be $6 off of this trough to the next peak?

Think about it $6 off to [ $12, $12, $10 ] that we're looking at now.

Okay. Good. So maybe just taking a step back, I mean, obviously, since we are talking about freight and the freight cycle. Where do you think we are in the demand cycle broadly?

If I could answer that. But I guess, all kidding aside, we're clearly closer to the end than the beginning. The indicators that we look, we look at the same indicators externally that probably most of you. We listen to ACT, FTR truck utilization, which has been improving. But the indicators in our business is our truck rental business. So we've been below our target utilization for our truck fleet is 70 to -- I'm sorry, mid- to high 70s, so 75 to 79. We've been in the low to mid-70s this year. So we're certainly off there, off a lower fleet by the way. But I guess more recently, over the last couple of quarters, we have seen truck utilization improving seasonally, which we hadn't seen last year. So it does appear that we're getting to where our fleet is, is beginning to get some leverage during the season. So maybe a bottoming out there. On the used truck side, even though pricing is still soft, we have seen over the last couple of quarters that the rate of decline being mid-single to low-single digits. So it seems to be beginning to bottom out also. And then another one, which is really important is our lease customer miles per vehicle. So we do track the number of miles that our lease fleet runs. We have a large fleet of commercial trucks with our customer. We have a total fleet of 250,000 commercial vehicles, about 160,000 of those are leased. And there was an 11 quarter decline in miles per unit, consecutive decline that we saw here over the last several years. In the second quarter, it was the first year that there wasn't a decline, it actually went up, but then it came back down slightly in the third. So looks like what is not a snap back up, but a bottoming, if you will, on that side. Given those indicators, we would expect at some point in '25, you're going to see the freight market turn around. Our used truck and rental business will improve. If it happens in the beginning of the year, obviously, it's really a very positive thing for '25. It happens late in the year, less positive, but clearly, we're -- looks like we're beginning to bottom.

Is that the key KPI, the rental utilization like if you saw that move up?

That's typically where we first see movement. If you think about it, when customers get to the point that they're utilizing their base fleet, the first thing they do, they're not going to go buy a new truck yet, they're going to come rent one, and that's typically where we see it first.

But if memory serves, I think, in the full-service lease business, the FMS, that portion of the business, things have been pretty sticky through the cycle or generally sticky in terms of customers and contract renewals and what have you. Is that right?

They have, on the truck leasing side. On the rental side, though, it is a transactional business. That's where you see more of the volatility. And I would tell you the other thing is on the truck leasing side because there's -- I know I've heard several people talk about are the private fleets overfleeted post COVID, and I think the answer to that is yes, because most of our customers, 70% of our customers in lease are private fleets who outsource their trucks from a leasing standpoint. And we are seeing those customers signed a whole bunch of leases 2 years ago, 3 years ago when things were really hot. Those leases took -- those vehicles, sometimes took up to a year to come in. And when they came in, maybe they didn't have as much of a need for them as they used to. So they're bleeding out of those. So we're seeing a lot of customers where their trucks get to the end of their lease. Maybe they have 10 trucks terming out and they only renew 8 of them. So we're seeing that core still kind of getting out of trucks versus adding trucks, which is obviously what's good for everybody. But again, we think that is also playing out and getting towards the tail end of its life.

But you still feel comfortable in the lease reprice story, the last piece of it?

Absolutely. Absolutely. The pricing, we have stuck with the pricing discipline. We're getting the 150 basis points that we've targeted. And I think that's a key -- key to the transformation is that has really been the discipline around pricing across each of the contractual businesses, knowing that, look, to drop price on some of these, you drop price to get a little bit of growth, but ultimately, you got to live with that for 6 years, and it's not worth the trade-off. So we're confident about our ability to continue to get that price.

Do you feel that the competition in lease has been pretty good too?

I think it has. We initially lost some -- we had -- we did lose more business. We were growing at 10,000 to 11,000 units in our lease business. That's pared back to more like 2,000 to 4,000, but we think that's a good place to be. And I think overall, the market is sort of adjusted over time to where -- similar to where our pricing is.

Okay. Before we move to some of the businesses, the supply chain dedicated has been such a focal point. When we get asked about it, there's always the inevitable question about the used truck cycle and used truck markets. And how do you think about the business long term from a contribution factor? How important is that contribution?

Yes. Here's the difference, pretransformation, I think, when we signed a lease, we were using kind of an average used truck value, let's call it a rolling 5-year average of what we were selling used trucks. That was what our residual pick was on these leases. So if the used truck price at the end of the 6-year lease came in above that average, you did a little better than what you're expecting. If you came in below, you did worse. We made the decision that, that was probably not a good model, especially when you had 3 years of being below. So we lowered that to a bottom quartile -- quintile level. So what that tells you is the vast majority of the time, we will get at least 150 basis point spread that we priced into that lease. And most of the time, we're going to end up above it. So the risk we were relying on the used truck prices being above that average before. We're not relying on that. Now they can be below and you're still going to get the return. So used truck prices will always be an important component but will not be the determining factor of us getting the appropriate return on our investment.

Got it. And I know there was -- and this may be tough to answer. There was some talk that new emission standards coming in, in 2027. I don't know if there's any new color given the new administration, prebuy. And I mean -- again, that's not necessarily part of what's driving the $6 numbers we're talking about, but any thoughts around that?

Yes. Look, I think with the new administration is still to be determined what's going to happen, but I think most people believe that the '27 is probably already baked. The OEMs already have the technology, and they're moving forward with that. What will probably and most likely be adjusted or the changes that have been set up for post '27, which the technology has not been developed yet and maybe there's going to be a delay on some of that, which for the industry may not be a bad thing. You want the technology to be able to catch up with what some of these demands are from these emissions changes.

Okay. Got it. So maybe thinking a little bit about the dedicated business, which seems to be an area where more transport providers have focused on. You've been in it for a pretty long time. We've heard that it's a competitive market or has been very competitive. Can you maybe give some updated thoughts on how your pipeline looks for that business? How has the competitive market been for you guys? And are you able to still achieve and get what you want in the door on that side?

Yes. So yes, we're in the dedicated business. We're in what we call the customized dedicated. So the majority of our customers are not dock-door to dock-door type deliveries that could be replaced with truckload as easily. They are typically deliveries that require special handling. Think about a delivery to a retail store that's in a mall or the delivery of steel in a flat bed, things that require more than just a driver driving the truck, they have to do other things. So that business, we've been in it for a long time. With the acquisition now of Cardinal, which is also a similar profile, we're the second largest, a close second to our #1 competitor out there. As it relates to growth, we are still seeing new customers coming in to dedicated. What we haven't seen and what is muting our growth somewhat, our organic growth is existing customers rightsizing their fleet a little bit now, right? So during COVID when there wasn't any truckload capacity available, some of our customers added fleet to their dedicated fleets to offset into really a substitute some of that truckload business or truckload freight moves. That is kind of going away now because obviously, there's plenty of truckload capacity available. So that's been a headwind over the last year, 1.5 years. As we go into next year, that's going to create some -- probably some headwinds for organic growth in that business, along with the other ones. I think we were going -- we'll be short of our target top line growth next year. Rates were high-single digits there. But the long-term growth projections for that business, I think, are still solid. The driver shortage, which is not as acute right now because of where the freight market is, expect that driver shortage to kick back in the minute the freight market comes back. So that's really going to be a primary driver of more outsourcing to dedicated. And then obviously, the complexities around transportation for companies that don't do this for a living, whether it's the technology on the equipment or all the regulations around truck drivers, it becomes more attractive an opportunity to outsource versus doing it yourself. We always say that whatever makes what we do more complicated is actually good for us because it's more likely to be outsourced. So we still believe that those components that are driving that secular trend are still in place.

Yes. I understand, obviously, in a market like this, maybe normally customer contract for '25 and then they come to you and say, "Well, we really need on the next like 20 years or something like that. What about the stickiness of the customer base? Have you experienced much turnover in the dedicated?

No. Well, I think once a customer decides to outsource the dedicated, it's rare that they bring it back in-house, number one. And even to convert to another provider, customers will give you the benefit of the doubt typically because there's always risk in that conversion. So no, we don't see loss of customers being a significant issue there. Now our relationships in all of our contractual business tend to last for decades. Customer will outsource as well as we're doing a good job bringing them value. They'll continue to do business with us for many years.

And is your target market the folks who have never made a commitment to dedicated? Or are you also going after other people's dedicated?

Mostly customers that have not made a commitment to dedicated. That's a bigger opportunity in dedicated. It's a bigger opportunity in truck leasing, and it's the bigger opportunity even in supply chain.

And I assume it's the addressable market is the entire private.

It's huge. It's like 95% of the market is still not outsourced. So that's the excitement here. All you got to do is chip away a little piece of that 95% and you can grow at high-single digits, which is what we're targeting.

So how about Cardinal? You've brought that up a couple of times. Where are we in the process of integrating it into the fold, the synergies? And is what you got generally tracking what you expected?

Well, the easy answer is yes. We're very pleased with the acquisition. It has a very similar profile in terms of the customers and the operations as Ryder. We had identified some synergies, the biggest of which is just bringing the vehicles that they have, the commercial trucks that they have which they were buying on their own and doing their own maintenance through third parties, bringing that through the Ryder network. It's bringing a significant portion of that $40 million to $60 million of annual synergies that we've identified. So we feel really good about that. We're seeing that benefit. And then obviously, consolidation of some overheads and things like that also we've got line of sight to that, too. So we've identified $40 million to $60 million. We've got line of sight to that. We think you'll see a good chunk of that come through in 2025 and then the rest of it in '26.

Got it. Do they operate as a separate entity within Ryder?

They've now -- we've now incorporated them. We've now incorporated them into the Ryder network. There's still some technology that we operate a little separately, but it's now been folded into the network.

Okay. And despite some of the headwinds on the top line that you brought up, the thought is that the profit margin targets, which I think is high-single digits, I mean that's still the attainable goal today?

Yes. We actually hit it in the third quarter. But for a full year, some of that is seasonal. We feel confident we could get there in 2025.

Okay. Got it. And in an up cycle, presumably, that just gets better essentially.

Yes. I mean it's not -- remember, this business is contractual, things can be variable. It's not -- it doesn't have the leverage that a truck rental business has or -- but there will -- as you grow, you could get some marginal improvement. We think that business operating at high-single digits is a great return. Over time, can we do better? I think it's going to require more scale and also optimizing across some accounts that we -- that's another initiative that we have a longer-term initiative of really trying to optimize not just within an account, but leveraging trucks and drivers from 1 account in the geographic area for another one. We've got some technology that we're putting together to help us do that. And we think over the next couple of years, that could be a driver to maybe get us to another level in terms of earnings.

And just sort of -- and I don't think you addressed it. The lease business can convert?

Great point. Yes. So the secret for sauce, if you will, of growth at Ryder and Dedicated is that truck leasing customer base. So we have 15,000 customers who lease their trucks from Ryder. We just need a few of those each year to decide to not only lease the truck and outsource the truck, but outsource the truck and the driver, let us take care of the whole dedicated operation. So upsell, if you will, to Dedicated and we get a really nice growth rate in Dedicated. So over 50% of the sales in Dedicated come from our truck leasing team.

Got it. Let's turn a little bit to supply chain. Well, you guys have been at it a long time, probably longer than most. It seems like you've got margins which historically may be fluctuate a bit to a good level. Talk about supply chain. I mean is this the area where you're most excited from a secular perspective, would you say overall?

There's a lot of opportunity in supply chain in terms of adding value to customers, really across the value add of those, especially as we start to introduce more technology opportunity to do -- to create things across customers. So we do think that business, especially in a post-COVID world, where there's a real focus around resiliency, there's a focus on near-shoring and on-shoring. We're North America based. We're not global, trying to be great everywhere. We want to be great here in North America. We've got a really strong presence U.S., Mexico and Canada. Great cross-border operations there, too. So we operate in 4 industry verticals, automotive, which is where we got started in logistics. I think we're the premier automotive -- inbound automotive logistics company in the U.S. We act as a lead logistics provider for a large OEM and also do a lot of transportation logistics for many of them. That business is now about 25% of our revenues. It used to be the vast majority. So we've been able to diversify. But that business has -- that sector has been very resilient over the last several years, too, based on the customers and the models that we serve. We have a CPG business where it's mostly outbound distribution from these large CPG companies. We run big warehouses. We have -- we operate over 320 distribution centers across these industry verticals for our customers over 100 million square feet. And in CPG, that's a big part that we provide. And then we also provide all the outbound transportation from our customers to their customers in that vertical. We have an omnichannel retail. That includes not only contract logistics for retail customers, but also an e-commerce fulfillment business that we acquired a few years ago and a final mile delivery business, big and bulky that we can also provide. So we really provide quite a suite of services that we can provide in that vertical. Actually, I also forgot to mention in our CPG vertical, we acquired a co-manufacturing co-packing business earlier this year that now allows us to provide that service of co-manufacturing co-packing to our CPG customers. And then last but not least, industrial companies. So a lot of these are companies that might have manufacturing in Mexico for consumption in the U.S. or manufacturing in the U.S. We provide both transportation and distribution services to those. So a nice broad breadth of verticals and a broad breadth of services that we provide within those verticals. We think the growth opportunities there are strong. We've talked about low double digits as the target there, giving us a little bit of a slowdown post COVID in that growth rate for that industry maybe requires an acquisition or 2 to get there. We're probably organically more like high single digits but getting to that low double digits, we can do some acquisition.

Of the verticals you mentioned, is it the omnichannel -- like where is the most inquiries coming from? And then, I guess, broadly, I know it's supply chain logistics. So you do a lot of services, as you mentioned. Is there one thing that is -- that's the biggest hook for people to think about outsourcing to you, like whether it be warehousing or inbound management, that kind of...

Yes. I think it depends on the vertical. And by the way, depends on which year you ask me, I'll tell you which 1 we like the most. They tend to move around. Auto is probably the most mature. But again, it's also been the most resilient. And that business is really about engineering and execution around inbound logistics into manufacturing plants. CPG is all about warehouse -- mostly about warehouse distribution and the activities inside that warehouse. Are we operating those efficiently? Are we providing continuous improvement to our customer and bringing efficiencies to those operations? That's what makes that business more sticky. Around retail, it's interesting is around retail, I think it's more the breadth of services that we can provide. We talk about being port to door. So we're 1 of the few providers here in North America that if you need transportation, we can provide transportation, if you need warehousing, we can provide you warehousing. If you need even intermodal at some of the ports or final mile delivery, we can do any or all of those for a retail customer. So the ability to do that, I think, is what differentiates us. And then -- and on the industrial side, it's much more like automotive, kind of a similar type of operation.

I'm sorry, it's more curiosity from a warehouse perspective. We sometimes get asked, I mean, how automated are these, the robotics? Is it attached to a contract specifically? Or do you build out these highly automated facilities? Now I'm just sort of curious about that.

It's almost yes to every 1 of those. I mean we do have -- the majority of our warehouse operations are tied to a dedicated customer. We have multi-client warehouses in e-commerce, final mile and in some of the CPG activity, but a majority of it is tied to a customer. About 30% of our warehouses have some type of automation in them, but that's growing. I think there's clearly a movement to more automation as the labor costs have gone up and the price of automation has come down. We are very much value-based automation. So we're not going to put automation in for automation's sake. We have a team that focuses solely on evaluating and testing the automation that's out there and where it makes sense for 1 of our warehouses, whether it be dedicated or multi-client, we're going to implement those. But clearly, when it's dedicated, you work closely with the customer, too, to make sure we try not to -- for a dedicated account, we're not going to take all the risk on the automation without the customer being engaged in that.

You mentioned growth rates and expectation of growth rates and maybe M&A could be a part of supply chain. You also mentioned that most of your focus is North America. Will it continue to be North America? Or could you even do something M&A-wise outside of North America?

Yes. I think I can't say never. We did that. We went -- we did that global tour. And after doing that for a couple of decades, decided, you know what, there's plenty of non-outsourced business in North America. This is a great economy to be in, the greatest economy, the biggest economy in the world. And if we just continue to chip away at the non-outsourced parts of the business, we've got plenty of growth. And so far, it's played out very well. We're bigger than we were when we were global and we're much more profitable than we were when we were global.

Who is the competition?

So it depends here, obviously, in -- it's different in each vertical, but there's big names, both in the truck leasing business, it's Ryder and Penske. In the dedicated business. J.B. Hunt is the biggest, and then there's a lot of other players. But in the customized, I would say it's been them. And then in our supply chain business, it's the big names that you know, the GXOs and the DHLs. But then in each vertical, there's also more niche type competitors that we compete with.

So I remember back at your Investor Day, you had in the lobby folks talking about Mexico and you had a cool map with potential planned expansions or building facilities in Mexico. And the whole nearshore and reshoring concept seems to be pretty alive and well. Tariffs have come up. I'm sure you've had this question a few times. Any perspective?

Yes. I don't know. Other than what we were talking about earlier, I do believe this administration does care about how the market stock market does, how the economy here in the U.S. does, and I think things have become very detrimental to that, will be reversed if they do get implemented. So I do still feel at the end of the day, we're going to be in a good place. The best solution -- I mean where Ryder can do the best is obviously reshoring in the U.S. would be. That's where all -- I have all the services on the truck leasing and rental side and on. So a reshoring is a serious positive for us. Nearshoring is good too because I mean Mexico and Canada, but although in Mexico, I don't have all the same service offerings that I have here, especially on the truck leasing and rental side. So I think we're okay either way. But time will tell. Time will tell what happens with these tariffs. On the flip side of that, though, lower tax rate, corporate tax rate would be good, if that happens. But even if that doesn't happen, just the extension of the current -- of the 2017 tax cuts would be a positive about $200 million of free cash flow for Ryder in 2025, given bonus depreciation gets reinstated. Less regulation is usually good for most businesses. And then overall, I think you've seen postelection improved confidence from small to midsized businesses. To the extent those businesses are able to invest and grow, that will be really good for our truck leasing and Dedicated businesses, which that's the customers that we support there. So that, I think, would be a positive.

One thing I wanted to ask, it comes up with Ryder is your capital cycle and your cash flow cycle. I know historically, there is a little bit of a counter cyclicality, I think, to the cash flow, and there's been talk of sort of maybe smoothing some of that out. So maybe share some thoughts around cash flow generation. And also the capital cycle. I know originally the start of this year, you thought about adding more to commercial rental. I mean how quick can you actually pivot if you have the opportunity to do so?

Yes. So we'll be positive free cash flow this year. Next year, probably positive free cash flow also depending on the amount of lease capital that we need to deploy. But I think the important thing is if you look at the operating cash flow that gets generated over the next several years, we're looking at -- I think we said over the next 3 years, we're looking at about $8.5 billion of positive -- I mean, of operating cash flow, plus you add to that the proceeds from used trucks and all that. You take then what we need just to replace the leases in the rental business, and you have a certain amount of money, which ends up being about $4 billion that you have available to either invest in growth or do acquisitions and buybacks. So versus free cash flow, which that's going to depend on how many units we have to grow, we need to grow and what the price of that is going to be, I think the amount of capacity that's being generated on our balance sheet to do these other things is really what is the key point here. And we're going to have -- we should have plenty of money to invest in organic growth and lease. Again, we're not going to do 10,000 unit growth likely. We're going to do 2,000 to 4,000. That will leave us plenty of money to do more acquisitions and do continue to do return money to shareholders through buybacks and dividends.

Great. Well, it seems like we are actually out of time. So with that, thanks once again, Robert, for coming and sharing your insights about Ryder and the various businesses that you're in. Appreciate it.

Great. Thank you for having me.

Thank you. Thanks so much.