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

Okay. Welcome back. We're going to keep things rolling here with Ryder. I'm Brian Ossenbeck. I cover transports and logistics for JPMorgan. So we've got Robert Sanchez, who's the Chairman, President and CEO of the company. He's going to make some intro comments. He got a few slides to go over to kind of set the stage, and then we'll go into Q&A. And as usual, if you got questions in the room, raise your hand, get my attention, and we'll get you a microphone. So we also have Calene and Cristina from the team in the audience. But Robert, let me kick it over to you, and thanks again for coming.

All right. Thank you, Brian. Before we get started, those of you that aren't familiar with Ryder, let me give you just a quick overview of what we do. We're a $13 billion transportation logistics outsourcing business. We operate in North America with 93% of our revenues coming from the U.S., which has become much more relevant over the last few weeks. We operate in 3 segments: Fleet Management Solutions, which is basically the outsourcing of a truck. So if you need a fleet of trucks -- as a business, you need a fleet of trucks to move your product, you can buy your own trucks, do all your own maintenance and then figure out what to do with the vehicle at the end or you can outsource it to Ryder. We operate about 250,000 vehicles in that segment. And we have a Dedicated Transportation Solutions business, which is the outsourcing of a truck and the driver. So I can also outsource not just the truck, but the driver and outsource the whole private fleet to Ryder. That's what the segment does. That represents about 20% of the revenues of the company. And then we have the Supply Chain Solutions, which is the outsourcing of broader supply chain activity. Think about distribution centers, warehouses, traffic department where we're managing freight that is not on a Ryder truck and could be on a third-party's truck. E-commerce fulfillment, where we have a network of warehouses and facilities where we fulfill e-commerce transactions. We have a last mile, big and bulky final mile delivery business, where we're delivering stuff that the typical parcel companies do not move, think about furniture and office equipment, exercise equipment, that type of stuff, appliances. So broad supply chain activity. Anything that has to do with transportation and logistics, typically Ryder can do for companies. The good news is that all that stuff has gotten more complicated to do over the last couple of decades and complexity is our friend at Ryder. The more complicated things become, the more likely they are to be outsourced, and that's really given us an opportunity to grow a business that's been around for over 90 years. We've really been on a growth spurt now for the last probably 15. So this is a comparison in 20 -- at the end of 2019, we pivoted our growth strategy to what we call our balanced growth strategy. And it had 3 components: Number one was we wanted to derisk the business. And by derisking the business primarily meant that we realized we were taking too much risk on our truck leases, which is in our fleet management business. The residual assumptions we were making when we price those leases turned out to be a little bit high compared to where used truck prices were coming in. We had been using a methodology of an average over a 5-year period to try to forecast what that vehicle would be sold in the used truck market 6 years out. And while the used truck market was in normal cycles, it worked pretty well. But as post the '09 falloff, the used truck market became much more volatile, higher highs and then lower lows and longer periods in a low and really impacted the earnings of the company. So what we did is we reduced our residual assumptions in our pricing for leases beginning at the end of 2019 to what I would call bottom quartile, bottom quintile type levels, which meant we would -- we didn't rely as much on that final sale of the used vehicle to get the returns that we expected on the lease. So that was step one. We started that in 2019. We have a typical holding period of 6 years. So it takes us 6 years to get the whole portfolio of leases repriced, and this is our last year of really repricing most of those leases. That's been part of the benefit. The other thing we wanted to do was improve the overall returns of this business. We were targeting 60 to 100 basis point spreads historically in that business. We felt that for all the work that we do in maintaining these trucks throughout their life and the purchasing power that we have, the service that we bring to that customer, we could shoot for more. So we started targeting 100 to 150 basis points and have been achieving that. We're now in the fifth year of the higher -- of the lower risk, higher return leases in the portfolio, which has given us an overall big earnings boost to the company. In addition to that, the third leg of the strategy was to accelerate the growth in our more asset-light businesses. That's the Dedicated Transportation Business and our Supply Chain Solutions business. So this is the tale of the tape after 5 years, 6 years now of doing this. You can see the revenue mix back in 2018 before we started this, we were $8.5 billion with almost 60% of the revenues coming from our more asset-intensive leasing business. Today, we're at $13 billion with only 40% coming from the more asset-intensive leasing businesses and 60% coming from the more asset-light supply chain and dedicated solutions. Our earnings in 2018, which was a peak year in the freight market was just under $6 a share. Last year, which we believe is a trough in the freight market, we were at $12 a share. So peak to trough, our earnings are double what they were before the transformation. This year, in 2015, we're expecting $13 to $14 a share as we've got initiatives that we'll talk about in a minute that are helping to drive that. From a return on equity standpoint, we were historically achieving low -- call it, low teens over the cycle return on equity. As we started this journey, we started targeting mid-teens over the cycle. We then raised that to high teens over the cycle. And last year, we've now raised our target ROE to low 20s over the cycle. We believe this year, we'll achieve 17% to 18%, which, again, we're still coming off of a lull in the freight cycle. But as that freight cycle continues to move up, we feel pretty confident we can get that return on equity up in that low 20s level. So a big improvement there. And then obviously, under operating cash flow, we've seen an increase there as the profitability of the business has improved. So as we -- as I talked about the $13 to $14 a share that we expect to do this year, the good news is that we've done a lot with this balanced growth strategy, but there's more to come. And the more to come is really about $350 million. A $150 million of it is from initiatives that we've identified of additional things we could do. So one of them is this last leg of the repricing of the leases that are in our fleet management business that's going to add another $20 million. We did an acquisition of a company called Cardinal in our dedicated business last year. And the synergies of that we've identified is $40 million to $60 million. We expect to get a good chunk of that this year. We've got good line of sight to that. And then finally, really around -- I forgot to mention maintenance costs. So that's another piece that I didn't mention, but one of the drivers of the improved profitability has been our ability to take cost out of our maintenance organization. We maintain 250,000 commercial vehicles, which means we spend about $1.3 billion maintaining trucks. So we've been chipping away at process improvements and just getting better at that across our 750 locations. We've achieved over $100 million in annual cost savings over the last 4 years and now have identified another $50 million that we know we can achieve over the next few. So that's also going to contribute to this $150 million. So we expect this year to have achieved about $100 million of the $150 million in initiatives that we've got line of sight to. Then there's another piece to the $350 million, which is $200 million. The $200 million is just as the freight market recovers, we expect to get our rental business, the more cyclical parts of our business, our rental business and our used truck business is back to more normalized levels. And those -- that alone could generate an additional $200 million in earnings. So that's -- those are the drivers of the improvements in returns. This year, we're only looking at about $15 million of the $200 million being achieved because we still think this will be a soft year in terms of the overall freight market. So that's the tale of the tape for us in terms of earnings. Again, we're not forecasting a significant improvement in the overall freight economy, maybe a little bit of a pickup in rental at the tail end of the year. But the majority of the earnings improvement that we are looking for this year is coming from initiatives. So things that we have control over, the pricing of the equipment that -- the leases that we're signing, the maintenance costs that we're bringing out and the synergies that we see from our more recent acquisition. Another slide I'd like to talk about is really to show you the -- how the earnings power is increasing the capital capacity of Ryder. Obviously, we're in the leasing business. We buy a lot of trucks. We borrow money in order to do that. And as we generate more earnings, it increases our overall debt capacity. We've got target leverage of 250% to 300% debt to equity. And as we generate more earnings, that capacity keeps going up, gives us money to buy -- to use to buy more trucks or to invest in other parts of the business. This gives you an idea of how that works. We've got about $10 billion. Over a 3-year period, we've got about $10 billion of operating cash flow and used vehicle sales proceeds that we expect to generate. That would increase our debt capacity by $3.5 billion. So think about $13.5 billion over a 3-year period that we can use to invest in different things. The first call is going to be the replacement of leased trucks that expire, and that's about just under $9 billion that we'll spend on replacing leased trucks. We've got our dividend that we pay out, which over a 3-year period, is about $400 million. That leaves us with $4.3 billion of what we call available for flexible deployment. So we can use that to invest in organic growth, primarily in our truck leasing and dedicated businesses. And we also -- and we're targeting 2,000 to 4,000 unit growth. So if you assume we're hitting that level, that still leaves me with $2.3 billion to either invest in acquisitions or buybacks or other investments that we could return money to shareholders. So that's kind of the model that we now have working, which we think is in a really good spot. We see this model really being able to continue to contribute and allow us the flexibility to invest in organic growth, acquisitions and return money to shareholders.

All right. Great. Thanks for the intro, Robert. So maybe we can just pick up kind of where you left off in terms of you're not expecting a big recovery in the guidance. But what are you hearing in terms of conversations with customers, with prospective customers? Do you see any areas, whether it's a geography or a vertical that's a little more exciting as you start the year?

Yes. We started the year with -- I think, ended last year -- after we got the election behind us. I would say, our customers, prior to the election were in a wait-and-see mode. Wait and see what happens with interest rates, what happens with elections. I'd say probably starting in the end of the first quarter last year, we started to see a slowdown in sales of our contractual businesses, our lease business, our dedicated and our supply chain. And it was primarily customers just not making decisions. Pipeline kept growing because decisions kept getting put off. And I would tell you, once the election happened, I said, okay, we're past this, everything is good. As we've gotten into this year now, we're back in this wait and see now because of the tariffs and some of the other uncertainties around policy. So I would tell you, customers are generally across the board in more of a wait-and-see mode again and not a lot of decisions being made yet. I think everybody is waiting to see what the rules are going to be going forward. I think there's a desire by most customers to do something and to move forward with projects. But right now we're seeing just more of a wait and see.

I think you're roughly what, 93%, 94% U.S. revenue base. But the other part with the cross-border is you've invested and have a decent exposure to Mexico. Auto has always been a big part that's come down over the years in terms of exposure. With all the noise in the back and forth, have you seen any pull forward or stop and starts on the cross-border side?

Yes, I would tell you not a lot. I think it's interesting to see. These are -- most of the customers that we have in our supply chain business are large Fortune 500 type companies that have long-term investments and different manufacturing capabilities, if you will, Mexico. There's not a lot, I think, that can be done in the short term. So we haven't seen a lot on that side of it. I would tell you that as we -- obviously, we're running all our different scenarios like everybody else is. For Ryder, there's puts and takes. On the plus side, I would tell you, more manufacturing coming to the U.S. is really good for us because we are 93% U.S. That's where most of our capabilities are. We do have strong capabilities in Mexico, primarily to support manufacturing that comes to the U.S. and then also in Canada. So long term, I think, that would be a good thing. The other positive would be, clearly, if tariffs are put in place and the cost of trucks, commercial trucks goes up, that's going to slow down the purchase of trucks and maybe accelerate getting the freight recession behind us with more balance of freight and trucks. On the negative side, though, I think in the short term, if there's an economic slowdown, that could impact our rental business. It could impact our volumes for our supply chain businesses. And the extent of that is really hard to gauge. What I can tell you is in our supply chain, and our lease business and our dedicated, it's all contractual. So the volatility doesn't impact us to the level that it might to somebody who's got a more transactional business.

So you are one of the largest, if not the largest buyer, of commercial trucks in North America. So a lot of those come from Mexico or at least manufactured in parts going across the border. So we still don't know, like I said, the rules of the game, but are you in discussions with OEMs, are they able to pre-ship some of those to get them across? Is that something that they're able to do? And is that something you guys are considering at this point? You know you have some growth, so can you pre-stage some of those?

Yes. On the margin, there's some stuff that we can do and that we're doing for our customers. We do have the ability to pass those costs through even on trucks that have been ordered. I don't typically buy a truck until I have a signed lease. If I sign a lease, I order the truck and the tariff gets put in place after the lease is signed, I do have the ability to still pass that through. And obviously, any new leases that we signed, we would pass through. But we're doing everything we can on our end to try to get as much of that production across. But again, especially with the on and off again approach, it's been more challenging. We also don't know what the price impact is going to be from the OEMs. No one -- none of them have really quantified that yet.

The other big part with the OEMs is the prebuy with EPA 2027. So maybe you can walk through that in terms of how that would impact Ryder, what opportunities that would bring if you still think it's going to happen in this deregulatory or potentially deregulatory environment?

Yes. Look, I think the prebuy for Ryder historically has been an opportunity to sell more leases because companies have to make a decision, they pull forward decisions, and we end up having slots available from the OEMs as such a big purchaser gives an opportunity to get more customers into leasing. So in the short term, it's just locking in more leases. It doesn't have as big an impact on the bottom line. Where I think it helps us more on the bottom line is longer term, when there is a change in technology that makes the new technology less attractive, either more expensive or less reliable, in this case, probably just more expensive. The older technology becomes more attractive. That happened back in '07, happened again in -- before 2012, so I think that could happen again. That tends to raise the value of used trucks in the marketplace. So anything that was built before that change. So that would be a help for us if that happened. But now is it going to happen or not? We don't know. I think last month, I said, yes, I thought it would still happen because the OEMs have developed most of the technology. Maybe it will happen with some modifications where maybe you don't have all of the components that were originally in the 2027 technology change where some of the technology change has already been developed will be included, but maybe some of the other components of that legislation won't be.

What are some of the other regulatory environments that you're watching? I'm assuming California is still always one, just given the size, but also given the CARB rules. So they've pull back the Advanced Clean Fleets, but you still have the clean trucks. So given your footprint and your scale, how do those 2 potentially play out?

Yes. The Advanced Clean truck is basically the OEMs are only allowed to sell a certain number of diesel units based on the number of electric vehicles that they sell, which, as you know, electric vehicles have just been for commercial truck purposes, have been very, very difficult to move just because there's not -- the economics don't work yet for most of them. So we don't know. We don't know what the EPA is going to do in terms of some of the waivers that were passed that were given in the past. If those will still hold. If they don't hold, that could maybe impact Advanced Clean truck, I don't know. But we're managing through that. We've -- it's limited the number of trucks that we could buy in California, which is hurting, I think, some of our customers out there. But again, I said everything we do is getting more complex, and that's an example of complexity and we'll pass through the cost to them and then really work with them to make sure they can get the vehicles they need.

So we have seen a little bit of an uptick in terms of used truck pricing. There's trucks and tractors, there's obviously 2 quite separate markets. But are you seeing something similar? Obviously, that market has been down for a while now with the rest of the freight market. And I don't think you guys have high expectations for that in the guidance this year.

Yes. And I think there was a -- so we've been seeing it kind of bumping along the bottom, actually slightly down each quarter, low single digits. I think there was -- ACT had a preliminary January number that looked up. But then the real number -- the final number, I think, came in up 1% or something. So I think the bumping along the bottom is still probably a good description.

Can you talk a little bit more about the cycles because we have like the financial crisis, not a lot of trucks get built and then 6 or 7 years later, the prices go up because you don't have that production gap starts to show up. So 2020, 5 years ago now, hard to believe, but I would assume that something similar would happen in the business. Are we only a couple of years away from potentially seeing something history repeat itself?

Yes, our holding period is typically going to be 6 -- by the time we get to the used truck market, 6, 7 years on some of these things. So we're still maybe 1 year or 2 out of that. But yes, at some point, you should see a shortage of -- there weren't enough babies born. There weren't enough trucks built 6, 7 years ago, and then we'll see that. But that will probably be -- that might be 2026, 2027. As you know, there's a lot going on there, too, so...

Right. Right. Well, we do -- one of the other things I want to ask about in terms of the -- we hear a lot about that's maybe a little bit longer lead time than we might expect is just the nearshoring, reshoring with supply chains and with outsourcing and coming back to the U.S., hopefully or North America more broadly. In your experience, is that like a 3- to 4-year time frame? Is it a 4- to 5-year time frame? So if we do get some certainty on tariffs and everything else with that in the policy perspective, like when would we expect to see some of those supply chains come back and be online, I guess?

The more recent example of that, I think, was post-COVID when -- especially in the auto sector, there was a move of suppliers closer to where the assembly is taking place and it's also a move away from China. And I think as I look at that, that probably took a couple of years for these suppliers and -- Tier 1, Tier 2 suppliers to be able to reposition their manufacturing in different countries. I would expect that's probably a similar time line here because I think they were doing as quickly as they could. So you're probably looking at by the time that they actually get it all done and operational, it's probably a couple of year process.

So one of the things we're hearing more about just industry-wide, not Ryder or any company specific, but it's just the concept of cargo theft becoming a bit more at least visible. It's always been there. It's always been challenged, but now we're seeing more, I guess, organization related to that. But with your supply chain outsourcing visibility, how does that affect? Ryder has had an opportunity? Are you seeing similar requests for shippers when it comes to just what seems to be a bigger and bigger problem. And we hear about it more from shippers now as well, just the...

Yes. Well, safety and security is one of the services that we bring to the table. So it is an opportunity for us to companies that are strong with that. We certainly bring best practices to it. But we haven't seen a big increase across our fleet. On the leasing side, our customers are responsible for that, so clear on that. Our customers are just leasing the truck from us and then they handle whatever has to do with whatever they're moving, they're moving with their own drivers. So when it comes to the stuff that we do, that's a service that we -- that's part of the service that we provide is making sure our drivers are trained on how to try to avoid these types of situations. And again, it hasn't been a big impact on our fleets.

So one thing we -- stood out to us when you look at the guidance that you're talking about a little bit earlier, there's not a lot of cyclical recovery in there. We've heard this back half recovery from the freight market for the last couple of years, same for this year. But you got a lot of visibility, I would assume, with the initiatives that are coming. So is the cycle, if it happens, just all upside? Do you have a lot of visibility to these initiatives? Are there ones you can add on to that? Like it seems like you're in a pretty good spot for this year.

Yes. We feel like we're in a good spot. I mean, if you think about our year-over-year on the top end of our range, we're saying we're going to go from $12 a share to $14 a share on the top end. That equates to about $100 million of earnings before tax. $70 million of it is initiatives. So it's the combination of those things I talked about. The synergies from our recent acquisition, we've got really good line of sight, the repricing of our leases that we're in the final legs of doing that. So we've shown that we can get that. And then the maintenance initiatives that we also feel pretty good about. So we feel good about that $70 million. We got $15 million only from rental recovery. And it's -- we've got a recovery -- a somewhat of a recovery in the back half of the year, not a significant one, partially offset by used vehicle gains still being down year-over-year because we're not assuming a lot happens on the used truck pricing yet, so that represents about $15 million. Then the other $15 million is really cost management cost takeouts. We have a zero-based budgeting process that we've run for now, I don't know, 7, 8 years, and we always leverage that each year to try to find more cost takeouts when we need them.

Can you talk a little bit more about the Cardinal acquisition? Maybe how it started, how it's going? Because it's what, former Ryder folks there, so I'm assuming you knew them for a little while, but how is that -- it sounds like it's going pretty well so far.

It's going very well. Ryder's dedicated operation is what we call more customized or specialized dedicated. That means that it's not typically just a driver who's driving into a dock door and loading a dry van trailer. It's going to require the driver to do more than just drive the truck. When they get there, they have to do -- there's special handling required or special types of equipment. So think about steel companies where you're driving a flatbed with a bunch of steel behind it. You got to deliver that steel. That's one of the things that we do very well. Delivering to a retail store that is in a mall. So not a big box that you can just pull in, you got -- driver has to get out and move some totes into. Those are the types of dedicated operations that we run. Cardinal had a very similar profile of customer that aligned really well with Ryder's customer base. So that has been a really easy -- I wouldn't say easy, but it's been a favorable blend to bring those organizations together. Culturally, also, I think, a good fit. And then really, the synergies have been primarily from just the equipment. So Cardinal was going out buying their own trucks, doing maintenance through third parties. You bring that through the Ryder network. There's just savings in that we can buy the trucks better. We've got really optimized maintenance operations, and we're able to bring value there. And then obviously, the consolidation of some of the back office and overhead is also helping us get those synergies.

Is this a is this something you can sort of scale? Are there other Cardinals around there, maybe not at the same size, but is this a pattern you can not to like one every year, but maybe one every other year in terms of like building out that structure maybe a little bit faster than doing it organically?

Yes, we'd be interested in doing that as we're always in the market looking. We find another -- again, again, we want to have it like Cardinal, well-run company, good customer contracts, but we are in the market looking for other Cardinals like that, that we can bring in because it also gives us some density on freight, which is important for the -- if you think about what's the next $150 million of initiatives that we would look for is now how do I optimize this dedicated business across customers. Because right now we kind of operate most of them as stand-alone customers, providing service to that customer, but there are opportunities to leverage drivers, to leverage power, to leverage broader equipment. And that's an opportunity as we see as the next wave. And the more density we can get in a geography, the more opportunities we're going to have to do that.

So that would be the Flex operating plan model. And so maybe you can...

Correct. Yes, we talked a little bit about that.

Yes, I think that was at the Investor Day, not too long ago. So is that just fitting more backhauls together, more density, more stops, slip seating? Like how -- what are some of the concepts? Because like you said, it's not quite like the dedicated that maybe most of us are familiar with.

So yes, backhauls, doing more backhauls. We always try to do that. But this is also having the visibility across accounts to be able to take a driver that might have some additional time still available and put them on a different account route, take equipment that may be sitting on one account for a certain period of time and put it on a different one. We don't do a lot of that today. And I think Flex is really about that. First, doing it manually, but we also have a technology we're developing that is going to help us do that on a more automated basis.

If there's any questions in the room, go ahead and raise your hand. Thought we might have one down here in the front, please.

You mentioned that your drivers do more than just pull up and say, "Hey, take my stuff." Do you train them? How do you recruit? How do you manage the chronic truck driver shortage?

Sure. That's a great question. We have about 13,000 professional drivers who are employees of Ryder. We have, I would say, a vast driver recruiting organization, fluctuates, but anywhere between 80 to 100 folks that are out there. So they're in the markets. I say we can typically find drivers where private fleets can't. We do have training programs that we put in. We don't typically hire a driver unless they've already driven somewhere for a period of time from a safety standpoint. But what's attractive about Ryder is that they're working for a company. This is what we do for a living. It's not a private fleet where you're just sort of a support. They're home every night because for the most part, I think 85%, 90% of our routes are home every night. So you're not over the road for long periods of time, which can be difficult on the work-life balance. And you're also at a company where you've got multiple options. So if you're on 1 account, you're doing a good job, but you want to either move to another part of the country, you want to do something different, we've got a lot of different accounts that do something a little different, gives you some variety in what you do and, obviously, pay. We make sure that we're paying well within the market for drivers. So our turnover is somewhere in that 30% to 40% typically, where if you look at the truckload carriers and over-the-road folks, they get a much higher turnover.

So a couple of minutes left, Robert, maybe we can talk about technology broadly within the company, some of the initiatives that you have focused on in the past has been visibility, connectivity, obviously, productivity in general. But what are some of the top things you're working on from a tech perspective in Ryder?

So we purchased, I mentioned a company called Baton about 2 years ago. Now it was a start-up that we had originally invested in through our Ryder Ventures organization. And it was a group that was working on optimizing truckload deliveries. And the more we got to know this group, we realized -- we thought, first of all, a really smart group, doing really neat things. And we felt that, that technology could be better applied to the Ryder network and all the freight and trucks that we have visibility to. So we've invested in them, built up that organization. Now that is really a tech technology lab for Ryder. So they are working on visibility, not just visibility, which we have through RyderShare, but also how do I optimize now? How do I take all this freight that I have visibility to? And how do I do a better job of optimizing across dedicated, across our supply chain business. Ultimately, the vision is, and this is way out there, but ultimately, the vision is to have a Ryder ecosystem, where if you're leasing a truck from Ryder, you can plug into the Ryder ecosystem and then you get the benefits of being able to see all the freight that we see and what might -- you might have opportunities for backhauls, you might have opportunities to move a load for somebody else. So they're working on the backbone of that technology. That's probably Phase 3 or 4, I'm giving you. But Phase 1 and 2 has just really given us taking that visibility and now looking for the opportunities to cross-utilize equipment. On the fleet management side, we've got RyderGyde, which is our visibility for folks that just lease trucks from us. What are their trucks doing, which trucks are idle, when do trucks need to come in for maintenance, which trucks are costing them more on a cost per mile basis and that type of visibility we've got out there. And then we've also rolled out -- it's not a technology, but it's a new service called Torque, where we're doing mobile maintenance. So the retail mobile maintenance. So this is for customers that aren't interested in a full-service lease necessarily. They want to just on a retail basis, have a truck show up at their location and do the maintenance for their trucks at their location. We're finding that to be a pretty good business. We've done a few little acquisitions and rolling this thing up. We'd like to, over time, build a broader network that we could service trucks for that segment of the market. And again, just being able to penetrate that segment of the market with a mobile maintenance offering.

Okay. Very good. Well, we are just about out of time, so we'll end it there. But Robert, thanks very much for your time today. Really appreciate it.

Thanks, Brian. Thanks for having us.