Ryder System, Inc. ($R)

Jump right in. We welcome Ryder Systems' CEO, John Diez. John has been CEO for 3 months. after having served as EVP and CFO for nearly 5 years, President of Ryder's Fleet Management Solutions business unit from 2019 to 2021. He's been with the company for 24 years. But given the rapid changes in the truck market, Ryder's exposure to dedicated transport solutions, fleet management solutions and supply chain solutions provides great insight into the state of the market from its various perspectives. So we welcome Ryder back if you can believe it's your first time since 2005 when we had your former CEO, Sweeten join us. So a while back, but we're happy to have you with us today. Also joining John is Calene Candela from Investor Relations in the audience. So I guess you're going to send all the tough questions over there. Okay. So with that, John, I know you've got a few slides to kick us off here. So I'll turn it over to you. And hopefully, within that, maybe you can kind of throw in maybe 3 key takeaways that you want us to take away with as well along with your slides.

Sure. Fantastic. Thank you, Ken, and good morning, everyone. If you go to that next slide, let me just give you a quick overview. One more. Let me give you a quick overview on Ryder, who we are and the customers we serve. So Ryder is a leader in the outsourced transportation and logistics space. We're strictly focused in North America. So we operate primarily in the U.S., Mexico and Canada. What I would say is we're organized around 3 businesses: our fleet management business, our supply chain business and our dedicated transportation. Everything we do, the customer could do on their own. So if you think about our fleet business, which is 43% of our revenues, customer could go out and finance their own vehicle. They could choose to do their own maintenance on their commercial fleet. In our case, we offer a compelling value for our customers. We have 800 maintenance locations as you see on the screen that helps serve the needs of our customers, whether it's at a local level, regionally or across the country in the U.S. and Canada. Our fleet management business, really the advantages we offer is better procurement on the front end, compelling financing and a much better maintenance experience with better uptime than that our customers could do it on their own. Dedicated transportation is an extension of our fleet management business. So if you think about outsourcing the truck, this is outsourcing the truck and the driver. So we take over the delivery of our customers' products from their warehouse or their manufacturing facility to either their distribution network, their end customer, whatever the case may be. We operate 13,000 professional drivers. So we have great drivers that execute on our -- for our customers each and every day. Our advantage is not only the engineering that we bring forward in designing these solutions the asset flexibility we could offer, but most importantly, our ability to recruit, retain and manage drivers more effectively than they can do it on their own. And then lastly, our largest segment today, which is our supply chain business. Our supply chain business, excuse me, is 43%. Fleet management is 38% of the overall revenue. Our supply chain business today is the outsourcing of broader supply chain capabilities. That includes primarily warehousing, but it could be warehousing and transportation through a dedicated and warehousing solution. It could be things like e-commerce and last mile. So if you're looking for support and help in delivering your product to your customer directly to their home. We could do that. Our last mile business is the delivery of large, big and bulky. Our e-commerce business supports customers and businesses and delivering their product not only online and grabbing those orders online, but also fulfilling those orders and sending them out to either stores or to the customer directly. We serve a great number of customers. You see them there. Our customer base is very diversified. Food and bev, retail and the industrial space are really where we do most of our work and we have a great number of customers, 14,000 customers in our leasing business alone that we have an opportunity to serve and create value for them each and every day. Go to the next slide. So a big part of what we've been focused on over the last several years in 2019, we launched the transformation. We call it our balanced growth strategy, and you see the results of the transformation here with KPIs comparing pre-transformation 2018, which was the peak of the freight cycle and then post transformation today in 2026. The key elements of that transformation for you to take away is -- we launched to derisk our fleet management lease portfolio in a meaningful way. I'll get into that in a second. We also look to enhance the returns of our fleet management business. Those were structural changes that we made as well as repositioning the business and accelerating the growth of our asset-light businesses, Supply Chain and Dedicated. So you see there our revenue mix went from 44% supply chain dedicated to today, 60%. More importantly for us, as we've also grown the business from $8 billion to $13 billion, but grew it more profitably even though we're executing today in these challenging freight conditions. Return on equity with the structural changes we made to the business was 13% in the prior peak. Here in 2026, we're going to deliver 17% to 18%. And you see our operating cash flow grew 60% over that time period. So if you go to the next slide, really, these are the takeaways for all of you. It's threefold is really the resiliency of the model today is performing at a very high level. The structural changes we've made have not only elevated our earnings profile, but there's even more that we think we could enhance and deliver in the years ahead. Secondly, we're well positioned for the cycle upturn. So we saw the down cycle begin with interest rates moving up in 2022. That has continued. We think we're in at the bottom of the cycle with the opportunity for some earnings recovery as the cycle takes an upturn here. That's what we highlight here in the center, $250 million is what we believe we can deliver over the next several years as the cycle upturn takes hold. And then the third thing is we've added significant number of capabilities. We're happy to serve the market from port to door. So we have capabilities from drayage on the port side, warehousing and fulfillment, a dedicated and final mile, which are all capabilities we could package together discretely for our customers, which we think is going to help us grow our contractual relationships in a meaningful way going forward. I think that's it. Is there -- yes. So that's a quick takeaway.

All right. Great. Thanks for that day, John. Appreciate it.

So let's start maybe high level. Where are we from your perspective on a freight cycle recovery today? Are we past the bottom? Are we seeing early stages? Or is it just capacity has come out, the government keeps cracking down on the regulatory side, and it's really a supply side.

Right now, clearly, we see the supply side helping and we've seen plenty of capacity taken out of the market. We saw the early signs of that last year. That has continued. What we did see in Q1 for us, which we think we're in the -- there were early signs and encouraging signs of a cycle upturn for us was -- we saw for the first time our fleet management and dedicated customers make commitments. So we've been seeing as they've been kicking the can down the road on long-term contracts, 90% of our business are long-term contracts from 3 to 7 years. We saw strong sales in Fleet Management and Dedicated. And our supply chain business which came out of a great 2025 record sales year. Q1 was another record quarter for us. So we're seeing higher levels of commitment from our customers. On the heels of the fact that we continue to see the market indicators which is the FTR truck utilization, a measure of capacity in the marketplace that's elevated which is a good sign. Spot rates continue to climb, up 30-plus percent year-over-year. And then we're seeing, even in our business, we're seeing good activity. We saw retail used vehicle sales volumes go up and we saw good pricing. In fact, pricing came in and kind of came in a little bit stronger than what we had expected. We were expecting that level of pricing to come in later in the year that came in earlier in the year.

Used equipment.

Or used equipment. And then we're seeing good upward momentum with regards to the second half for used vehicle sales from a pricing standpoint as capacity continues to exit. And we expect new vehicles, the price increases to be substantial as we get to the latter half of the year.

Because of fuel because of new technology, what's the ...

Yes. So there's -- in our space for new vehicles, we're expecting a new emission standards that's going to trigger a significant technology investment -- we believe that technology investment, absent the warranty component of that is going to be in the neighborhood of 10,000 to 15,000, so it's quite substantial on a new piece of equipment. Add on top of that, inflation with regards to tariffs and even some of the energy prices that you're seeing funnel through to the consumer. That's also going to play through. So we're expecting a large increase later this year. for the new equipment.

So no changes to that '07 emission standard change. The administration is keeping as is, there's no delay to that.

We don't believe there's a delay. I think all of us are expecting now in the industry that it will go through. The one change that is happening is originally they were also looking to add a 10-year warranty period, which would raise the price of the equipment significantly. We think they're going to scale that back and they're not going to move forward with the warranty component, meaning that the OEMs have to guarantee you a 10-year have to guarantee a 10-year product for the consumer. And obviously, that was going to come at a price.

Yes. All right. So 90% of revenue is contractual, sounds like pretty long term. Maybe talk about market pricing here, right, and seeing the shifts in the market. How does that how quick can that translate to contract gains? Because obviously, you mentioned the rise in spot rates. How do we think about that into contract gains?

Yes. So we typically see about a 6-month lag from the early signs of market recovery to good market activity. So the Q1 performance came in maybe a little bit sooner. We'll see if it's sustained as we get through the year. Typically, we see about a 6-month cycle from beginning a process with a customer to ultimate signing. So as we get deeper into the year, our expectations are that customers are going to be willing to commit at higher levels than we should see stronger sales through the year. .

So you mentioned -- I think you noted 5% to 25% of the market is outsourced. You're talking on the truckload side.

No. So the markets we serve were not a truckload care, even though we provide dedicated activity for our customers, 5% of the outsourced market is in the warehousing side, 15% roughly is on the Dedicated transportation side and 25% on the fleet side, that kind of gives you an idea of the markets we serve. What we continue to see is that outsourced supply chain space continues to grow at a rapid pace. That has been growing high-single digits, and we've been growing organically double digits for the last 5 years. We've added some acquisitions that have really elevated our growth levels. But even on an organic basis, we continue to grow that business double-digits.

Perfect. So given that outsourcing is increasing, and then given the labor challenges that we're seeing given the difficulty in getting access to labor right now. What is that doing on -- I mean, how quickly are we seeing driver pay? And what is that doing to cost?

Great question. So spot rates have been moving up. capacity has been taken out of the market. Driver pay, in particular, typically, you first see signs of an improving freight environment. You're going to see it on the driver side with turnover and activity move up. We have seen some of that as we exited Q1. And -- you'll then see sign-on bonuses to attract drivers in the marketplace. Sign-on bonuses are not broad spread, but in select markets, we are seeing sign-on bonus. And then later on, you're going to see wage inflation, which will be the next part of the market dynamic. .

So given that, I guess, tightness of labor, do we see an acceleration of -- are you testing autonomous? Is that something that's squeezing into the your use of capacity?

Well, right now, and as you look forward, we do think there's going to be tightening labor capacity, and it's going to become more challenging, which is good for our dedicated business, we should see good growth. We are leaning into autonomous. I think we're still a few years out. We do need a few years being one. It's a great question. We've been saying 5 years for each of the last 5 years. So I would think certainly 5 years is not out of the question. You're seeing on the passenger side, more autonomous vehicles. So that will carry through for the commercial side. But we do need regulation to catch up. So for it to really take hold you're going to need to see regulation change. I think the technology by and large, has seen evidence of improvement, evidence of success in select applications. Certainly, there's good activity. We have partnered up with a number of providers, both OEMs with their autonomous platforms as well as other providers like GATC and Aurora that we have pilots in place. So we are seeing the technology improve over time. But clearly, there's still a little bit of ways to go before we see that in the marketplace.

Does seem like we're moving from theoretical to special reality. Yes, we're still very early, but okay. quite detail on the transformation program. So talk to us about changes that are structural at Ryder versus maybe cyclical like you were talking about used truck pricing.

Yes. That's probably the most exciting part for us. So if you think about the derisking actions we took and improving the overall returns. We set out to remove about $100 million of annual maintenance costs from our leasing model and we delivered that. We just came out and said we were going to go and get another $50 million, those are structures harder how did you do that? A few things. One, process redesign, buying smarter with regards to our parts and adding technology. Those have been the catalyst for us to deliver that $100 million. The second component, which probably was the most challenging for us in that we were dependent on the market dynamics as we reduced our residual values and raised pricing. Each of those came with price uplift to the customer. So if you think about the first step was reducing our residual values for pricing of our leases, and then we raised the expectations on our spread on our lease equipment. We did that over a number of years. We're on the tail end of that. We've repriced the entire portfolio, the last piece is this year, that has delivered or will deliver $125 million of annual savings. So that business structurally it's about $200 million plus improve in the margin profile, less dependent on used vehicles to deliver on earnings. We lifted also our earnings profile for the fleet management business, that business typically would do low-double digits in a normal market conditions in the best of times. And now we said over the cycle of that business, you could expect it to deliver low teens over the cycle.

So if you're increasing the residual values, are you getting better -- we're reducing residual value. Are you getting better gains on sale when you go to sell?

We are, obviously, we're in the heart of the freight market recession right now. used vehicle performance has not been great, but we're on track to deliver $20 million to $30 million of gains this year. Our typical gains, as we've called out in a normal cycle will be more like $75 million to $100 million.

Okay. And then you've talked about a lot about a balanced growth strategy. So what does that mean today versus what it was 5 years ago?

Yes. So the second component of that balanced growth strategy, we made the structural changes on our fleet management business. We diversify to more of the asset-light businesses. Those businesses are performing at a very good level. Those are contractual businesses. So if you look at the earnings profile of the company today, very dependent on those contractual models. They continue to perform at a very high level. What's next? Well, we're going to get to see this model perform for the first time through the up cycle. We think we can do 2 things. One, deliver on that $250 million of earnings uplift. We still have $70 million to deliver on our structural changes. And as exciting for us is all the capabilities we've added over the last couple of years should help accelerate growth in our contractual businesses over the cycle. .

All right. So given the transformation, how is the capital intensity in this capital business as you shift to SCS and lighter asset business?

We continue to look to grow our fleet management business. So if you look at the capital intensity, it's all allocated towards that fleet management business. The supply chain dedicated businesses don't require a lot of capital. We have seen some capital deployed on supply chain for automation, but it pales in comparison to the vehicle capital expenditures we have there. We do expect with this freight recovery. We're going to have to spend more capital to upsize our rental fleet in particular, and then we expect our lease customers to start coming back and adding fleet which will add additional capital requirements for the business.

Okay. I think you just had the -- you don't have the -- you had the margin targets, right? So if you look at SCS going from 7% to from 8.7% a year ago, dedicated 5.2% to 5.9%. Kind of talk about how you're looking at targeting high-single digits in each of the segments. What gets you from where we are now to those levels?

So I think the numbers you are quoting are Q1. So seasonally, Q1 is our lowest performing quarter. So that's okay. If you look longer term, last year, each of the businesses delivered at those target levels, both supply chain dedicated at high-single digits and Ken has them there for us. So supply chain dedicated last year delivered high single digits. Fleet management was just around 10% last year. As this freight market recovery comes back, we expect that fleet management business to get into the double digits, mid -- low teens. And then in the peak of the cycle, it should deliver mid- to high-teens levels. So that fleet management is dependent on the freight cycle. Supply Chain Dedicated continues to deliver at target levels last year and continuing into this year.

Okay. So Fleet Management Solutions benefited from the stronger used vehicle sales. Is that shifting in this market in terms of gains?

While we have seen gains improve year-over-year. So last year, we saw gains in that $20 million range. We're expecting it to be about $30 million this year. So a slight uptick. As we get through the cycle, we would expect that number to climb to that $75 million to $100 million. And at the peak of the cycle, it should be above that $100 million level over time.

Okay. All right. So let's take a step back, right, the thesis of supply chain is becoming more complex, which that Amazon announced their supply chain services business opening to third parties they're going to try and simplify for shippers lower cost. What do you think about that capability? What is it -- does it affect Ryder?

Yes. So Amazon has been providing or access to their supply chain network to their existing vendors for some time. This is not a big departure from that in that most of the people that we deal with on our customers, they've elected either to move away from Amazon and have chosen to do it themselves or those that work with Amazon continue to work with folks like ourselves as well. I do think our e-commerce and last mile business is where you may have some overlap. But those are very small parts and components of our overall business. Our e-commerce and last mile overall is about 4% of the total revenue. So over time, you may see some impact there, but from what we do, most of what we do on the supply chain side is customized, tailored solutions highly engineered for our customers with the automation and technology, really customized for the solution that had for that particular customer. That is not being impacted by this. And certainly, it's a big part of our growth strategy for supply chain. That's where we continue to see growth.

So you said the opportunity is to make it simpler for the drivers or to outsource, right? You -- I presume you're paying a little bit more for that. So are you winning share from the asset-based carriers, the that lack the asset depth, where are you gaining the share from?

Well, I think people are going to see that capacity is very tight and they're going to look for capacity to continue to grow and deliver the products that they sell. And we're well positioned because we have the assets on the ground to serve their needs. So that's one. We do see over time when spot rate market moves up, a number of retailers switch from 4 higher carrier solutions to a better service and a more competitive rate on the dedicated side. So they'll trade service for rate when the market is sloping down, when the market comes back up, they'll come back and get the better it.

Yes, yes. So you quickly raised your full year guide in the first quarter after setting it just a few months earlier, right up to [ $14.5 to $14.8 million from $1345 to $1445 ].What shifted quickly in your outlook? Was it you sell prices? Was it contracts that you've renewed? What was the leading the game? Well, when we set out our guidance for the year, that's highly dependent on executing on our strategic initiatives. So $70 million of our strategic initiatives -- coming out of Q1, we felt good about delivering on that. So that was reinforced in the guidance. Number two, -- we saw Q1 come in a little bit better. The catalyst there being used vehicle sales performance. What we're seeing there, Ken, is we saw, relative to our expectations, we saw kind of pricing level off sooner in the year than what we had expected. And that's really the reason for lifting the overall guidance for the full year. Q1 was a little bit better and then UVS expectations improving. I'm sorry, you said you saw pricing leveling off earlier.

Yes. So there were -- we had seen, especially on the tractor side, slide, and we expect that, that slide to continue in Q1 into Q2. But we saw as we exited Q1, better pricing coming out of the quarter, and we expect upward pressure to be there for better tractor pricing in the second half due to the new pricing of equipment as well as capacity continue to be taken out of the market.

Okay. Let me just see if there's any questions, they'll keep going. on we got a mic. .

If autonomous becomes real in 5 years, how do you think that impacts your business?

Yes. So we've been working with a number of players where we could add value through that process. One, we have a few pilots right now. One is maintaining that equipment. We have a great large network across the country. where we can provide maintenance services not only to the vehicle itself, but also the technology that's equipped on that vehicle. Number two, leveraging our network, we think many of these autonomous networks will be redesigned and they're going to need space, and they're going to need someone to operate them. So clearly, we're well positioned to do that. And then thirdly, I would tell you from a transportation management perspective, that final mile delivery is still going to be required, and it's not as simple to do that. . So we're really well positioned to be able to take that autonomous vehicle trailer and deliver to its final destination through our capabilities on final mile. Yes.

Do you envision that you're putting capital into these assets and growing your business? Or are you an outsourced provider for someone else that what's the capital and for all this equipment?

I don't know. We're going to be prepared to either put capital in if we see the opportunity there. We deployed a significant amount of capital on equipment that's extremely expensive. The price of a new tractor going into next year will be close to 200,000 or 200,000 plus. So deploying capital for -- to meet the needs of the marketplace, not something we're afraid of. But it's still early to tell. That's a great question. are you using AI currently in your operations? And are you seeing any near-term sort of uplift. Yes. So from an AI perspective, the question was, are we utilizing AI -- and the answer is yes. Obviously, we're -- one of the great things we've done over the last couple of years is investing in technology. We have our own proprietary technology 1 of which is Ryder Share, which provides visibility and control to our customers about their delivery. We're embedding AI there. We're embedding AI in our rider guide, which is our fleet management solution as well. What that does is it creates a more proactive solution for our customers where they can have early indicators of what's happening in their network, take action automatically for them. . So those AI solutions are being embedded in each of those proprietary technology solutions. Number two, we have invested. We have a venture fund, a Ryder venture fund where we invest in different AI technologies. We've probably looked at more than 100 of these. We've made some investments in a few that have created good yield and momentum for us. Happy robot is one, a genic AI technology. We've deployed that in our transportation management and brokerage business where they do the negotiation with carriers at a better, higher yield than what we were doing it traditionally. We have seen that also from an effectiveness and efficiency perspective, we're having to use less labor to support that business as a result of some of these technologies. And then longer term, we've got a number of use cases that we're tackling through AI which we think can be significant value longer term. No breakthroughs there. But when you look at our maintenance spend, our warehouse efficiencies and some of the things we're doing on a customer acquisition side, we think there's great opportunities going forward from an AI perspective.

Any others? That was great. Those were 2 of my next 4 questions, was the AI and the autonomous. So I guess if we think about the -- or as the an improving freight recovery. Where do you benefit? Where do you get pinched? What are the guidepost to measure your success in that market?

Yes. So the clear benefits for us, which we've laid out, $250 million, most of that's going to come via rental and used vehicle sales. That -- those 2 businesses will scale up pretty quickly when we see the market recovery. Longer term, you will see higher levels of growth, we think with the capabilities we've added, we could accelerate that growth relative to other cycles. So those are the things we're looking for. What are the guidepost -- to your question, we clearly need to see higher levels of demand. Our rental orders were promising as we exited Q1 and but they're still below normalized levels, I would say. So once we see our order intake on the rental side, I think we're going to see us deploy more capital towards rental, and you're going to see that product line grow. Overall, I think market pressures are that capacity will continue to come out in the first half. That should be good for used vehicle pricing as we get deeper into the year. And you need a good economy. And so we're still dealing with the Iran conflict. I think there's a level of uncertainty that comes with that. Hopefully, we get through that quickly so that customers and our businesses that we support will start investing and committing to long-term solutions.

So the fleet management solutions, that's where you're seeing the increase and decrease of used truck prices where that can kind of flex that business dedicated where you're outsourcing and managing capacity for drivers and becoming the full driver for them. And then you've got supply chain, which includes the warehousing where you're also going to go onto.

Dedicated, we're starting to see evidence of a tighter driver market as soon as that becomes really an acute point for people to deal with. We're going to see Dedicated start taking off and you're going to see good revenue growth from that business. So we're -- there were early signs in Q1 for Dedicated. We're hopeful that will continue. .

Is that good -- how do you adjust in that market in a rapidly rising market to ensure you're covering for the cost of the driver -- future cost of the driver, inflationary cost in that relative to what Werner or J.B. Hunt is doing on their dedicated side?

So we saw this during COVID, and we went out and -- really, we had to look at all of our contracts. We introduced in our contracts kind of a labor index that allows us to, as market conditions change to serve our customers the right way. We have protection for some of this wage inflation as we move through the market. So from that perspective, we should be in a good place. And obviously, the more exciting piece of that is we should see better growth overall from a dedicated perspective.

Okay. Great. Any other questions? Well, I think if I sum up, it sounds like you've got a good used truck market pricing right now, which can accelerate going into the '07 emission standards change, right, that can make pricing really tight. You've got an improving backdrop, although more supply side driven than demand you are seeing some of the demand creep in, it sounded like and that good pricing, which you can balance out with costs with the way your contracts are structured. And anything I'm missing?

No. And more importantly for us is our port-to-door solutions give customers an opportunity to deal with any supply chain challenge they may have. So if they're looking for warehousing, transportation or an integrated solution, we can deliver that. So I think we're well positioned for what's to come. .

Great job on the overview. Thank you very much. I appreciate the time.

Thank you. I appreciate it.