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

Okay. Just to go back on dedicated for a second because, again, another topic of discussion in this conference has been whether dedicated is just going to be a structurally better business going forward, just given that it's been again, for 4 up cycles now, we've been saying we're never going to see an up cycle, the strong ever again the next one is bigger and kind of more disruptive -- and one way to control your again, control your costs and manage revenues is to, a, outsource your operations or your fleet to someone who knows what they're doing and, b, sign a long-term contract to do that, right? So does it feel like the pipeline and the momentum behind Dedicated is like the strongest you've ever seen? Or do you think there's still room for that to be?

I think there's still room for it. I think we're in the early parts of it. I think there's been a lot of developments even in the last few months on just market dynamics that continue to push more for favorable economics to outsource and all that. So I think those conversations are just starting to happen internally at some of these companies, and our salespeople are out there as best they can to be touting what we can do for them and why it's going to take risk off the table because whether it's difficulty in finding a driver or your insurance costs are rising to a level that you can't or you've got new technology that you're not going to know how to maintain next year. All those things are going to drive them to come to us. And I think it's just a matter of time. So I think we have seen it be as robust as possible in the last few years, but I think there's still more to come.

Great. Let's see a little bit. Obviously, we spend a lot of time on the segments and the top line here. But also you referenced the strategic initiative, the $250 million of. So you remain on track to deliver $70 million this year, completing the $170 million program, next cycle peak, you're targeting $250 million. Remind us again kind of what the buckets are, how much of this kind of you have very high visibility to how much of this needs a cycle for you to deliver and kind of what that cost operational looks like?

Yes. Okay. So first, on the $170 million, which is just the underlying initiatives specific to Ryder, those we feel very confident in being able to deliver that by the end of this year. Those are related to our pricing initiative on the lease side as well as cost savings on the maintenance side of the house. So those have been kind of just once we started this process 6 years ago and had the maintenance initiatives, we just created a well-oiled machine that part of the organization just knows how to do it, how to do it well, and they have a continuous improvement mindset. So every year, they're coming up with new initiatives. And so even though we're hitting the end of that initiative for this year, I wouldn't doubt that there will be more to come as we continue to ask that organization for more. But on the $250 million, which is the part tied to the cycle, as I mentioned, $20 million expect to come this year, UVS simply from the used vehicle sales proceeds being higher. But the majority of that $250 million is tied to rental and then to use vehicle sales, right? So I would say rental is the predominance of that with used vehicles being the second part. As I mentioned, our rental fleet is at an all-time low. So in order to achieve that $250 million, we're going to need to make an investment in the rental fleet. We're down about 10,000 units from prior to COVID. So it's a pretty significant investment that we would need to make over the next few years, probably at least 12, 18 months. And we can still get some of the $250 million simply from our utilization being at a higher rate. But that's not going to be ideal. The idea would be to invest in that rental fleet and capture that new demand.

Got it. Just going back to your [Indiscernible] response, kind of you said, hey, no real impact on apart from the general inflation insurance inflation that the industry has seen Obviously, this is an industry-wide problem, like we've big reports on this together with our insurance analyst. Is there anything you guys can do? Or is it just kind of, hey, that's the way the industry is going and kind of you just have to price for it and pass that through.

Yes. Well, I mean, I think other than lobbying efforts, which are [Indiscernible] it would be needed. But right, we won't count on that, but I do -- we do have our efforts out there because just some of the things that are happening are really unimaginable, right? But other than that, we just focus on our safety standards, right, and making sure that we are -- safety has always been culturally for us, number one. so we start every meeting with a safety message. I mean that's how much it is ingrained into the culture at Ryder. And we monitor our safety metrics constantly, so making sure that for our drivers, and it's really for our drivers that is top of mind and that they -- we train them, they go through their practices. We have a process where if we have multiple incidents from a driver, there's consequences. So we have great practices in that area, and I think that's the way we're going to be able to control it. But it's a tough one. And like I said, I think it is industry-wide, but as long as we can keep ours as low as possible, then we're going to be better than the person next to us.

Sounds good. Speaking of safety, I didn't want to shift gears and spend some time talking about autonomous trucks, a I've been asking everybody about it. It's been a big theme of the conference partly because I've been asking people about it. but also because kind of I hear that it's coming up in a lot of the investor meetings kind of I'm sure you guys have seen that as well. and also because you are -- I would consider a leader in the space, even though you're not an OEM or an autonomous technology company, I think you have probably more partnerships with more stakeholders across this universe than anybody else. Right? So I know that technology is something that you guys spend a lot of time on. So what is the current house view on autonomous trucking, what works well, what still needs work and kind of what role do you think that you guys can play in that cost?

Yes. Yes. There's a lot going on there. I would say in the last year, we've seen a lot of development advancements in the developments of the AV technology. We are keeping a very close eye on it. Mostly, we want to make sure we understand how the technology is evolving. We want to know how it's going to be commercialized and ultimately what value it's going to add to our customers. That's the priority. -- in order to keep our finger on the pulse here, we have partnered up with OEMs like Daimler and international motors, and we've also partnered up with 80 technology companies like Aurora and GAC and Code to pilot their technology. And we have seen success but in limited applications, right? It's not fully -- it's not going to be an end-to-end solution, at least not yet. What we're seeing is pockets of success. And basically there, we've tested it in yard management in over the road. And so yes, we're seeing pockets of benefit. To me, I think it's still a few years out. I think that we need to understand what the regulatory environment is going to be that's a big question, and there has been a national framework for AV. So that's important. I think the other one1 is OEM readiness. Right now, everything is being retrofitted into a vehicle, but it's not necessarily being manufactured that way. And so what do those economics look like and what does that mean? And then the liability side, right? So we've been talking a lot about insurance and what does it mean? Who's going to be liable for this. So until we have those questions answered and understand what those economics look like. I think it's going to take some time. That's why I think we're still a few years out. But when it does come around or we are going to be ready to be part of that ecosystem as you referred to it. In FMS, in our leasing division, we are going to be able to provide maintenance on this equipment, just like we provide maintenance on our regular ICE vehicles today. The solution will be not only maintenance on the underlying base equipment, but also maintenance on the technology itself. Right now, that maintenance is being done by the technology provider, but over time, it's probably -- it's going to be outsourced. And then that vehicle that Autonomous vehicle is going to be just like our vehicles today. We're going to be able to lease rent, provide maintenance and all of our ancillary services to it, like fueling and washing and everything else. So that's on the leasing side. One thing to keep in mind is our FMS network has over 800 shops across the United States. Our supply chain, we have 100 million square feet of warehouses across the U.S. these vehicles are going to need hubs to transition. We could be a provider of that, right? We have the footprint to be able to provide that service should it be needed. So I think that's another avenue that we have top of mind. On the supply chain side, I will tell you that if we end up adopting AV and go down this route, no matter where you are, it's going to disrupt supply chains, and we are here to redesign our -- either our existing customers or new customers that now need to think of a whole new supply chain infrastructure. So I think we can benefit from that as well. And then on the Dedicated side, I think there, as I mentioned, this is not end to end. I think there is still a first mile, last mile that's going to have to be done by dedicated -- the other thing, too, is the dedicated business that we provide. About 70% of it is specialized Dedicated, which requires some type of handling of the load by a human, right? So I'm not sure how it's going to work, and I think those are things that still need to be figured out. But I think we're going to be there to help in that process, and we're ready wherever we are in that journey.

Got it. That was incredibly comprehensive and detailed response -- just a couple of follow-ups there. It's very logical to you with your service footprint with your real estate footprint playing apart kind of, again, in that ecosystem, if you will, have you guys gone so far as to think of how will this practically work? How do we for this, what does that revenue look like? You don't have to share it with us right now. But has that math happened? Have you thought about at this point?

It has not. No. have not gone that far. I think some of the things I mentioned, which is just what is the cost of all of this still to be determined, right? And until we understand that, I don't know we have not come up with what that means. And ultimately, we're going to do whatever our customers want right? As you said, we're not manufacturing this. We're here to serve our customers. And if our customers see the economics and the benefits of doing it, that we're going to be there for them to help them. we are agnostic to the technology, whether it's EV, AV or any other type. If our customers see the benefit and the need for it, we're going to be there for them.

Got it. We just published this kind of big report on autonomous trucking last week. You were very helpful with giving us a bunch of data for that report. And one of the conclusions of that report was just kind of raising the point of are the 4 stakeholders involved, which is the autonomous trucking companies, the OEMs, the fleet operators and the shippers are these 4 stakeholders talking to each other? Kind of are they kind of addressing each other's concerns. The questions you raised are very, very valid, very relevant questions, but I would say also some on basic. So are you having these conversations with the OEMs? Are you telling them, "Hey, we don't know what the unit economics are like. We don't know if you still need humans at both ends obviously, you're working with Aurora working with Codiak, are you telling them about these things and kind of what does that dialogue look like?

Yes, that's exactly the purpose of the pilot. So we're there for them so that we can provide the feedback. We're introducing these vehicles into certain applications, testing it out and providing continuous loop of feedback to say, this is what's working, this is what's not. So companies like Aurora, Kodiak and [Indiscernible], those are all companies that we've actually made some investment in also as part of our Ryder Ventures fund. And so we have a stake in it as well, right? And so their successes are success, and we want to make sure that they're getting all the feedback. That's the point of the pilot. So yes, there is that continuous loop. Is it comprehensive? Is everybody at the table at the same time, probably not. It's just some of us, but those conversations are happening.

I think if anyone can get everybody to the table, it's probably you guys, given that you have your fingers and kind of all of these pies here. Last question for me on the topic. Again, you addressed kind of for what this means for every segment. Is there additional opportunities beyond stuff you're doing right now? Obviously, these trucks will need like rangers to get out of them if they are stranded on the highway, there's talk of doing intermodal for the road and kind of drag at both ends and kind of using service points there's talk of having drivers kind of doing load unload at facilities. There's talk of people potentially having to refuel these trucks, kind of add the fuel stations kind of -- are there other services beyond the ones you offer right now that you think you can offer in the [Indiscernible]?

I mean, nothing that we have talked about that you haven't already mentioned. We're looking to complement our existing services. So if our service or our footprint can help in any way, we're there. But I'm sure, just as you -- as with any change in technology and anything else, there will be things that come up that we haven't even thought about yet. And we're, again, part of the pilot. These are all the discussions that are happening behind the scenes to make sure that we have our finger on the pulse, and we know exactly what is changing and how we can be there to support it.

Underwood. Super helpful. Any questions from the audience?

You talked a little bit at the beginning of the remarks about your discipline on choosing customers who will be with you an up cycle or a down cycle. With potential up-cycle coming, are you at a higher starting point because it's been a focus of yours over the past few years? Should I think about maybe more tempered volume growth because of that discipline that you've already had in place. Any thoughts on how that looks in an up cycle? And then also curious about your capital deployment plans. Obviously, you have a lot of flexible capital how are you thinking about M&A, shareholder returns, investing back in the business with that?

Okay. Yes. So -- so yes, the growth will be tempered. And I think what we've said, even when we started on this journey, we said that growth of 2,000 to 4,000 vehicles a year on the lease side is what we would expect with this level of returns that we're expecting from our customers. Prior to the transformation, we were growing 10,000 units a year, right? So we're not going to be at those levels. We're going to choose our growth wisely with the customers that we want. So yes, it will. But that will be in line with our targets that are set in our FMS business of being mid-single-digit growth. right, on a percent. So that's the first question. On the second one, your question was Capital allocation. Okay, yes. So on the capital side, yes, our priorities with our outlook for the next 3 years, we're expecting to have about $13 billion of capital to allocate to the business. $9.5 billion of that is going to go just for the replacement of existing leases as well as dividends, right? So our dividend policy will stay intact, which leaves about $4.5 billion of discretionary spend. Our priorities there are going to be first and foremost to grow organically. I've mentioned how there's a lot of potential here to grow organically. When we mentioned the $250 million coming back, that doesn't include growth in our contractual business space. And so growing that business base at our targeted margins and our targeted growth rate is going to provide us annual earnings of at least $50 million, which will compound every year, right? That's $50 million every year. So organic growth. But organic growth will also include the investment we need to make in the rental fleet because it's so small right now. The second priority is going to be acquisitions. So we've done a lot already to grow our capabilities in supply chain. I think we have expanded into the areas that we want to. So any new opportunities that we're looking into are going to be more to expand our existing capabilities, just to grow them. to grow the existing capabilities that we have. We're looking for well-run companies. We don't want the fixer uppers. We want the ones that are well run that are going to complement our existing business. tuck-ins like we did with Cardinal or anything on the leasing side would be the ideal sweet spot for us. We had a lot of synergies that we recognized from those acquisitions, and those are the ones that benefit us the most. We're also looking at expanding the health care vertical in supply chain. It's another one that we've been expanding right now organically. But to the extent that there's an acquisition out there that makes sense, we'd want that. And then if there is no organic growth and no acquisition opportunities, we're going to do buybacks right? Our business right now is naturally delevering because of the solid contractual base that we have, we're generating a significant amount of cash. And so it's causing our business to deliver. Our target leverage is 2.5 to 3x. So that provides us all this opportunity that I just spoke about.

Got it. I know we're out of time, but just very quickly to bring us home here. going to my previous comment, the good news about Ryder is that the markets kind of recognized all the changes you've made. Stock has been at an all-time high for a long time now, but you're still one of the cheapest stocks in our coverage universe, which is the opportunity, right? So if you could address the investors kind of what are people kind of not getting about the story and kind of how do we drive that multiple will be waiting for it?

Yes. I think it's the potential that we have to grow when the market does come back, right? So we're performing at this level at an 18% ROE in a down market, right? Not many companies can say that, and we've been growing our earnings every quarter. So there's still a lot of growth to come from the transactional, but it's really this contractual business growth that I think is the part that's being missed. And it's a significant amount of the earnings potential of our company. So I think that's the piece that's missing. So...

We'll come with the cycle. Cristina, Thank you so much for your thoughts...

Thank you. Thank you very much.