Ryder System, Inc. (R) Earnings Call Transcript

All right. Hi, everyone. Welcome to Deutsche Bank's Industrials Conference. We're in the afternoon session here. I think we're in the final inning. So very pleased to be joined by John Diez at the current moment, President and CEO of Ryder, John, thank you for being here and supporting us at this conference.

Thank you. Great to be here.

So maybe we can start with a few opening remarks by you, just giving us some insight on the currently at the land as you see it what the market looks like, how Ryder fits in, and we'll take it from there.

Sure. I'll give you a little bit of background and introduction to Ryder. We're a $13 billion business. We're organized around 3 segments. We're in the outsourced transportation and logistics business. All of our business is B2B, 30% of it is contractual in nature. And it's organized around the 3 segments, fleet management, which is our truck leasing and rental business. That accounts for about 40% of the portfolio. Then you've got our supply chain business, which is end-to-end supply chain logistics capabilities Warehousing is the predominant service that we provide there, but we also provide transportation and integrated transportation and warehousing solutions to our customers. And then our dedicated business is the smallest of the 3, just over 20% of the business, and that is where you elect to outsource your transportation. We do the delivery for our customers to their customers or if it's a middle-mile solution to their distribution site. All 3 businesses operate in North America, and we're not -- we don't operate outside of North America. And then I think the big thing for Ryder to take stock of is we've gone through a transformation that began in 2019, 2020. The transformation was aimed at doing 3 things. One was to derisk our lease portfolio. Second was to increase and enhance the margins of the business. And third, really diversify the business portfolio and accelerate the growth of our Supply Chain Dedicated business. Fast forward from 2019 to 2020, I think, by and large, we're fairly complete with our transformation. If you look at our lease portfolio, we reduced the ideal values, what that translated into was increased price to our customers. We had to reprice the lease portfolio. That's been very successful over that period of time. If you look at our Supply Chain Dedicated business that used to be 44% of our overall revenue base. Now it's 60% of our revenue base, so a highly diversified business. Most important for us is cash flow from operations has improved 60%. Profitability has more than doubled over that period of time. And then if you look at kind of the earnings power of the business is substantially greater, and you can look at our return on equity metric, which we're looking at guiding 18% return on equity today and kind of just coming off the bottom of the cycle. And in 2018, at the peak of the cycle, we were doing 13% return on equity. So that's a quick overview. As far as market conditions, I touched on it a little bit, we are seeing a freight recovery. It's a supply-driven freight recovery which benefits parts of our business. What we haven't seen is kind of an acceleration in demand, but we are seeing that conditions are improving across the business. We see it in our sales, activity in FMS, DTS and our supply chain business. And then we are seeing used vehicle pricing. We started seeing in first quarter and second quarter, they're starting to go up and lifting from where they were a year ago. So that's a quick summary on Ryder and what we're seeing early in 2026.

Okay. Great overview. So maybe we can dig a bit more into the used equipment market in particular. I think you more than most I've spoken to today, should be very well equipped to weigh in on that, just given, again, that the truck leasing business that you have 40% of your operation. Just how it might be influenced by like the capacity and driver constraints in the industry, this is the huge truck market? And how do you think it evolves? What does that mean for Ryder? What are you exactly seeing -- you said the last 2 quarters, you've seen a nice little uptick. Talk to us about that.

Yes. So we start seeing improving conditions at the beginning of the year. Capacity has been taken out of the market, both from a regulation enforcement of that regulation. -- as well as kind of nondomicile driver activity. And what you saw is the spare market started recovering late last year. And obviously, that is also a function of capacity being taken out. pricing, we saw sequential improvements from Q4 into the beginning of the year. Q1 was better than the prior year, slightly better. And then Q2 was certainly sequentially better than what we saw in Q1. Our expectations and what we've seen thus far this year is a 5% improvement on year-over-year pricing. We expect that to continue moving up. And then we would expect, as market conditions continue to get tighter. Next year, we'll be in that double-digit range for year-over-year market improvement.

Okay. But it's a little bit of like a unique situation, right? Because if there's drivers that are being pushed on the industry, effectively, there's maybe a glut of capacity that's like trucks that aren't being used by drivers. I mean, am I thinking through that correctly? Or what is...

I think you have. I think we started seeing that last year, and a lot of that capacity has washed out. And now you're seeing the fact that the market has moved up, there's probably more attractive freight to move for over-the-road carriers. Tthose that want to come back into the market, which have been sitting on with saline, and that's giving us a little bit of a lift in that used vehicle pricing environment. So even though some of the capacity have been taken out, that help lift spot rates. And then with the spot rates moving up, you're seeing a little bit more demand come into the marketplace.

And talk about the value proposition right now used versus new? Like what we're seeing in the new market, order trends, maybe new emission standards.

I'll take it one at a time. Clearly, we're anticipating used vehicle pricing to keep moving up in part because the new vehicle pricing environment is moving up as well. So we are expecting UPA regulations to take effect next year. It's going to move pricing up. We do expect that to be meaningful. It could be high single digits to low double-digit increases based on the latest information. What we have seen at the beginning of the year is Class 8 orders and activity has been moving up. First quarter was weak. I would say, Q2 didn't move up meaningfully. I think that's a reflection of people looking to start taking advantage of what they're seeing in the freight environment and also anticipating some of that price increase going into next year. So we do to see momentum across the board in both new sales activity as well as used vehicle activity.

And do you think some of the new sales activity is a reflection of like prebuy or anything like that? And what do you think replacement versus growth, like.

Yes. I think what we're seeing right now is predominantly replacement activity that have been deferred, where you had seen fleets and even ourselves, if you look at our our fleet age profile that's been aging out even further over the last 12 or 18 months. I think a lot of fleets have delayed making replacement decisions until they saw market activity starting to firm up a little bit. I think that's what you're seeing. If you look at the full year Class 8 numbers, I think we're still below replacement levels. So we're catching up on that replacement level number. And then next year, I would anticipate that you are going to see overall fleet growth in this environment. So I think in the answer to your earlier question, we're still at below replacement levels with the new activity, even though it's moving up. So the overall market is still taking capacity out of the market in 2026 but as you get into 2027, you may get to a more neutral or even in a growth mode depending on the strength of the orders.

Can you put some numbers around that? Like what do you think is replacement like normal replacement demand? What do you think -- if I see a number above x, it signifies like maybe more growth?

Yes. It's hard for me to quote because everyone does these a little bit different. I would tell you, I think right now the last set of numbers I saw were about to 10% low replacement levels. So if you see a move up 5% to 10% above that, you get back to replacement levels. And then from there, you should be at replacement levels, whether you're talking Class 8, whether you're talking about Class 3 through 8, there's all different figures out there that I don't want to misquote. But that's kind of the order of magnitude, 5% to 10% below replacement levels for 2026. And then obviously if the order volume continues to move up, which it has been trending upward, I would expect that to crest that the neutral point into 2027.

Yes. it's interesting, right? Like it seems like kind of a sanguine sort of outlook on potentially getting back to growth mode. But you and I were just talking on the side about some of the challenges that the industry is facing, right, like from a cost perspective, things are getting much more expensive, inflation and then you have the regulatory landscape that's been changing. So talk about, I guess, feedback from some of the smaller carriers that work with you and their ability to grow. On one hand, we do see spot market signaling like lots of good opportunities to capitalize on these strong rates. But on the other hand, again, like all these costs increases are probably not easy to?

Yes, the big companies and the big customers we deal with are able to digest that better. I think the smaller players are looking for clarity in the marketplace and they're looking for some level of certainty around market conditions and the business environment. They're dealing with higher insurance costs. They're dealing with higher equipment costs they're dealing with the uncertainty in the overall economic space. So for them to make a commitment on signing up for a long-term lease makes it that much more difficult. So I think everyone's still looking for a little bit of clarity. The big players that have been delight to replace their fleets. I think those are the ones that we're seeing are making decisions around replacing their fleet or growing their fleet as they see business conditions start to improve.

And given that clarity is tough to come by, so a lot of unknowns out there around what's going to happen. Do you think that increases the value proposition of leasing?

I certainly think so. With regards to our value prop, not only -- I think the biggest thing for us is the costs keep going and rising for our customers. So if you're looking to operate your own transportation network and you're dealing with rising equipment cost, trying to find diesel mechanics to work on your trucks. And then you've got insurance costs moving up. Certainly, our dedicated offering provides a great opportunity for us to grow. And even in our leasing business, we continue to see opportunities there where you take some of that risk off the table, you're not putting forth capital to invest in your own fleet.

Okay. All right. Very good. Moving to the supply chain solutions. You've done a good job of increasing your exposure to maybe more asset light, the supply chain side. At the same time, this year, we also saw a lot of atoms on headlines, wanting to get big in asset-light supply chain. Is that something that like competes with your business? You said warehousing is a big part of that. Like are you worried about Amazon being more of a formidable threat?

Well, we're aware of the Amazon announcements. What's exciting for us on supply chain is that is a business that -- most of that business is highly customized engineered solutions that are tailored to that 1 customer. So we're dealing with large Fortune 50 type companies that are looking to really us execute their supply chain on their behalf. When you look at that business, we've been growing that business organically over the last 5 years, double digits. It's a scale business now. We just came out with the results. Our sales for the last 18 months or at record levels. So we haven't seen a slowdown in the opportunities and the value we create in the marketplace. We do have, as a part of our supply chain business, we do have an e-commerce fulfillment business, which that's where we would think an Amazon would come in and be an alternative to our customers. That's a much smaller peak supply chain business. A customer could elect to do the fulfillment through us. We'll put that business through the Amazon network and have Amazon be the supply chain arm for them. Most of the customers we serve there have elected thus far to do business with us as opposed to Amazon, but it's a very small portion of our supply chain portfolio overall. We haven't seen Amazon really did show up in our space as of yet. But clearly, that's something that we'll keep an eye on.

How small of a piece there?

So it's about a $400 million business. and supply chain overall now is closer to $5.5 billion, $6 billion. So that gives you an idea, it's just under 10% of the overall supply chain business.

Okay. That's helpful. All right. So let's consider maybe the broader dynamics in the spot market. I'm going to zoom out a little. I understand that a significant portion of your business, I think you said 90% is contractual right? So I'm curious how quickly you can capitalize on the improving rate environment and substantial gains we've been hearing about. We've been hearing some estimates double-digit increases like in ever have that significant of an impact at Ryder or stable business, so less volatile, but you will eventually see good solid increases. Just help us think through that.

Yes. Look, over time, there's always a trade-off between lower price and service and as low as on the flip side now, as we're seeing is higher price relative to service. So as the spot rate market continues to move up. contract rates move up as well and dedicated benefits from that. These are 3-year contracts. So it does take time for some of that pricing to funnel into our dedicated contracts over time. we should benefit from that, and we are seeing our sales so far this year have been tremendous on the dedicated side. So a lot of folks are trading price for service now that they could get a much better service at a competitive price relative to the spot market. So we are going to continue to see growth in our business there. The pricing impact will not be as dramatic as what you see in the spot rate market, right? It's a gradual increase as you highlighted, and it does take some time. Where we do see the impact of that is generally in our used vehicle sales activity. So you are seeing kind of the early innings of a recovery of used vehicle sales. With that spot rate market moving up -- we have a lot more people buying in to used equipment and getting started to participate in that market. And we should see continued healthy strong uplift in tractor used fecal pricing. -- rental benefits a little bit too from that as people look to start trucking operation. They may start first with a rental piece of equipment from us. get into the market, expand their business and then they'll look to sign off for a longer-term lease.

Can you just explain that bifurcation a little bit more on the rental versus the lease and jump how what portion of your business caters to either?

Yes. So we operate and manage about 230,000 vehicles. 30,000 of those vehicles are in our commercial rental fleet and many of our customers first began with no long-term commitment. They decided to just rent trucks on a short-term basis. As you see kind of these volatile conditions, typically, people will begin first with a rental truck to execute loads and could execute freight against that. Then as the market strengthens over time and they get a lot more confident with their business and the volumes longer term, they'll sign up for a 5-year lease commitment with Ryder and that's typically the pattern we see in our customer profile. They'll start with rental, no commitment. -- and then they'll go on to lease and then they'll go from lease into our dedicated solution.

So it's more like a gateway opportunity the rental business. And given that there's not as much of a commitment aspect, I'm sure the pricing is more favorable than.

Yes, the pricing in rental usually comes at a premium over lease for that reason, but it provides an adequate entrant point, as you said, for fleet operators to begin operating.

Okay. And then you made this point about how you're seeing tremendous sales in your leasing division. I guess, just talk about like what is driving that? I mean what's the feedback from your customers around that? -- what is the thing that's like -- is it just -- and is there more of like a private fleet aspect of that? Just give us a flavor here.

I think there's 2 components. So typically, the freight recovery happens through demand, and we usually see it come through our commercial rental business. And then there's a 6-month lag, which takes effect and we see our fleece sales start moving up. This 1 is unique. I think it is a supply side recovery, where you've seen capacity kind of taken out of the marketplace. So what we are seeing is a lot of deferred replacement activity and our end customers and private fleets have been holding to replace their fleet. And now they're coming in and saying, "Okay, I need to replace my fleet. That's one. Two, I do think private fleets are looking to in the spot rate environment looking to grow their fleet and if they could put more freight through their vehicles as opposed to using the for-hire carrier market for some of that excess freight capacity. I think they're bringing it in-house, and that's creating a little bit of opportunity for us as well.

Okay. And just you said that you're working through and striking contracts, albeit you're not going to see the same dramatic increase that we typically see. How far along are you in this process of touching some of the contracts to reflect kind of current conditions, albeit there is going to be more muted, but you are still going to see a nice increases. How much of the book have you repriced?

Yes. So. About 1/3 or just under 1/3 of the book to get you repriced each year. And each time we're looking at reflective of market conditions, what's happening in the driver market. The driver market is starting to see signs of tightening capacity where sign-on bonuses, we're paying more sign-on bonus than we were maybe 6 months ago. You are going to see follow-on effects, the knockoff effects is wage inflation on the driver side. We haven't seen that yet, but we do anticipate that to come. So all that gets factored into the economics as we reprice business. So you will see that continue to progress as that book of business comes up for replacement.