Ryder System, Inc. (NYSE:R) Q4 2022 Earnings Call Transcript

Ryder System, Inc. (NYSE:R) Q4 2022 Earnings Call Transcript February 15, 2023

Company Representatives: Robert Sanchez – Chairman, Chief Executive Officer John Diez – Executive Vice President and Chief Financial Officer Tom Haven – President of Global Fleet Management Solutions Steve Sensing – President of Global Supply Chain Solutions and Dedicated Transportation Calene Candela – Vice President, Investor Relations

Operator: Good morning and welcome to the Ryder System, Fourth Quarter 2022 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. Today’s call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin.

Calene Candela: Thank you. Good morning and welcome to Ryder’s fourth quarter 2022 earnings conference call. I’d like to remind you that during this presentation, you’ll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economics, business, competitive, market, political and regulatory factors. For a detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning’s earnings release, earnings call presentation and in Ryder’s filings with the Securities and Exchange Commission, which are available on Ryder’s website.

Presenting on today’s call are Robert Sanchez, Chairman and Chief Executive Officer; and John Diez, Executive Vice President and Chief Financial Officer. Additionally, Tom Haven, President of Global Fleet Management Solutions; and Steve Sensing, President of Global Supply Chain Solutions and Dedicated Transportation are on the call today and available for questions following the presentation. At this time, I’ll turn the call over to Robert.

Robert Sanchez: Good morning, everyone and thanks for joining us. I’m extremely pleased with the strong results delivered by the team in the fourth quarter and throughout 2022. Secular trends, favorable market conditions and continued execution on our balanced growth strategy enabled us to deliver record revenue and earnings in 2022. I’ll begin today’s call with an overview of our strategic priorities and the significant progress we made during 2022. John will then take you through our fourth quarter results, which exceeded our expectations again this quarter. We will also review our capital expenditures, cash flow and capital allocation priorities. I’ll then introduce our 2023 outlook, review our assumptions and discuss how we positioned the business to deliver on our targets over the cycle.

Let’s begin with slide four. In 2022, we made significant progress on our balanced growth strategy, which allows us to balance top line growth, with returns and free cash flow and ultimately increase shareholder value. Our key strategic priorities are focused on derisking and optimizing our business model, enhancing returns and free cash flow over the cycle, and taking actions to drive long term profitable growth. As it relate to derisking and optimizing the model, several years ago we lowered residual value estimates in FMS to historically low levels to reduce the reliance on used vehicle proceeds to achieve targeted returns. In late 2021 we began adjusting our DTS contracts in order to better insulate us from labor cost variability. At the time, driver wages escalated rapidly and by amounts greater than we could quickly recover under our existing contract terms.

We negotiated rate increases with our customers and also began to adjust contract terms to facilitate quicker, more efficient cost pass-throughs in the future. This is a multiyear initiative with approximately 40% of DTS revenue under new contract structure as of year-end. Another optimizing initiative was the exit of our sub-performing FMS business in the UK. We announced this decision in early 2022 and as of year-end, we substantially completed the exit of business operations and received approximately $400 million in proceeds from the sale of vehicles and properties. These proceeds have been redeployed to higher return opportunities. We also executed important initiatives to increase returns and free cash flow. The pricing initiatives in dedicated and supply chain to address higher labor and subcontracted transportation costs, improve returns in both segments in 2022.

In FMS we surpassed our $100 million annual maintenance cost savings targets with our multiyear initiative as anticipated. Our lease pricing initiative remains a strong contributor to higher returns in FMS. As of year-end 2022, 60% of our lease portfolio had been priced at higher returns. An additional 20% of the portfolio has already been contracted under the new pricing model, with vehicles expected to be in service over the next 12 months or so. This initiative is expected to be fully implemented by the end of 2025. With an estimated total annual benefit of $125 million upon completion. Lease growth in the UK inflicted positive in 2022 with an increase of 1,300 vehicles. Accelerating Supply Chain and Dedicated growth is a key driver for achieving long term profitable growth.

54% of Ryder’s 2022 revenue was from Supply Chain and Dedicated, up from 37% in 2015, reflecting secular trends in our initiatives to accelerate growth in these higher return businesses. Supply Chain and Dedicated also generated strong sales of new long term customer contracts in 2022, which we expect will continue to contribute to profitable growth. Our strong balance sheet enables us to fund – enables us to fund organic growth as well as strategic supply chain acquisitions. In 2022 we executed several targeted acquisitions that support our strategy to accelerate growth in our supply chain business. Whiplash was the largest acquisition in 2022 and significantly grew our e-fulfillment network and scalable e-commerce and omni-channel fulfillment solutions.

Our acquisition of Baton, a tech startup, enhanced our new product and technology development capabilities. Our strong balance sheet also enabled us to return over $680 million to shareholders through three share repurchase programs and through quarterly dividends. Overall, we demonstrated significant progress on our balance growth strategy with plenty of opportunity ahead for increased returns, cash flow and shareholder value. I’ll now turn the call over to John to review our fourth quarter results.

John Diez: Thanks, Robert. Total company results for the fourth quarter are on page five. Operating revenue was $2.4 billion in the fourth quarter up 14% from the prior year, reflecting revenue growth in all segments and supply chain acquisition. Comparable earnings per share from continuing operations were $3.89 in the fourth quarter, up from $3.52 in the prior year, driven by higher earnings and dedicated rental and supply chain, partially offset by lower used vehicle sales. Return on equity, our primary financial metric was 29% for full year 2022, reflecting ongoing truck capacity constraints in the market, as well as contained benefits from our initiatives to increase returns. 2022 free cash flows decreased to $921 million from $1.1 billion in the prior year, reflecting higher planned capital expenditures, partially offset by higher used vehicle sales process.

Free cash flow in 2022 includes approximately $400 million from the sale of vehicles and properties in the UK, as part of the exit of that business. Turning to FMS results on page six, fleet management solutions operating revenue increased to 2% reflecting 8% higher rental revenue driven by higher pricing. Fleet management operating revenue increased globally despite a 4% negative impact from the wind down of the UK business. Rental pricing increased 6%, primarily due to higher rates across all vehicle classes. Pre-tax earnings in fleet management were $255 million, unchanged from the prior year, despite lower gain from $20 million and inflationary cost pressures. These headwinds were offset by year-over-year earnings benefits from declining depreciation related to prior residual value estimate changes and higher rental results.

Rental utilization on the power fleet remains strong at 82% on a larger fleet. Fleet management EBT as a percent of operating revenue was 19.3% in the fourth quarter and 20.2% for the full year, both well above the segments long term target of low double digits. Excluding all used vehicle gains in the quarter, fleet management EBT percent was still in the segment’s low double digit target range. Page seven highlights used vehicle sales results for the quarter. Used vehicle market conditions remain relatively strong, reflecting tight vehicle availability amid moderating freight activity. Compared with the prior year, used tractor proceeds in North America declined 6%, whereas used truck proceeds were 4% higher. On a sequential basis, proceeds for used tractors and trucks, both declined by a lower amount than we anticipated.

In fact, the proceeds decrease 2% and truck proceeds decrease 7%. During the quarter we sold 6,800 used vehicles from which 2,000 related to the exit of our UK business. Excluding the UK sales activity, used vehicles sold were down by approximately 300 vehicles versus the prior year and down 200 vehicles sequentially from the third quarter. Our used vehicle inventory was 4,300 vehicles at year-end, below our target range of 7,000 to 9,000 vehicles. Although used vehicle pricing declined, it remains well above residual value estimates used for depreciation purposes. For your information, slide 22 in the appendix provides historical sales proceeds as a percent of original cost, incurred residual value estimates for both used tractors and trucks.

Turning to supply chain on page eight. Operating revenue versus the prior year increased 44%, primarily reflecting the Whiplash acquisition and organic revenue growth of 22%, driven by higher pricing, new business and higher volumes. All industry verticals generated double digit organic revenue growth for the quarter. Supply chain EBT increased 67% primarily reflecting higher pricing adjustments as well as new business. These benefits were partially offset by a $20 million asset impairment charge related to the early termination of a customer distribution center. Supply chain EBT as a percent of operating revenue was 4% in the quarter, up from the prior year, but below the segment’s high single digit target range. Moving to Dedicated on page nine, operating revenue increased 10% due to higher pricing and increased volumes.

Dedicated EBT increased 150%, primarily due to pricing adjustments to address unusually high labor costs, as well as benefits from improved market conditions for professional drivers. Dedicated EBT as a percent of operating revenue of 9.4% was in line with the segment’s high single-digit target. Turning to slide 10. 2022 lease capital spending of $1.8 billion was up year-over-year due to increased lease vehicle replacements for expiring lease contracts. Our 2023 forecast of $2.4 billion reflects higher lease replacement and growth capital. We expect the lease fleet to be up, 3,000 to 4,000 vehicles at year-end. 2022 rental capital spending of $541 million declined versus prior year, reflecting more planned investments. In 2023 rental capital spending is expected to decline further to $400 million as we’re expecting greater conditions to normalize.

Our average fleet is anticipated to be down slightly from 2022, and our ending rental fleet is expected to be down by 4% or 1,600 vehicles. We continued to increase capital spending on trucks versus tractors as trucks continue to benefit from relatively stable demand and pricing trends, and the asset class tends to be a little less volatile during a downturn. Our full year 2023 forecast for gross capital expenditures is $3 billion and primarily reflects higher lease replacement and growth capital versus 2022. We expect proceeds from the sale of used vehicles of approximately $800 million in ’23. The low prior year which includes proceeds related to the UK exit. Our full year 2023 net capital expenditures are expected to be $2.2 billion. Turning to slide 11, the trajectory of our cash flow continues to improve over time, reflecting growth in our contractual supply chain Dedicated and Lease businesses, which comprise approximately 85% of Ryder’s operating revenue.

Photo by Yassine Khalfalli on Unsplash

In 2022, our operating cash flow grew to $2.3 billion, and we expected to increase the $2.4 billion in 2023. Our free capital profile has changed significantly since the implementation of our balanced growth strategy. The negative free cash flow generated in 2019 reflected higher growth objectives for lease at the time. From 2024 lower targeted lease growth under the balanced growth strategy, as well as COVID effects and OEM delays resulted in lower capital spending and higher free cash flow. Proceeds from the exit of the UK FMS business also benefited free cash flow in 2022. Summary on the right side of the slide illustrates the strong free cash flow generated by the business prior to investing in fleet growth and adjusting for the UK exit proceeds in 2022.

2023 we expect to generate $200 million in free cash flow, and prior to investing in growth capital, this number is expected to be approximately $600 million. Proceeds from the sale of used vehicles are expected to be flat year-over-year, reflecting higher volumes of units to be sold due to increased replacement activity in 2023, offset by lower pricing. Our capital allocation priorities continue to support our strategy to drive long term profitable growth. Our top priority is to continue to invest in organic growth. This includes replacing and growing our ChoiceLease fleet over time, which draws in a large amount of capital each year. We also plan to continue to invest in technologies, including RyderShare, our customer facing visibility platform and other digital technologies to drive accelerating growth in Supply Chain and Dedicated.

We’ll continue to pursue targeted acquisitions, which have been a key contributor to our accelerate growth and supply chain. Acquisitions have helped transform our supply chain business, both in terms of expanding capabilities, as well as through balancing our vertical mix. Our balance sheet remains strong, and we have ample capacity to fund organic growth, targeted acquisitions as well as return capital to shareholders through share repurchases and dividends. I’ll now turn the call back over to Robert to share his key highlights from full year 2022 results and introduce our 2023 forecast.

Robert Sanchez: Thanks, John. Slide 12 provides key highlights from our full year 2022 results. Secular trends, including accelerated demand for resilient supply chains continue to drive companies to pursue long term transportation and logistics outsourcing solutions. These secular trends, along with favorable market conditions in our initiatives drove operating revenue up 19%, reflecting higher revenue in all segments and increased comparable EPS to $16.37 up 71%. We generated strong ROE of 29%, reflecting favorable market conditions in FMS and continued benefits from our returns initiatives. Looking ahead, we believe our solid execution in 2021 and momentum from our multiyear initiatives positioned us well for 2023. Slide 13, highlights key aspects of our 2023 outlook.

In terms of market assumptions, we expect secular trends to continue to favor transportation and logistics outsourcing. We expect macroeconomic and freight conditions to soften in 2023, and lower the demand for used vehicles in rental. We expect OEM production constraints and delivery delay to continue throughout 2023, delaying the revenue and earnings impact from new leases signed. We expect lease regrowth in our target range, although dependent on OEM delivery schedules. Our lease sales backlog remains at approximately 11 months, and we’re not expecting deliveries until 2024 for most leases signed as of today. We were encouraged in the fourth quarter by improving market conditions for professional drivers and anticipate incremental improvement in 2023.

Inflationary costs, including higher interest rates are also expected to continue. In terms of financial forecast for 2023, operating revenue is expected to grow approximately 4% as strong supply chain and dedicated growth is partially offset by the impact of our UK exit, OEM delays and normalizing rental conditions. Comparable EPS is expected to remain strong and be between $11.05 and $12.05 in 2023, reflecting higher result in supply chain and dedicated and normalizing conditions in used vehicle sales and rental. ROE is expected to be between 16% and 18%, in line with our long term target of high teens. Free cash flow is expected to be around $200 million, down from the prior year, primarily due to higher planned investment in lease and prior year proceeds from our UK exit.

Overall, we expect earnings to remain strong in 2023, reflecting our initiatives to increase returns and drive profitable growth through the cycle. Slide 14 outlines our key segment outlook highlights. We expect the impact of our UK exit, OEM delays and normalized rental market conditions to pressure operating revenue growth in FMS. FMS EBT as a percent of operating revenue is expected to be in the segment’s low double digit target range, reflecting benefits from our multiyear lease pricing and maintenance cost savings initiatives, as well as normalizing conditions in used vehicle sales and rental. Supply chain operating revenue growth is expected to be in the segment’s low double digit target range, driven by secular trends in our initiatives.

Supply chain EBT percent is expected to approach the low end of the segment’s high single digit target range, as growth and pricing actions are partially offset by amortization of intangibles from recent acquisitions and dedicated operating revenue growth in EBT as a percent of operating revenue are expected to be at the target, reflecting new contract wins and pricing actions. In addition, we expect to continue to make strategic investments in innovative technologies and new product development, primarily to accelerate profitable growth in supply chain and dedicated and leverage disruptive trends in transportation and logistics. Our forecast also assumes execution of the new 2 million share discretionary repurchase program announced this morning.

Overall, we expect strong earnings generation in 2023 despite weakening economic conditions. Slide 15 provides a chart outlining the key changes from 2022 to reach the high end of our 2023 comparable EPS forecast. The largest EPS headwinds are from the reduced gains on used vehicles sold and lower rental results, both reflecting the impact of a slowing macroeconomic and freight environment on these transactional businesses. Lower gains are expected to reduce EPS by $3.85. We expect used vehicle pricing to be below prior year and expect it to decline sequentially throughout the year. Used vehicle sales volumes are expected to increase approximately 30%, reflecting a higher number of leases reaching the end of their term. Inventory levels are also expected to increase, but remain below our target range of 7,000 to 9,000 vehicles.

Lower rental utilization on the smaller fleet is expected to reduce EPS by $1.95. Rental utilization is expected to be in our target range of mid to high 70’s, but lower than the 80% plus levels seen in 2022. Incremental strategic investments are expected to reduce EPS by $0.40. These investments continue to be focused on addressing disruptive technologies in transportation and logistics, and providing a foundation for future revenue and earnings growth. Non-recurrence of prior year earnings from our exited FMS business in the UK will reduce earnings per share by $0.17. This decline does not include gains from the sale of UK assets and exit related costs, which were excluded from comparable EPS results in 2022. FMS contractual, which reflects ChoiceLease and SelectCare is expected to contribute $0.10 to EPS, primarily reflecting higher lease prices.

We expect revenue and earnings growth and lease to continue to be limited in 2023 by ongoing OEM delivery delays. Due share count from share repurchase activity is expected to increase EPS by $0.85. This primarily reflects the impact from 2022 progress. The largest expected benefit in EPS in 2023 is from profitable growth in supply chain and dedicated. They are expected to increase EPS by $1.10. This increase reflects ongoing secular trends, as well as our initiatives to accelerate growth and increase returns in these higher return businesses. The spring, the high end of our comparable EPS forecast to $12.05, with a range of $11.05 to $12.05 for the year. Included in our 2023 forecast EPS is approximately $1 of outsized gains and rental. Based on our forecast, core earnings generated primarily by our contractual lease, dedicated and supply chain businesses, as well as normalized gains and rental results are estimated to be approximately $11 in 2023.

Turning to page 16, we’re forecasting comparable EPS of $11.05 to $12.05 versus the $16.37 in 2022. Please note that our full year GAAP EPS forecast includes approximately $3.75 for a cumulative currency translation charge related to the exit of our FMS UK business. We’re also providing a first quarter comparable EPS forecast of $2.75 to $3 versus the prior year of $3.59. On page 17, looking ahead into 2023 and beyond, we expect incremental benefits from key multiyear strategic initiatives. Supply chain and dedicated, we expect ongoing secular trends in our sales and marketing initiatives to drive new opportunities for profitable growth. Our actions to strengthen dedicated contracts and recover inflationary costs in both dedicated and supply chain will contribute to higher returns.

We expect incremental benefits as we price our remaining lease portfolio at higher returns upon renewal. We are targeting 2025 to complete this initiative and estimated cumulative annual benefits will be $125 million. We exceeded our $100 million annual savings target from our multiyear maintenance cost savings initiative in 2022 and have additional initiatives in the pipeline to drive further efficiencies. We expect to pursue additional targeted accretive acquisitions in order to expand our capabilities and add supply chain industry verticals. Our strong balance sheet continues to provide us with capacity to return capital to shareholders through repurchases and dividends. Turning to slide 18, we believe Ryder is well positioned to increase shareholder value.

It demonstrated strong execution on our balanced growth strategy, which has meaningfully contributed to our record results in 2022 and provides us with strong operating momentum as we move forward. We see significant opportunity for profitable growth supported by secular trends and our operational expertise €“ our operational expertise and ongoing momentum from multiyear initiatives. Our strategic initiatives are focused on achieving our long term financial targets, including high teens ROE over the cycle, as well as continuing to transform the business so that we are positioned to outperform prior cycles. We remain committed to investing in products, capabilities and technologies that will deliver value to our customers and ultimately our shareholders.

That concludes our prepared remarks. Please note that we expect to file our 10-K later today. We had a lot of material to cover today, so please limit yourself to one question each. If you have additional questions, you’re welcome to get back in the queue, and we’ll take as many as we can. At this time I’ll turn it over to the operator.

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Q&A Session

Operator: Thank you. And our first question comes from Jordan Alliger. Please go ahead.

Jordan Alliger: Yeah hi! Maybe I just want to talk about supply chain a little bit. Can you talk a little bit about you know the inbound proposals you might be getting, you know the pipeline for that in the slowing economy. You know are you still seeing the pickup. Are you still seeing it pretty robust, because it meets the supply chain security. How it may dovetail into the whole near sharing concept which we seem to be hearing more about, especially for higher end manufacturing. And just in general, what sort of verticals do you think are seeing the most demand? And then just finally, maybe just what was the impairment about, the $20 million. And is it more reflective to add that back, thinking about how it did for the quarter. Thanks.

Robert Sanchez: Yes, thanks Jordan. Let me give you €“ I’ll give you some high level stats, and then I’ll hand it over to Steve to give you some more color around where we might be seeing it. But listen, we’re seeing certainly the secular trends benefit of more people wanting to outsource, more companies wanting to outsource, supply chain activities continues to be strong. Our pipeline as an example is up 6% year-over-year, and last year we had a very strong sales year. Large deals are up 60%, so these are major multinational corporations that are looking for help on supply chain activity, and also I would say picking up more of the e-commerce type business that we’ve got now with e-comm and also with Ryder Last Mile. So that’s what we’re seeing.

As it relates to the impairment, that was a €“ what I would say is a bit of an anomaly in terms of the types of customers that we contract with. This was a customer we’re doing distribution management for them. Their credit was a little bit softer than what we normally would go with. The equipment was a little bit more specialized. So we’ve taken that impairment to account for the redeployment of that equipment. There’s still a little bit of exposure. There’s still some exposure going into this year, and that all depends on how this customer makes out as far as credit. But we built that in €“ just so you know, we have built that into the forecast for the full year that we gave you. So let me hand it over to Steve to give you a little bit more color around the pipeline and the types of customers that we’re seeing.

Steve Sensing: Thanks, Robert. Jordan yeah, we’re again €“ you know kind of give you a recap of last year, another record sales year in supply chain, so that’s really two straight years in a row. Pipeline remains very healthy up year-over-year, double digit percentage. Now I think that’s really an effort of our continued, ever better marketing campaign, certainly our investment in the sales team and really the deep vertical industry expertise of our team. So a lot of our customers are expanding services and capabilities. I think I’ve shared with you guys before, 70% of our customers come to us for more than one service or capability. So that continues to be very strong. And then on the near shoring and onshoring front, we built a great business down in Mexico, probably one of the top providers there.

Certainly one of the top cross border service out there. So we’ve got our eye on the ball there. We’re expanding in Mexico, which is feeding into the U.S. So all positive signs remain at this point.

Jordan Alliger: Thank you.

Robert Sanchez: Thanks Jordan.

Operator: And our next question is going to come from Jeff Kauffman. Please go ahead.