RYDER SYSTEM INC Q3 FY2024 earnings call

• Ryder delivered solid results despite freight recession and weak used vehicle sales/rental markets. Contractual earnings growth from business model transformation and balanced growth strategy drives outperformance.
• Adjusted ROE of 16% over trailing 12-month period is in line with expectations. Board authorized new $2 million share repurchase program; year-to-date $382 million returned to shareholders via repurchases and dividends.
• 2024 comparable EPS expected $11.90 - $12.10, double 2018's $5.95. ROE expected 16% - 16.5%, above prior cycle peak. Revenue mix shifted towards Supply Chain and Dedicated, with supply chain three-year growth rate expected ~20%. Operating cash flow expected $2.4 billion in 2024, 40% higher than 2018.

Fleet Management Solutions

• Operating revenue increased 1% due to higher ChoiceLease revenue, partially offset by lower rental demand. Pretax earnings were $132 million, down year-over-year. Rental utilization on the power fleet was 71% compared to 75% in the prior year. Fleet pricing declined slightly by 1% due to a shift towards light-duty trucks. Used vehicle gains were lower due to lower volumes and pricing.

Used Vehicle Sales

• Compared with prior year, used tractor proceeds declined 22% and used truck proceeds declined 19%. On a sequential basis, proceeds from used tractors decreased 12%, and proceeds for trucks increased 4%. Sold 4,700 used vehicles, with used vehicle inventory of 9,100 at quarter end, shifting towards trucks with more favorable pricing trends.

Supply Chain

• Operating revenue increased 10% driven by acquisitions. Earnings increased 14% or $12 million, primarily reflecting stronger omni-channel retail performance and lower overhead spending. EBT as a percent of operating revenue was 9.3% in the quarter.

Dedicated

• Operating revenue increased 49% reflecting the acquisition of Cardinal Logistics. EBT increased 31% or $8 million, reflecting improved operating performance and acquisition benefits. EBT as a percent of operating revenue was 7.5% in the quarter.

Revenue contribution: Approximately 60% of 2024 revenue expected to come from Supply Chain and Dedicated businesses compared to 44% in 2018.

• Fourth quarter expected year-over-year earnings growth, with comparable EPS $3.32 - $3.52. Full year 2024 comparable EPS range $11.90 - $12.10 (adjusted from prior $11.90 - $12.40). ROE unchanged at 16% - 16.5%.
• Full year 2024 operating cash flow unchanged at $2.4 billion. Free cash flow range $150 million - $250 million. Fourth quarter outlook doesn't assume freight improvement in 2024, with top end assuming seasonal rental demand uptick.

• Ongoing freight recession and weak used vehicle sales/rental markets.
• Economic uncertainty causing customers/prospects to delay decisions and downsize fleets, impacting near-term contractual sales.
• Competitive pressures in the market.

Q: Good morning, I know you sort of expect to hit the full run rate on the lease repricing in 2025. But I am curious, given the ongoing freight slowness out there. You maybe talk to your lease renewal experience broadly, both on new business, you might be bringing in new customers versus renewals? And then you mentioned, I think, this private fleet. And I guess I don’t know if it’s the same question, but we’ve heard that private fleets have been increasing at the expense of four higher fleets. I’m wondering if that works to the benefit of a leasing company like yourself or these retailers who might be expanding their own capacity, so to speak, leasing versus owning what you think, could that be some tailwind.

A: Thanks, Jordan. Yes, I think first question around pricing and the pricing benefits, we do expect to get the full – complete the full benefit of the price – of the repricing of $125 million. We’re probably looking at next year, probably the final $20 million of that initiative. As it relates to renewals and new customers, yes, I think I’ll let Tom give you a little bit more color. But we are seeing our base customers, which are primarily private fleets not growing their fleets as much as we had seen over the last several years. I think that is a reflection of maybe what you’re hearing where you’re hearing the private fleet really grew their fleets. Now that the vehicles have come in, there’s less of a need to add more and maybe even some downsizing that we’re seeing with existing customers as they rightsize their fleets. But long-term, as private fleets continue to grow, we should see some benefits. But I’ll let Tom give you more color on what we’re seeing currently with renewals. The majority of our lease customers, just to be clear, our private fleet as opposed to for hire.

Q: Great. Thanks. Good morning, everyone. Just maybe as a follow-up on that conversation. Can you talk a little bit – I know it’s early days here for fourth quarter, but what in terms of seasonality you guys have been seeing so far, if any, and kind of how that plays into kind of delivering the potentially higher end of the 4Q guidance range?

A: So seasonality and rental that we see. Tom, you want to give them color so far in the month? Yes. So like Robert mentioned, in Q3, we did see an uptick in demand, but that uptick in demand was when you compare to previous years, just seasonality. In fact, it was on the lower end of a seasonality uptick from Q2 to Q3, as we’re sitting here a few weeks into the fourth quarter, we haven’t seen anything other than seasonal uptick. There’s been no signs of recovery yet here in the fourth quarter, and we’re certainly not expecting that to happen here in the fourth quarter other than the normal seasonal holiday increase that we would typically get from a demand perspective with Thanksgiving and Christmas. That’s all we’re expecting is that normal seasonality here in the fourth quarter.

Q: Thank you very much. Well, congratulations, everybody. I want to focus on the tail wagging the dog here. I just kind of have to admit questions. I understand what’s going on with ChoiceLease and private fleets. That part I get. But SelectCare vehicles have been dropping at about a 5% rate for a couple of quarters now. And I always thought outsourced maintenance was kind of part of the pitch to a lot of these fleets. And while we’re talking about SelectCare, rental fleet, utilization still barely above 70%, and that would imply we want to reduce the fleet, but your ratio of rental fleet to full service lease vehicles is about 20% below normal right now. So do we not really take down the rental fleet despite the low utilization? Do we just kind of wash through that? So SelectCare and rental fleet. Those are my questions.

A: So I’ll let Tom give you the color on SelectCare. I’ll tell you on the rental fleet, though, I think that it’s a good point. We have – historically, we’ve really brought the rental fleet down pretty significantly. And then we’ve been slow to get it back. And I think in many ways, have missed out on a lot of the rental upturn even have had customers on an upturn that we haven’t had vehicles for. So we are hanging on to these vehicles and allow utilization to be maybe a few percentage points lower than it would otherwise be. As we wait for this upturn to come because we want to make sure we have the vehicles to make that happen. And it gives us an opportunity to really leverage and get more earnings as the upturn comes. So you’re making a good point on the utilization level. But again, that’s purposeful and really just preparing us for the upturn and giving us an opportunity to really leverage those units and get some additional earnings as we come up and take care of more customers. I’ll let Tom give you some color on SelectCare. And maybe just one other point on the rental fleet. We are down 7,000 units from the peak rental fleet from two years ago. So we have brought that fleet down quite a bit. But like Robert said, we do want to have fleet available for when that inflection point happens and the demand comes back. So we want to take advantage of that. Obviously, hopefully, that will happen in 2025. On the SelectCare fleet, this question came up last quarter as well, and I think we’ve seen this trend all year. The first point I’ll make is that margins are actually up sequentially and up year-over-year. So I wanted to make that point. There’s a subset of the SelectCare fleet that is very low revenue, very, very low margin, and that’s what we’re seeing come out of the fleet. We’ve seen that for two quarters. And I would tell you that we’re expecting that to happen again in Q4, so don’t be surprised by that. But I would just tell you that the units that are coming out are very low impact, low revenue, low margin.

Q: Hey, good morning, everyone. Maybe a follow-up on the tractor price backdrop discussion you guys are having. So it sounds like你 would still have gains, but maybe the gains are lower. And I think the release noted lower volume and pricing headwinds in the quarter. And the view the inventory is declining, I guess when we look forward, would you expect the gains on those sales to continue to sequentially decline in the coming quarters? And then relating that to cash flow, I don’t think your free cash flow guidance changed and the proceeds from asset sales were maintained despite lower volume of sales and lower pricing on the sales. Can you help us bridge the gap on the how free cash flow guidance stayed the same, given that backdrop on the asset sales?

A: Yes. I think from a gain standpoint, you should see it kind of hover around where it’s been. It’s been in that I think it was $15 million this quarter, it was $20 million a couple of quarters ago, somewhere in that range, I think as we go into Q4, assuming pricing continues to sort of look for a bottom, which is kind of what we’ve been seeing, it’s still down. If you take out some of the anomalies, it’s been down sequentially now single-digit for the last three quarters. So looking for a bottom, not quite there yet. I think if you look at some of the forecasts from some of the groups that follow this, they’re expecting some type of an uptick as we get into 2025 just by measure of the amount of freight moving a number of trucks on the road. So hopefully, that’s coming in early, and we get that early. But as you go into this quarter, I think it’s more of what we’ve seen in the last couple of quarters. And in terms of free cash flow... Yes, Daniel, this is John. Just the free cash flow, as you heard from Robert, the movements sequentially, actually truck pricing was a little bit better with tractors coming in a little bit lower sequentially. The volumes were a little bit softer. That was probably more the impact, I would say, this quarter on the cash flow. But within the margin of our $100 million range that we had given back in Q2. As a result, we didn’t think we needed to adjust for that because we do see kind of market conditions kind of bouncing along the bottom at this point in time.