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

Ryder System, Inc. (NYSE:R) Q4 2023 Earnings Call Transcript February 14, 2024

Ryder System, Inc. beats earnings expectations. Reported EPS is $2.95, expectations were $2.75. Ryder System, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Ryder System Fourth Quarter 2023 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 2023 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 economic, business, competitive, market, political and regulatory factors. More 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 Fleet Management Solutions, and Steve Sensing, President of Supply Chain Solutions and Dedicated Transportation Solutions, 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 proud of our team for delivering strong results again in the fourth quarter and throughout 2023. Our operating performance continues to demonstrate that the transformative changes we’ve made to derisk our business model, enhance returns and free cash flow and drive long-term profitable growth have significantly increased the earnings and return profile of the business versus prior cycles. I’ll begin today’s call by sharing some key insights from 2023 and providing you with a strategic update. John will then take you through our fourth quarter results, which exceeded our expectations again, reflecting better performance in our Supply Chain automotive business, lower truck maintenance costs and a lower tax rate, partially offset by volumes in omnichannel retail and rental demand.

I’ll then review our 2024 outlook and discuss how we are positioning the business for the cycle upturn. Let’s turn to Slide 4. In 2023, we delivered strong returns during a freight cycle downturn and as conditions in used vehicle sales and rental weakened throughout the year. Despite this backdrop, we generated ROE of 19%, which is in line with our target range of high teens over the cycle and reflects the strength of our contractual business and the actions we’ve taken to improve the return profile of our business. Comparable EPS of $12.95 was above our initial full year forecast, reflecting better-than-expected performance in used vehicle sales, lower truck maintenance costs, improved results in our supply chain automotive business and a lower tax rate.

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Q&A Session

These benefits were partially offset by weaker-than-expected volumes in omnichannel retail and lower-than-anticipated rental demand. Comparable EPS in 2023 was significantly above the $5.95 of comparable EPS generated in 2018 prior to our business transformation, highlighting the impact of our balanced growth strategy. Operating revenue grew 2%, reflecting contractual growth of 7%, partially offset by lower rental and the impact from the exit of our UK business. The business generated strong operating cash flow of $2.4 billion, reflecting contractual growth, partially offset by lower rental demand. We continued to return capital to shareholders through buybacks and dividends. During 2023, we repurchased 3.6 million shares. Since 2021, we have repurchased approximately 16% of our shares outstanding.

We also increased our dividend by 15% in mid-2023. We’re encouraged by the strong returns generated in 2023 by our transformed business model and believe that executing on our balanced growth strategy is enabling us to deliver higher highs and higher lows over the cycle. On Slide 5, I’ll provide some key updates. Executing on our balanced growth strategy has increased our earnings and return profile versus prior cycles, and has provided us with additional opportunity for long-term value creation. Further advancing our strategy to accelerate profitable growth in our supply chain and dedicated businesses, we recently closed on two strategic acquisitions. On November 1, we completed the acquisition of Impact Fulfillment Services, or IFS, which added co-packaging and co-manufacturing capabilities in SCS.

Earlier in the month, we completed the acquisition of Cardinal Logistics, a leading provider of customized dedicated transportation solutions. I’ll provide more insight on the Cardinal transaction shortly. Our initiatives remain focused on enhancing returns. Adjusted ROE of 19% for the trailing 12-month period is in our target range of high teens over the cycle and reflects normalizing market conditions in used vehicle sales and rental as well as our initiatives. These initiatives include pricing and cost recovery actions, which benefited returns in all segments. FMS and DTS achieved target EBT margins for the fourth quarter as well as full year 2023, reflecting initiatives to increase returns as well as execution on our enhanced asset management playbook.

Our strong balance sheet and solid investment-grade credit rating continue to provide us with ample capacity to pursue targeted acquisitions and investments as well as return capital to shareholders. During the quarter, we repurchased 420,000 shares under our discretionary repurchase program. We currently have authorization for a 2 million share discretionary repurchase program as well as a 2 million share anti-dilutive program with approximately $3.5 million in total shares remaining under these programs. Our full year 2023 free cash flow was negative $54 million, below our most recent forecast of approximately positive $100 million, primarily due to higher year-end working capital needs. Turning to Slide 6. I am very proud to share the results of this slide because they clearly illustrate the increased earnings and return profile resulting from the transformative changes that we’ve made to the business.

In 2018, prior to the implementation of our balanced growth strategy, we generated comparable EPS of $5.95 and ROE of 13%. This was during peak rate cycle conditions. At that time, the majority of our $8.4 billion in revenue was from FMS. Supply chain revenue had a three-year growth rate of 16% and operating cash flow was $1.7 billion. Now let’s look at Ryder today. In 2023, during a freight cycle downturn, our transformed business model generated meaningfully higher earnings and returns than it did during the 2018 peak. Comparable EPS was $12.95 compared to $5.95 in 2018, and ROE was 19%, well above the 13% generated in 2018. Through organic growth, strategic acquisitions and innovative technology, we have shifted our revenue mix towards supply chain and dedicated with 56% of 2023 revenue coming from these asset-light businesses compared to 44% in 2018.

Supply chain three-year growth rate has also increased to 24%. As a result of profitable growth in our contractual lease, supply chain and dedicated businesses, operating cash flow grew from $1.7 billion in 2018 to $2.4 billion this year. As shown here, the business is outperforming prior cycles even when comparing prior peak to current downturn conditions. I’m encouraged by the results of our transformation thus far, and I’m confident that our solid execution in 2023 and momentum from multiyear initiatives positions us well for 2024 and beyond. Moving to Slide 7. On February 1, Ryder completed the acquisition of Cardinal Logistics, a leading provider of customized dedicated transportation solutions. This acquisition further advances our balanced growth strategy by accelerating profitable growth in our dedicated business.

DTS Growth is an important part of Ryder’s strategy to create shareholder value. Secular trends, including the driver shortage and demand for business intelligence and freight visibility technology such as RyderShare continue to drive private fleets to pursue an outsourced dedicated transportation solution. In addition, our dedicated business has demonstrated a resilient earnings profile over the cycle. During the most recent freight downturn as well as during prior cycles, dedicated earnings held up well, benefiting from favorable driver market conditions and reduced turnover costs as well as our initiatives. Finally, our dedicated business benefits from sales and operational synergies with FMS. Upselling FMS pipeline and lease customers to dedicated has been the largest driver of new sales activity for DTS for some time.

DTS also benefits from access to equipment, asset management and maintenance services from FMS, enabling DTS to deliver increased value to their customers and drive incremental cost savings. Building upon this foundation, Cardinal’s national footprint and complementary contractual services provides us with opportunity to build scale and density in our dedicated transportation network. With this, we’ll gain greater economies of scale, and we’ll have even more flexibility to optimize resources across our network. Turning to Slide 8. The integration process is already underway. On an annualized basis, the transaction is expected to add approximately $1 billion in total revenue and approximately $800 million in operating revenue, which excludes fuel and subcontracted transportation.

Approximately 85% of Cardinal’s operating revenue is from their dedicated transportation business and will be reflected in DTS. Increasing the scale and density of our dedicated business is expected to drive operating leverage and synergies. Approximately 15% of Cardinal’s operating revenue is generated by their freight brokerage, contract logistics and last-mile delivery businesses, which will be reflected in SCS. FMS will provide maintenance services for the Cardinal fleet and we expect meaningful cost synergies as we begin servicing the fleet as well as procuring and disposing of Cardinal vehicles. Cardinal owned and leased vehicles will be provided to DTS via intersegment equipment leases with contractual maintenance agreements consistent with other vehicles operated by DTS.

Intersegment lease and maintenance revenue is eliminated upon consolidation. We expect the transaction to be marginally accretive in 2024 and more meaningfully accretive in 2025 after achieving synergies and completing integration efforts. We’re very excited about the opportunities ahead and believe that dedicated will continue to be an important driver of value creation for Ryder. The team is focused on a successful integration and realizing the synergies and benefits we are confident are achievable. I’ll turn the call over to John to review our fourth quarter performance.

John Diez: Thanks, Robert. Total company results for the fourth quarter on Page 9. Operating revenue of $2.4 billion in the fourth quarter, up 2% from the prior year primarily reflects contractual revenue growth in all three segments, partially offset by lower rental revenue. Comparable earnings per share from continuing operations were $2.95 in the fourth quarter, down from $3.89 in the prior year, reflecting expected weaker market conditions in used vehicle sales and rental partially offset by improved supply chain results. Return on equity, our primary financial metric, was 19%, in line with our high-teens target over the cycle. The year-over-year decline reflects weakening used vehicle sales and rental market conditions, partially offset by our returns initiatives.

Full year free cash flow decreased to negative $54 million from positive $921 million in 2022 due to higher capital expenditures and lower used vehicle sales proceeds. Normalized timing of OEM tractor deliveries contributed to higher CapEx in 2023. Prior year included $400 million in proceeds from the UK exit. Turning to fleet management on Page 10. Fleet Management Solutions operating revenue decreased 4% due to lower rental demand partially offset by higher contractual revenue from ChoiceLease and SelectCare. Pretax earnings and fleet management were $134 million and down year-over-year as anticipated. Prior year FMS results largely reflect the impact from elevated market conditions in used vehicle sales and rental. Lower used vehicle pricing in the quarter was partially offset by higher sales volumes.

Rental utilization on the power fleet of 75% was at the low end of our mid- to high 70s target range for the quarter and down from an unusually high level of 82% in the prior year. Lower utilization was partially offset by 1% increase in power fleet pricing. Despite a weaker used vehicle sales and rental environment, fleet management EBT as a percent of operating revenue was 10.6% in the fourth quarter, within the segment’s long-term target of low double digits. For the full year, it was above target at 13.2%. Page 11 highlights used vehicle sales results for the quarter. As anticipated, market conditions for used vehicle sales continued to weaken from elevated levels in the prior year. Compared with prior year, used tractor proceeds declined 39% and used truck proceeds declined 33% reflecting weaker freight conditions.

On a sequential basis, proceeds for tractors decreased 12% and proceeds for trucks decreased 11%, both generally in line with our expectations. During the quarter, we sold 7,200 used vehicles, up sequentially and versus prior year. Used vehicle inventory increased to 8,000 vehicles at quarter end and remains in line with our target inventory levels of 7,000 to 9,000 units. Increased sales volumes and inventory levels reflect higher lease replacement and rental de-fleeting activity. Although used vehicle pricing declined, proceeds remain above residual value estimates used for depreciation purposes. Slide 26 in the appendix provides historical sales proceeds and current residual value estimates for used tractors and trucks for your information.

Turning to supply chain on Page 12. Operating revenue increased 10%, reflecting organic growth from new business, increased pricing and higher volumes as well as the IFS acquisition. Double-digit revenue growth in our automotive, consumer packaged goods and industrial verticals more than offset softer volumes in our omnichannel retail vertical. Supply chain earnings increased 35%, reflecting operating revenue growth in the automotive and industrial verticals. In omnichannel retail, year-over-year comparisons benefited from a prior year asset impairment charge of $20 million, which was offset by lower volumes in the current year. Supply Chain EBT as a percent of operating revenue was 5.8% in the quarter, below the segment’s high single-digit target range.