Ryder System : First Quarter 2024 1Q 2024 Ryder Earnings Transcript

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 first quarter 2024 earnings conference call. I'd like to remind you that during this presentation, you'll hear some forward- looking statements within the meeting 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 Havens 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.

Ryder System First Quarter 2024 Earnings Release Conference Call

made to de-risk our business model, enhance returns 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 providing you with key strategic updates as well as an update on the integration of Cardinal Logistics. John will then take you through our first quarter results, which exceeded our expectations, reflecting better than expected used vehicle sales results and benefits from our maintenance cost savings initiative. I'll then review our outlook and discuss how we have positioned the business to benefit from the cycle upturn.

Let's begin on slide four. Turning to slide four, executing on our balanced growth strategy continues to drive outperformance relative to prior cycles. Across all phases of the current freight cycle, our earnings and return profile have been higher than prior cycles, demonstrating the effectiveness of our strategy. The integration of our recent acquisitions of Cardinal Logistics and Impact Fulfillment Services or IFS is on track. As you may recall, we completed the acquisition of Cardinal Logistics on February 1st, enabling growth and further strengthening our position as a leading provider of customized dedicated transportation solutions.

I'll provide some additional information on this integration shortly. November 1st of last year, we completed the acquisition of IFS, which added co-packing and co-manufacturing capabilities in supply chain, primarily supporting our CPG business. We continue to see long-term growth opportunities in all three of our business segments supported by secular trends that favor outsourcing decisions, large addressable markets, and the value our solutions bring to our customers. Our initiatives remain focused on enhancing returns. Adjusted ROE of 17% for the trailing 12-month period is in line with our long-term target and reflects our expectations given where we are in the cycle.

The impact on ROE from weakening market conditions and used vehicle sales and rental has been partially offset by our initiatives. These initiatives include pricing and cost recovery actions,

Ryder System First Quarter 2024 Earnings Release Conference Call

which benefited returns in all segments. FMS and SCS are expected to achieve their target EBT margins for the full year 2024, reflecting our initiatives as well as execution in our enhanced asset management playbook and FMS. We continue to expect DTS EBT margins to be just below the segments long-term target in 2024, reflecting acquisition integration and other related costs.

Our strong balance sheet and solid investment grade credit rating continue to provide us with capacity to pursue targeted acquisitions and investments as well as return capital to shareholders. During the quarter, we repurchased 120,000 shares under our discretionary repurchase program. We currently have authorization for a 2 million share discretionary program, as well as a 2 million share anti-dilutive program with approximately 3 million in total shares remaining under these programs.

Since 2021, we have repurchased approximately 16% of our shares outstanding. We also increased our dividend by 15% in mid-2023. Our full-year 2024 forecast for free cash flow is negative 175 to 275 million, higher than our prior forecast of negative 275 to 375 million primarily due to lower rental capital expenditures. We're encouraged by our solid performance in the first quarter and believe that executing on our balanced growth strategy will continue to enable us to deliver higher highs and higher lows over the cycle.

Slide five shows a comparison of key financial and operating metrics for 2018 and for our 2024 forecast. In 2018, prior to the implementation of our balanced growth strategy, we generated comparable EPS of 595 and return on equity of 13%. This was during peak freight cycle conditions. At that time, the majority of our 8.4 billion of 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 what we're expecting from Ryder today. In 2024, a year that we expect will represent trough conditions in used vehicle sales and rental. We expect our transform business model to generate meaningfully higher earnings and returns than it did during the 2018 peak.

Ryder System First Quarter 2024 Earnings Release Conference Call

2024 comparable EPS is expected to be 1175 to 1250 compared to 595 in 2018. And ROE is expected to be 15.5% to 16.5%, well above the 13% generated in 2018. Through organic growth, strategic acquisitions and innovative technology, we have shifted our revenue mix towards SCS and DTS with 60% of 2024 revenue expected to come from these asset life businesses compared to 44% in 2018.

Supply chain three-year growth rate is also expected to increase to 20%. As a result of profitable growth in our contractual lease, supply chain and dedicated businesses, operating cash flow is expected to grow 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 expected trough conditions. I'm encouraged by the result of our transformation thus far, and I am confident that the solid execution and momentum from multi-year initiatives position us well for 2024 and beyond.

Moving to slide six. On February 1st, Ryder completed the acquisition of Cardinal Logistics. This acquisition further advances our balanced growth strategy by accelerating profitable growth in our dedicated business. DTS continues to be 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. Our dedicated business has demonstrated a resilient earnings profile over the cycle, as shown during the current freight downturn, as well as during prior cycles.

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. As we reach full integration in year three, we

Ryder System First Quarter 2024 Earnings Release Conference Call

expect net synergies realized to be between $40 and $60 million. The expected synergies largely belong in three categories.

The first category is related to vehicle maintenance cost. Prior to the acquisition, Cardinal procured maintenance services from various third-party providers. Consolidating maintenance and asset management activities with Ryder is expected to generate significant cost savings and efficiencies going forward. The second category is cost savings related to vehicles financed under third-party operating leases. Approximately, two-thirdsone-third[corrected by Ryder] of Cardinal's fleet is financed through operating leases with various banks and financing companies. As these leases mature, vehicles will be replaced with Ryder-owned vehicles, which will benefit from Ryder's lower vehicle acquisition cost and financing.

The majority of synergies are expected from these maintenance and equipment cost savings. In addition, we expect to benefit from operating efficiencies as we integrate the business into our existing operations and leverage management and overheads. We expect these synergies to begin in the second half of 2024 with benefits accelerating in 2025. Our integration of the Cardinal acquisition is on track. 2024 integration costs are estimated to be approximately 10 million and represent the majority of total expected integration costs. In 2024, we expect DTS EBT percent to be mid-single digits, reflecting integration and other related costs.

Our legacy DTS portfolio is expected to operate at the segments high single-digit target EBT percent in 2024. By 2025, realization of Cardinal synergies is expected to drive the DTS EBT percent back to the segment's high single-digit target. On an annualized basis, the transaction is expected to add approximately $1 billion of total revenue and approximately 800 million in operating revenue, which excludes fuel and subcontracted transportation. As a reminder, approximately 85% of operating revenue will be reflected in DTS, approximately 15% in supply chain and FMS will include inter-segment revenue from equipment leases and maintenance.

Ryder System First Quarter 2024 Earnings Release Conference Call

DTS fleet count at quarter end reflects the inclusion of 2,900 power vehicles and 6,900 trailers from the acquisition.

We continue to 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 now turn the call over to John to review our first quarter performance.

John Diez: Thanks, Robert. Total company results for the first quarter on page seven. Operating

revenue of two and a half billion in the first quarter, up 6% from the prior year primarily reflects

recent acquisitions and contractual growth, partially offset by lower rental revenue. Comparable earnings per share from continuing operations were $2.14 in the first quarter, down from $2.81 in the prior year. The earnings decline reflects weaker market conditions in used vehicle sales and rental, partially offset by higher supply chain and choice lease results.

Return on equity. Our primary financial metric was 17% and in line with our high teens target over the cycle. The year-over-year decline reflects weakening used vehicle sales and rental market conditions. Free cash flow for the first quarter decreased to 13 million from 101 million in 2023, primarily due to lower proceeds from property and used vehicle sales.

Turning to fleet management results on page eight. Fleet management solutions' operating revenue decreased 1% due to lower rental demand, partially offset by higher choice lease revenue. Choice lease revenue grew 9% with about half coming from organic lease growth and the remainder from inter-segment lease revenue from Cardinal vehicles operating in our dedicated segment. Pre-tax earnings and fleet management were 100 million and down year- over-year as anticipated.

Ryder System First Quarter 2024 Earnings Release Conference Call

Results reflect lower use vehicle pricing compared to elevated levels in the prior year, as well as weaker rental demand. The impact from lower used vehicle pricing in the quarter was partially offset by higher use volumes. Rental utilization on the power fleet was 66% down from 75% in the prior year. Rental results for the quarter reflect market conditions that remain weak in addition to the sequential decline in rental activity we typically see in the first quarter.

Par fleet pricing declined 1%, reflecting on rental fleet mix with more trucks and fewer tractors. During the quarter, higher choice lease results and benefit from our [inaudible], partially offset the earnings impact from weaker market conditions in used vehicle sales and rental businesses. Fleet management EBT as a percent of operating revenue was 8% in the first quarter and is expected to be in line with the segments long-term target of low double digits for full year 2024.

Page nine 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 34% and used truck proceeds declined 30%. On a sequential basis, proceeds for tractors decreased 4% and proceeds for trucks decreased 3% slightly better than our expectations. During the quarter, we sold 6,500 used vehicles down sequentially and up versus prior year.

Used vehicle inventory increased to 8,900 vehicles at quarter end and remains in line with our target inventory levels. Both sales volumes and inventory levels reflect higher lease replacement and rental depleting activity. Although used vehicle pricing declined, proceeds remain above residual value estimates used for depreciation purposes. Slide 21 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 10. Operating revenue increased 11%, primarily driven by the IFS and Cardinal acquisitions. Revenue growth in our automotive consumer packaged goods

Ryder System First Quarter 2024 Earnings Release Conference Call

and industrial verticals more than offset softer volumes in our omnichannel retail verticals. Supply chain earnings increased by 47 million from prior year. Year-over-year comparisons benefited from a 30 million asset impairment charge in the prior year. Stronger automotive performance and recent acquisitions also benefited earnings in the quarter. Supply chain EBT as a percent of operating revenue was 6.6% in the quarter and is expected to be in line with the segments long- term target of high single digits for the full year 2024.

Moving to dedicated on page 11. Operating revenue increased 33%, reflecting the acquisition of Cardinal Logistics. Dedicated EBT declined from prior year, reflecting acquisition integration and other related costs as well as higher insurance costs in the quarter. EBT continued to benefit from favorable driver conditions as the number of open positions and time to fill for professional drivers improves. Dedicated EBT as a percent of operating revenue was 4. % in the quarter and below the segment's high single-digit target, primarily reflecting acquisition integration and related costs.

Turning to slide 12. First quarter lease capital spending of 582 million was slightly above prior year, reflecting planned lease replacement activity and the timing of OEM deliveries. For the first quarter, rental capital spending of 79 million was below prior year, reflecting lower planned rental investments in the quarter. For full-year 2024, we're forecasting lease spending of two and a half billion down from prior year. We have reduced our 2024 rental capital expenditure forecast by approximately a hundred million to align with our revised outlook for more modest rental upturn than initially expected. 2024 rental spending is now expected to be approximately 450 million.

Our 2024 average rental fleet is expected to be down 8%. In rental, we continue to increase capital spending on trucks versus tractors as trucks have benefited from relatively stable demand and pricing trends. At year-end, 2023 trucks represented approximately 60% of our rental fleet up from 49% in 2018. Our full-year 2024 capital expenditures forecast of approximately 3.2 billion is just below prior year. We expect approximately 600 million in proceeds from the sale of used

Ryder System First Quarter 2024 Earnings Release Conference Call

vehicles in 2024, down approximately 200 million from prior year elevated pricing levels. Full- year 2024 net capital expenditures are expected to be approximately 2.7 billion.

Turning to slide 13, 2024 full-year forecast for operating cash flow is unchanged at 2.4 billion and our forecast range for free cash flow has increased to negative 175 to 275 million. As shown, operating cash flow remains strong, driven by growth in our contractual lease, dedicated and supply chain businesses, which comprise approximately 85% of Ryder's operating revenue. Our free cash flow profile has changed significantly since the implementation of our balance growth strategy in late 2019. Lower targeted lease growth, 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.

The summary on the right side of the slide illustrates the free cash flow generated by the business prior to investing in fleet growth. In 2024, although free cash flow is expected to be negative 225 million at the midpoint of our range, free cash flow prior to investing in growth capital is expected to be positive approximately 400 million. Our capital allocation priorities remain unchanged and are focused on supporting our strategy to drive long-term profitable growth and return capital to shareholders. Our top priority is to continue to invest in organic growth. Strategic acquisitions have been a key contributor to accelerated growth in supply chain and dedicated.

Acquisitions have helped transform our supply chain business in terms of expanding capabilities to strengthen our core contractual businesses, as well as rebalancing our vertical mix. Balance sheet leverage of 246% at year-end 2023 was below our 250% to 300% target and continues to provide ample capacity to fund organic growth, strategic investments, as well as to return capital to shareholders through share repurchases and dividends. With that, I'll turn the call back over to Robert to discuss our 2024 outlook.

Ryder System First Quarter 2024 Earnings Release Conference Call

Robert Sanchez: Turning to page 14, we're raising the low end of our full-year 2024 comparable EPS forecast to 1175 to 1250 from our prior forecast of 1150 to 1250. This increase reflects first quarter outperformance from used vehicle sales and our maintenance cost initiative partially offset by weaker than expected market conditions in rental for the balance of the year. We've also increased our 2024 return on equity forecast to 15.5% to 16.5%, which is in line with our stated range of mid-teens during trough market conditions and low 20s during peak conditions. Rate market conditions remain challenging.

We continue to believe that 2024 will reflect trough market conditions in used vehicle sales and rental, and our forecast assumes a gradual pickup in the second half of 2024. Uncertain macro conditions are causing some customers and prospects in SCS to delay decisions, but we remain confident in the long-term secular growth trends in this segment. We continue to believe that the transformative changes that we've made to the business will continue to drive outperformance relative to prior cycles and that all segments are well-positioned to benefit from a cycle upturn. We're also providing a second quarter comparable EPS forecast of 275 to 295 versus the prior year of 361.

Turning to slide 15, in addition to managing through the down cycle, we are also focused on ensuring that the business is well-positioned to benefit from the cycle upturn. The majority of our revenue is supported by long-term contracts that generate relatively stable and predictable operating cash flows over the cycle and each business segment has opportunities to benefit from the cycle upturn. Most of our cyclical exposure resides in fleet management in rental and used vehicle sales. Improved freight conditions should increase demand for these businesses.

In rental, we intend to grow the fleet as we approach a cyclical upturn to capture the incremental revenue and margin opportunity. In used vehicle sales, we'll continue to leverage our expanded retail sales network in order to maximize proceeds with the potential to generate used vehicle