Q3 2022 Ryder System Inc Earnings Call
Good morning, and welcome to the Ryder system third quarter 2022 earnings release Conference call. All lines are in a listen only mode until after the presentation today's call is being recorded.
You have any objections. Please disconnect at this time I would now like to introduce Mr. Bob Brunn, Senior Vice President Investor Relations and corporate strategy for Ryder, Mr. Brian You may begin.
Thanks, very much good morning, and welcome to Ryder's third 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 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 all available on <unk> website.
Presenting on today's call are Robert Sanchez, Chairman, and Chief Executive Officer, and John <unk>, Executive Vice President and Chief Financial Officer. Additionally.
Additionally, Tom Hayden President of Global Fleet management solutions, and Steve sensing President of global supply chain solutions, and dedicated transportation or on the call today and available for questions. Following the presentation with that let me turn it over to Robert.
Good morning, everyone and thanks for joining us I am very pleased with this quarter's record earnings which reflects growth in all three business segments.
I'm also excited to update you on the significant progress we continue to make on our strategy to increase core earnings and create long term shareholder value I'll.
I'll begin the call by providing you with a strategic update.
John will then take you through our third quarter results, which exceeded our expectations again. This quarter. We will then discuss our outlook and review how we've positioned the business to deliver on our targets over the long term.
Let's start on slide four.
Secular trends, including recent supply chain disruptions and labor challenges are continuing to drive companies to pursue long term transportation and logistics outsourcing solutions as.
As a result of these trends and our initiatives strong sales momentum has continued and we have realized record contractual sales activity year to date, which positions us well for future revenue growth.
We're also pleased to report that the lease fleet in North America returned to growth this quarter, despite ongoing OEM delivery delays.
Our two recent supply chain acquisitions, Whiplash and Midwest warehouse and distribution system continued to perform well and were accretive to earnings.
These acquisitions support our strategy to accelerate growth in our asset light supply chain business.
Whiplash significantly grows our equal film network with scalable E Commerce, and Omnichannel fulfillment solutions and Midwest expands our multi client warehousing offering.
During the quarter, we also acquired Baton.
A tech startup, which we initially invested in through rider ventures, our corporate venture capital Fund.
This acquisition is expected to enhance our product and technology development capabilities.
We're excited about the value that this can create a rider customers as we build out a suite of products that focus on optimizing transportation and supply chain networks.
We generated strong return on equity of 30% for the trailing 12 months, which is above our target and reflects our initiatives and strong market conditions in Fms.
We successfully executed on our actions to return supply chain and dedicated to their high single digit earnings targets, resulting in segment earnings growth of approximately 190 and 150% respectively.
These significant increases in earnings primarily reflects pricing adjustments to address unusually high labor costs that began in mid 2021, and the benefit from profitable new business.
We increased our full year 2020 to return on equity forecast by one percentage point to 26% to 27% and also increased our full year 2022 comparable EPS forecast.
These increases reflect higher results in used vehicle sales and rental.
We completed our $300 million ASR in September retiring 4 million shares at an average price of $74 47, and have existing board authorization for a 2 million share discretionary program and a $2 5 billion share anti dilutive program.
Our strong balance sheet continues to provide us with the capacity to pursue targeted acquisitions and investments as well as return capital to shareholders.
We increased our full year 2022 free cash flow forecast by $50 million to 800 to 900 million to reflect higher expected used vehicle proceeds.
Our cash flow forecast also includes deferred capital expenditures of approximately 200 million due to OEM delivery delays at $350 million and expected proceeds from the previously announced exit of our UK business.
We continue to develop and implement customer facing technologies to differentiate our services and drive profitable growth.
As we as we've been doing for some time now.
We would like to highlight one of those technologies on today's call.
This quarter, we're highlighting rider guide and innovative customer facing platform that is bringing significant value to our fms customers.
Wider guide is a proprietary platform that empowers fleet managers and drivers to engage with Ryder services in a fully digital way.
We currently have more than 12000 active users per month.
Seeing strong growth in usage with a 24% increase in active users compared to last year.
Greider guide is focused on delivering a completely digital end to end experience for servicing vehicles from pre scheduling appointments.
I'll check in upon arrival at the maintenance shop and tracking the real time progress of vehicles through service completion, all within the rider guide platform.
Bringing real time and reliable visibility to our customers during two of the most critical customer touch points, namely the in shop experience and the roadside service experience has been a key area of focus for Ryder guidance.
For example, our new digital roadside experience allows drivers to pinpoint the exact location for faster and more reliable deployment of service and it enables interactive realtime progress updates for drivers and fleet managers as we get our customers back on the road.
We believe Ryder guide creates a new standard for best in Class Fleet management.
Our ongoing investments in this technology combined with our expertise and infrastructure enables us to provide an industry leading solution that makes it easier for customers to do business with Ryder.
I will turn the call over to John now to cover third quarter results.
Thanks, Robert total company results from the third quarter on page six.
Operating revenue of $2 3 billion in the third quarter increased 18% from the prior year, reflecting revenue growth in all segments and the supply chain acquisitions.
Comparable earnings per share from continuing operations were $4 45 in the third quarter up from $2 55 in the prior year and reflected higher earnings in all three business segments.
Return on equity our primary financial metric reached a record 30% for the trailing 12 month period.
Reflecting the ongoing truck capacity constraints in the market as well as continued benefits from our initiatives to increase returns.
Year to date free cash flow increased to $887 million from $829 million in the prior year.
Reflecting higher used vehicle sales proceeds partially offset by higher planned capital expenditures.
Year to date free cash flow in 'twenty, two includes $326 million from the sale of vehicles and properties in the U K part of the exited.
Turning to <unk> results on page seven.
Fleet management solutions operating revenue increased 4%, reflecting 16% higher rental revenue driven by higher pricing and demand.
Fms operating revenue increased globally, despite a 4% negative impact from the wind down of the UK business.
Rental pricing increased 7%, primarily due to higher rates across all vehicle classes.
Fleet management realized pre tax earnings of $265 million up by $79 million from the prior year.
$55 million of this improvement is from higher gains on used vehicles sold and.
And lower depreciation expense impact related to the prior residual value estimate changes.
Improved rental performance also significantly contributed to increased Fms earnings.
Rental utilization on the power fleet was strong at 83% on a larger fleet.
SMS CBT as a percent of operating revenue was 24% in the third quarter and 23% for the trailing 12 months.
Both well above the segment's long term target of low double digits.
Excluding all used vehicle gains in the quarter Fms EBT percent was still in the segments low double digit target range.
Page eight highlights used vehicle sales results for the quarter.
Used vehicle market conditions remained strong, reflecting solid trade activity and tight vehicle availability due to continued OEM production constraints.
Used vehicle sales proceeds in North America increased versus the prior year and remain above historical averages.
On a sequential basis as anticipated used vehicle proceeds declined.
Cracked and proceeds decreased 22% and truck proceeds decreased 11%.
During the quarter, we sold 7500 used vehicles of which 2500 were related to the exit of our U K business.
Excluding the UK exit related sales used vehicles sold were up approximately 300 vehicles versus the prior year.
And up 1000 vehicles sequentially from the second quarter.
Used vehicle inventory inclusive about the UK was 4700 vehicles at quarter and below our target range of 7000 to 9000 vehicles.
Agility of 1100 UK used vehicles in inventory at the end of the third quarter were sold in the month of October .
Although used vehicle pricing declined sequentially it remains well above our residual value estimates used for depreciation purposes.
Turning to supply chain on page nine.
Operating revenue versus the prior year increased 49% due to the acquisitions and double digit revenue growth in all industry verticals.
<unk>, new business volume and pricing.
Operating revenue, excluding acquisitions was up 23%.
<unk> increased 189%, primarily reflecting higher pricing and cost recovery initiatives as well as profitability business <unk>.
The impact of automotive supply chain disruptions in the prior year and acquisitions also benefited earnings comparisons.
<unk> as a percent of operating revenue was seven 7% in the quarter returning to the segment high single digit target range.
We expect SCS results to continue to benefit from pricing actions profitable growth and acquisitions going forward.
Moving to dedicated on page 10, operating revenue increased 17% due to higher pricing increased volumes and new business.
Dedicated EBT increased 149%, primarily due to pricing adjustments to address unusually high labor costs as well as new business.
EPS EBT as a percent of operating revenue of eight 9% was in line with the segment high single digit target and up sequentially from the second quarter.
We expect EPS to continue to benefit from pricing actions and profitable growth going forward.
Turning to slide 11 year to date lease capital spending of one 3 billion was up year over year due to increased lease vehicle replacements for expiring lease contracts.
Year to date rental capital spending of $492 million declined versus prior year, reflecting lower planned investments.
Our full year 2022 lease Capex forecast is unchanged at one eight to $1 9 billion and reflect higher lease replacement and growth capital versus 2021.
This forecast also reflects a $200 million reduction in capital expenditures due to the extended OEM vehicle delivery delays that is expected to defer capex from 2022 into 2023.
In North America, we continue to expect the lease fleet to be up by approximately 2000 vehicles by year end.
And we're pleased to see the lease fleet returned to growth in the third quarter up by 300 vehicles versus prior year.
With the majority of expected lease fleet growth occurring towards the end of 2022.
Associated revenue and earnings will primarily benefit next year.
Our full year 2022 rental capex forecast remains at $500 million below the prior year with our ending fleet expected to grow by 2% or 700 vehicles.
We expect the average rental fleet to be up by 9% or 3600 vehicles on a full year basis.
Gross capital expenditures are expected to be between $2 6 billion to $2 7 billion we.
We expect proceeds from the sale of used vehicles of approximately $1 2 billion.
This number includes $350 million in proceeds related to the exit of our UK Fms business.
And higher proceeds from the sale of used vehicles versus the prior year.
Full year net capital expenditures are expected to be between $1 4 billion and $1 5 billion.
Yes.
Turning to slide 12, we increased our 2022 free cash flow forecast by $50 million to $800 million to $900 million range to reflect higher expected sales proceeds.
The forecast also reflects $350 million expected proceeds from the UK exit.
And $200 million in deferred lease capital expenditures.
Our balance sheet leverage is 210% at the end of the third quarter and is below our 250% to 300% target range.
We expect leverage to remain below our targeted range for the balance of the year, providing capacity for target acquisition and share repurchases.
We increased our 2022, our we forecast to a range of <unk>, 26% to 27% up from our prior forecast of 25% to 26%.
ROE is expected to benefit from continued strength in SMS as well as realizing higher SCS and Dts returns in the second half.
I will turn the call back over to Robert to provide an update on our plans to drive higher core earnings over the cycle and our increased 2022 EPS forecast. Thanks John .
Turning to slide 13 at our Investor Day in June we discussed writers core earnings and the actions we've taken to deliver significantly higher core earnings relative to the prior cycle peaks.
We also reviewed the initiatives we have underway that we expect will drive core earnings even higher in the future.
As a reminder, core earnings excludes outside outsized gains and rental results that have benefited earnings in this historically strong freight environment and.
In a more normalized market environment, we expect gains of approximately $75 million versus the estimated $375 million forecasted for 2022, and also expect rental utilization to return to the mid to high seventies in line with historical averages.
As such.
We have incorporated these assumptions into our estimate for core earnings.
The left side of this slide illustrates the actions we've taken since the prior cycle peak in 2018 to increase core earnings are.
A key driver of this profitable growth.
It's been the profitable growth in supply chain and dedicated which has accelerated during this period.
Our maintenance cost savings initiative continues to generate significant benefit and we expect to achieve our target of $100 million in.
And annualized savings this year.
Our lease pricing initiative also continues to drive substantial value and we expect to achieve an estimated annual benefit of approximately $65 million by the end of 2022, which more than.
With more to come as the remaining lease portfolio is renewed at higher returns.
The right side of this slide describes the actions underway that we expect will increase core earnings in the future.
For the past several quarters, we have discussed the pricing and contractual adjustments. The team has been implementing to address unusually high labor cost.
We began to see in mid 2021.
As a result of these actions and consistent with our forecast supply chain and dedicated EBT percent return to the high single digit target this quarter.
We expect the impact from these pricing actions to carryover into next year with this carryover effect expected to benefit results in the first half of 2023.
Profitable new business is also benefiting supply chain and dedicated margins in.
Fms approximately 55% of our lease portfolio has been renewed to date.
Under our lease pricing initiative.
An additional 20% has been contracted under the new pricing model and is expected to be in service over the next 12 months or so.
We expect an incremental earnings benefit is.
The remaining portfolio is renewed at higher returns.
This initiative is expected to be fully implemented by the end of 2025 with an estimated total annual benefit of $125 million upon completion.
Profitable revenue growth is another key driver of higher core earnings during.
During the third quarter supply chain and dedicated had double digit organic revenue growth driven by secular trends and our sales and marketing initiatives, including new products and capabilities.
Our strong balance sheet provides us with the capacity to pursue targeted acquisitions and return capital to shareholders. We are pleased with the performance of our two recent supply chain acquisitions, which have contributed to core earnings we.
We also recently completed a $300 million accelerated share repurchase program.
Out of the team's execution on these key drivers of higher core earnings and fully expect these initiatives to generate incremental benefits in the future and position us for higher earnings and stronger free cash flow relative to prior cycles.
Turning to slide 14, we will take a look at where our current accounting residual value estimates are set relative to historical used vehicle sales proceeds index.
As many of you know in 2019 and 2020, we reduced our accounting residuals by approximately 30% in order to address used vehicle market volatility risk.
The left side of the slide shows our historical truck proceeds and the right side shows our historical tractor proceeds.
Both chart show, where our accounting residuals are set relative to historical and current sales proceeds.
For trucks residual estimates for accounting are set at trough levels Retractors residual estimates for accounting are set at historically low levels. We also incorporated a great cycle downturn shown by the range here, which impacted about 15% of our tractors.
As the chart shows and as we've expected used vehicle pricing has begun to decline from peak levels, but our residual value estimates for accounting purposes are well below the current pricing levels.
Used vehicle pricing would also need to do would be to declined 35% from Q3 22 levels in order to get $75 billion of annualized gains and 42% to get zero annualized gains all else constant.
Finally, turning to page 15, we are raising our full year comparable EPS forecast to $15 65 to $5 85 up from the prior forecast of $14 30 to $14 80 and above the prior year of $9 58.
We're also providing a fourth quarter comparable EPS forecast of $3 18 to $3 38.
Although the prior year of $3 52, reflecting an expected decline in used vehicle pricing.
Used vehicle sales and rental performance are the key drivers of our current full year forecast our forecast continues to assume that the historically strong used vehicle sales environment will decline near term rent.
The rental market conditions remained strong in October to date and are expected to remain strong throughout the fourth quarter due to OEM production constraints.
Record 2022 year to date contractual wins and acquisitions are benefiting revenue and earnings growth.
2022 lease fleet growth is expected to primarily benefit 2023 earnings as this growth is occurring late in the year.
Overall, we're pleased with the trends that favorable outsourcing.
And the results of our efforts in sales and marketing and new product development for.
We're confident that the actions, we're taking to increase returns and drive higher core earnings will position us to achieve our long term targets over the cycle.
That concludes our prepared remarks. This morning. Please note that we expect to file our 10-Q this afternoon.
Had a lot of material to cover today. So please limit yourself to one question. Each if you have additional questions Youre welcome to get back in the queue and we'll take as many as we can at this time I will turn it over to the operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Jordan Alegar with Goldman Sachs. Please go ahead.
Yes, hi, good morning.
I'm curious now that you have your margins on supply chain and dedicated.
The range is that you'd like to see them of your targeted range can you maybe talk a little about the stickiness of those margins and how should the economy continues to falter or turned down a little bit. Thank you.
Yes, that's a good question on the supply chain side as you know in dedicated these are contractual.
Businesses, where we have long term contracts with our customers. So even when there is some volatility in the market, but really the margins hold up very well. If you look historically the one area that we've had some challenges in the past has been around automotive.
But I would tell you with the backlog of automotive production that still exist.
I would expect certainly in the near term.
That volumes are still be pretty strong as we go into well into 2023.
So I guess to answer your question I expect them to really hold up pretty well even during a slowdown.
Thank you.
We will take our next question from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks. Good morning, so used prices started to fall, but earnings <unk> <unk> to <unk>, we're pretty flat, but now you've got a pretty big drop in the guidance from <unk> to <unk>. So maybe just help explain what's driving <unk> and then is there anything changing with that 950 of normalized earnings.
We are raising guidance for this year does that does the 950 come up in your mind.
Yes, the 950 for this year space stays the same it would go up for next year, but this year really the beat in the quarter was primarily used trucks and rental but if you look at the sequential decline in earnings from Q3 to Q4 I'll tell you used trucks is the biggest driver used trucks and reynolds more than half of that decline.
Then theres also Europe as we get out of Europe .
As you know we're getting towards the tail end of that so right now we've got more cost. There then we have the revenue coming in.
So that's some headwind in Q4 and then the rest is really just seasonal declines I would call it that or.
That are there, but but the vast majority of that is used vehicles and <unk>.
Little bit of rental.
And then Robert I know I don't know that Theres much if anything you can say, but.
We had the HG vora stuff earlier, there was talk about Apollo couple of months ago, or a month ago, where do we stand on all of this is if you have anything you want to say or can say.
Yes, Scott this is a matter of policy, we don't comment on rumors and speculation.
As you know on the HG vora letter, we determined that the price is not indicative of the value of the company and Thats really all I have to say on that.
Okay. Thank you guys.
We will take our next question from Allison <unk> with Wells Fargo. Please go ahead.
Hi, Good morning, just wanted to go back to the conversation on Ryder Guide. It certainly seems like a clear efficiency cancer rider is there I know, it's kind of early days, but as we think through that penetration is there a way to think about it maybe on a transactional basis.
The productivity or the efficiencies that you can accrue over time any thoughts there.
Yes.
Really excited about it because it's something we've been working on for a while and we've gotten a lot of feedback from customers and we're making the enhancements and adjustments so but I think it's just makes it easier for customers to do business with Ryder and makes that relationship stickier, but let me let me hand, it over to Tom you can give you a little bit more color on how we see that helping us from an efficiency and customer <unk>.
The endpoint.
Tom I think you're on mute.
Alright, sorry on the wrong device off sorry about that.
Hey, Bob.
I'll just make a comment about the efficiency quest.
Question, Robert Robert mentioned.
One of the recent functionality that we just put out around the ability to track.
Breakdown.
And if you think about our process previously.
During our during our breakdown event, we track that event via phone calls and.
So multiple multiple stakeholders within our customer base, which wasn't efficient at all and wasn't a great experience. This now delivering a completely digital experience.
Eliminates.
All of those all of those phone calls and back office functions.
And gives the customer a much better experience with visibility to what's going on in the event.
We view that as a moment of truth for our customers. When they are when they are broken down. So we see it two ways big benefit for the customer in terms of visibility and certainly from an efficiency standpoint, and the back office at Ryder, We think it will help us as well.
Great. Thank you.
Thanks Al.
Ladies and gentlemen, if you find that your question has been answered you may remove yourself from the queue by pressing the star key followed by the digit too. Thank you.
We'll take our next question from Brian <unk> with Jpmorgan. Please go ahead.
Hey, good morning, Thanks for taking the question.
Just wanted to ask more broadly about pipeline for contracts in FCS and dedicated where that stands right now because there's a lot of uncertainty.
The broader marketplace, theres, probably a bit of a catch up given all the constraints on OEM equipment and labor and the like.
But rates are going up as you mentioned to kind of cover some of those costs, where does that all stand maybe you can comment a little bit more on competition, because I feel like from time to time, we get some of these competitive contracts that go one way or the other or are you seeing any of that right now as the demand outlook starts to soften a bit.
Yes, Bryan well, let me I'll also included in there are choice lease.
Sales choice lease sales.
Our strong we have currently an already signed.
Our lease business that takes us through certainly into the third quarter of next year.
So a lot of a lot of that business is already locked in and waiting for the trucks to come in on the supply chain and dedicated side as we mentioned on the on the call. We have a record contractual sales by year to date in those businesses. So it continues to be a very strong pipeline, but let me, let me hand, it over to Steve to give you a little bit more color on the on the pipeline.
There.
Yes, Brian as Robert said, I think we had historical pipelines both year over year and sequentially Q this quarter versus.
Q3, so we're not seeing any softening their deal size is up in both dedicated and supply chain. So.
Not seeing any softness right. There I think one key callout as all industry verticals within supply chain grew in the double digit level. So team is really hitting it on all cylinders right now.
Okay, and I guess, a follow up for maybe John what does it mean for Capex and free cash flow.
Next year as you get a little bit more growth just waiting for the trucks to show up.
Do you think this can be a flat capex I'm, sorry flat free cash flow. Your next year. What are your initial thoughts on that given the visibility you already have to some of this demand. Thanks, yes, Brian obviously, the visibility we have especially on the Fms side.
We do expect as we laid out $200 million of the Capex.
Spill into 2023, so we do expect higher level of Capex going into next year you think.
About the lease replacement and growth activity, that's happening in that format.
And what we had said previously although we haven't really given any guidance.
For next year, yet, we have kind of signaled towards a flattish free cash flow environment for next year, but.
It's still a little bit early to call that so that's the direction we have.
Okay. Thank you very much.
Thanks, Brian .
We will take our next question from Todd Fowler with Keybanc capital markets. Please go ahead.
Thanks, and good morning, John just a follow up on that comment when you say flattish free cash flow next year are you talking with flat to the 800 $900 million of guidance this year or something different I would think we're note.
It's coming down.
Yes, yes, sorry go ahead, yes, so just to clarify the flattish environment, we're talking kind of a breakeven free cash flow.
When we say flattish there so.
We do expect used vehicle proceeds to come down as you said from the record levels. We're enjoying this year and then youre going to have some uptick in the capex spend level, which is going to compress that free cash flow number right. We would expect next year to be back in a growth mode and lease.
Plus you've got the carryover of some of the Capex from this year. So yes, I think a breakeven of around zero free cash flow is probably the best estimate right now.
Okay that helps and I apologize that wasn't my original question. So I can get another one just a follow up to the response there.
When you think about.
The the lease fleet growth being backend loaded and also the pricing.
Initiatives on the lease side and Robert I think you gave some quantification for kind of the annual target, but is there a way to sensitize.
What the lease fleet growth that's already been booked in 'twenty, two and the contracted pricing actions could equate to as we get into 'twenty three kind of where are you starting off just with kind of already.
EPS contribution that you have visibility to from the lease signings in the contract pricing. Thanks.
When you think about it we're starting with 2000 unit fleet growth in the fourth quarter right. So the benefits of that are going to go into next year, plus we're expecting growth next year. So if you think about our target.
Lease fleet growth levels, where we're going to be probably at or above the high end of that next year, just because we've had such a delay in getting those leased vehicles. So I guess, what I would give you just a broader view Todd on next year without.
Giving you a forecast I would say the biggest driver next year that we're seeing for improved earnings has improved core earnings right. So we expect our core earnings to increase next year from the $9 50 that we talked about today.
And thats going to be driven by supply chain and dedicated having a full year of target margins remember, we're only at half of the year. This year, that's a significant driver of earnings.
Share repurchase that we did.
The ASR.
He's going to give us some benefit also next year as we as that wasn't a full year benefit.
I think youre going to have growth in lease growth in supply chain and growth in dedicated which are all going to contribute to higher core earnings next year.
We have the lease pricing initiatives that you mentioned I would say is also going to be a contributor and then there'll be a partially offs there'll be some partial offset with.
Overhead and maybe some strategic investments, but do you guys think about next year as core earnings will be up from the $9 50 now earnings overall earnings will likely be down because you expect used vehicle prices.
To continue to come down next year, and probably bottom out at some time in the back half of the year and then you expect rental to slowdown at some point also so we would expect some headwinds from that although as I mentioned, we still haven't seen rental.
Go down because there is such a.
Need for vehicles still in the marketplace.
Yes, Robert Thats helpful and Thats really what I was getting at is kind of how we think about that 950 moving into 'twenty three and I think that those are the big buckets. So all of that commentary was helpful. I think for the time this morning.
Thank you Todd.
We will take our next question from Bert Subban with Stifel. Please go ahead.
Good morning, and thanks for the question.
So we've talked a fair amount about supply chain and the Ses story has been really positive for Ryder.
But theres been an increase I would say in private equity and VC activity just across that arena.
Can you talk about what youre seeing on the competitive landscape across STR SCS and do you think the barriers to entry that you have there will remain in place.
Yes.
Just as a quick answer that I would tell you our the barrier to entry for us in that business as our capabilities and it is not an easy business and we've had many years of.
Really working our capabilities.
Tuning our capabilities and what we do there and that's really what customers are looking for and.
And I would say, it's not as easy to replicate add to that the technology that we've now added and it really has become a pretty compelling value proppant, Steve why don't you give them a little bit more color.
Yes, Robert I'll, just add to both the technology piece the announcement of the acquisition of Bhutan as a key investment for us.
<unk> seen us build out Ryder share over the years that the key differentiator in the marketplace.
Our technology stack with whiplash as a differentiator we have rider view to that.
And last mile. So technology is a key differentiator, but at the end of the day. It comes down to the people. We've got great people long tenure and they deliver on the promise to the customer.
Just as a clarification question on a previous comment earlier about all of the industry verticals you guys had talked about autos being a tailwind coming into year end and I guess, it's starting to show that with double digits is their runway for that to stay sort of is the strongest segment as you go into 'twenty three no matter really what happens.
Yes, we believe so because it's just what we're seeing with our customers.
Backlog of.
And that is still needed in that industry just to meet the replacement demand that's out there. So we see we see.
See the auto business staying strong at least through the first half of the year.
As you get that demand filled in in and again historically.
I almost forgot about this since Covid historically auto has been relatively stable in terms of we typically in the U S are producing $15 million to $17 million.
Obviously, a year and that was relatively steady with the exception of the great recession, and then now during COVID-19.
So I would expect going forward, we will go back into that mode.
And even as we transitioned to more electric.
<unk> still has a very.
Key role to play in the logistics of that Assembly.
Thank you.
Thank you Bert.
Yeah.
We will take our next question from Brian <unk> with Jpmorgan. Please go ahead.
Yes, thanks for the follow up just wanted to clarify.
One thing here in terms of Baton another hidden started off maybe working with a bit more on that.
I think final mile with delivery and sort of the trade side and maybe talking about how they're linked into autonomous which I know you're also investing but I think they've pivoted from that since then so if you can talk about exactly what what you see in that.
In the industry.
And then I guess.
Separately, just do one more on UBS, we've seen some divergence in some of the vintages are getting a little bit stronger a little bit weaker does that have really any material impact on how you view the UBS market.
Or is that just a little too little too early in the downward trend is still very much in place.
Thanks.
Let me, let me answer the first one and then I'll hand, it over to Steve to give you a little more color on on Baton and what we're really excited about there.
The UBS side as you know we're selling typically.
Six to seven year vintage vehicles. So that's the that's the vintage that we typically track I would tell you that it's behaving as we expected certainly on the tractor side I'd say trucks are holding up a little better than we originally expected but.
But as we go into next year I think those are the vintages that we really if you want to monitor kind of where it's going on with our market. Those are the vintages to look for.
Steve you want to give them more color on photon.
Yes, Brian I think the key for US is that we still we're still buying technology off the shelf, but to stay ahead of the competition, we really needed to develop technology in house in our key here is to eliminate friction eliminate waste in our customer supply chain.
Operations.
Yes, there are base business was around more of kind of a dray type model I think we can build on that and theyre going to be focused on transportation and supply chain optimization. So.
Great addition to the team and we look forward to them.
Keeping us ahead of the competition as we move forward.
Okay, great. Thank you.
Thanks, Brian .
Our last question comes from Scott Group with Wolfe Research.
Go ahead.
Hey, Thanks for the follow up Robert can you just walk through the math on the sensitivity with used pricing and gains that you were just talking about in the prepared comments again and then separately just.
Your thoughts on <unk>.
Why the rental utilization is holding.
Holding up so much better.
Given the freight environment and why.
Maybe that can continue and maybe we don't go back to the mid seventies.
I'm sorry, Scott can you repeat the second part of your question yes.
Yes, so I mean, so rental utilization is holding up.
It really well given the despite the freight environment is there a chance we just don't go back to that.
Mid 70 that you think is more normal.
Right well look I think I'll answer that part and then I'll hand, it over to John .
The used vehicle piece on the rental utilization side clearly demand is helping us get to this 80 plus percent.
But there's also things that we've done internally around process around how we keep our rental trucks on the road and having fewer of them out of service that we have.
Really made some changes over the last couple of years, which we think are going to help us keep it high or will it stay in the low eighties throughout the whole year, probably not but we think certainly towards that higher <unk> level.
<unk> is achievable. So I would tell you part of it is the market will come down but part of it is also some of the things that we're doing internally to keep keep our rental trucks on the road John you want to.
Used truck question, yes, Scott so what we what we laid out on page 14 of the deck there.
One other commentary as you heard from US we gave a sensitivity relative to the core earnings, which contemplate $75 million in annualized gains.
So looking at where we're at in Q3 you.
You would need to see a 35% drop across all vehicle classes.
To get to an annualized level of $75 million gain.
And then we also provided to get to zero gain you would need a 42% drop from where we sit.
In Q3, so that that was the sensitivity we gave relative to kind of where we're sitting today, which are at elevated levels.
I'd say right now we're still at up.
Pre pandemic high.
So there's still quite a bit of assistance before.
We get to that core earnings level number.
Can I just I'm not sure I fully understood Oh go ahead sorry.
That's on an annualized basis to think about it have to stay there for a full year to get to zero gains for the year.
Yes, I guess, what I'm, what I'm not really following it. So you had like a $100 million of gains in the quarter.
And so to go from if you used pricing dropped 35%. We go from like an annual a 400 million to $75 million, but then if it drops another 7% from down 35% down 42. It only goes from $75 million of zero. So just the proportions just seem off maybe it's a better question offline.
I don't know or maybe I'm missing something.
Yes, the delta could be.
That the additional depreciation that we set on those tractors that we are 50% of the fleet.
Where.
We've already taken further depreciation down to trough levels on the tractor side. So that also helps to buoy that that delta between the $75 million.
<unk> zero, yes.
To help you with the with the sensitivity there I would tell you if you take our second quarter proceeds for North America.
And you annualize that Youre youre elevated above $900 million youre in the mid 900 level.
And youll by seven points to that that gets you to roughly that $75 million.
That gets eroded.
In that sensitivity. So that's that's the level that we're talking about.
But that's a simplified math that I, just said, 40%, but we could we can certainly follow up with you on that.
Okay Alright.
Alright Thats helpful. Thank you guys.
Thank you Scott.
We will take our next question from Justin Long Stephens. Please go ahead.
Thanks I appreciate you fitting me in I think I was having some technical issues getting in the queue, but I wanted to follow up on some of the earlier used commentary Robert you mentioned used to being one of the key drivers to upside in the quarter, but it's also one of the key drivers to sequential pressure.
Earnings from <unk> to <unk>, So could you share what you're assuming for the decline in used truck pricing as we go from third quarter to fourth quarter.
Yes look.
You saw truck pricing was down.
Attractive pricing were down in the quarter.
Trackers were down 22% and trucks were down 11%. So we're expecting kind of that trend to continue maybe maybe at a little bit slower clip, but we're expecting that to continue its a little hard to pinpoint that exactly quarter to quarter, nor do we want to signal the market exactly where it's going to go where the market is going to dictate that but.
Yes, we're expecting just more of that level of decline kind of a double digit decline.
Okay got it that's helpful and then getting.
Your thoughts on 2023, just Directionally, which was helpful. But I was wondering if you could talk about the interest rate sensitivity moving into next year as well just given what we've seen with rates here recently.
Yes, John .
So as you look forward, we are projecting even in Q4.
Great to keep moving up.
If you look at what's coming up for <unk>.
Refinancing, we probably got about just over $1 billion of debt.
That's going to be refinanced next year how are you.
The free cash flow this year, it's been tremendous so.
We haven't had to be in that that market that much. We are projecting right now if we were to go in.
And go into the market Youre looking at interest rates in the neighborhood of 6% plus so.
<unk>.
It's a healthy increase in the interest rate environment. The good thing is from our balanced approach, we only got over $1 billion Thats up for refinancing next year.
Got it thanks I appreciate the time.
Yeah.
Thanks, Justin.
Our last question comes from Jeff Kauffman with vertical research partners. Please go ahead.
Thank you and thank you for squeezing me in.
First of all congratulations just fantastic results.
Kind of want to think bigger picture on what you're seeing between your supply chain business.
And I know you mentioned rental fleet utilization is still very strong on a larger fleet. So we're not really seeing that economic Canary in the coal mine, but the rest of the world seems to be nervous about what's happening and I have got a lot of different industries and truckers that youre, saying, okay things are slowing down.
What are you seeing in vehicle demand on the rental leasing side that is different is just hitting us later or are you seeing cracks in the dam and then what are you seeing on the supply chain side, if I back out the acquisitive growth and I, just kind of look at the organic growth whats changing.
On the periphery.
Well on the rental side, I think youre seeing theres, a shortage of vehicles still in the marketplace right. So that we're certainly benefiting from that as the Oems are trying to get caught up on all the the delays in production.
There is also I would say we've seen certainly we've talked about this in the past the benefits of.
E Commerce and seeing that on the truck demand side. So this is definitely a significant amount of demand for front for rental on the truck side.
The supply chain side, Steve Let me, let me hand that over to you. We are seeing a lot of interest from.
From companies that have had to focus on supply chain over the last couple of years and really looking for help and I think thats why youre seeing organic growth in the.
In the <unk>.
Mid to high twenties.
In an environment.
As.
Is really.
Right.
For companies that want to improve their supply chain and they're coming to companies like Ryder, but Steve wants to give them a little more color.
Yes, Jeff in the quarter organic growth was 23% again, just reiterating that we were double digit across all industry verticals.
Couple of things.
Our continued ever better campaign, we pushed that again. This is the third year of that we'll continue that in.
'twenty three it's getting our brand awareness out there.
Creating historical pipeline, both on the dedicated and supply chain side and as Robert said before it's a difficult business and I think a lot of companies found that during.
During 2000, 22021, and our ability to hire drivers to higher warehouse workers.
Really invested in the recruiting side of the business too. So it's not an easy business and then I'll just close with the technology, we've got differentiated technology.
Customers don't have and in some situations our competition doesn't have either.
Thank you and just one follow up if I can.
Robert I'm thinking back to the middle of the last decade, when the rest of the world was slowing down and you guys were growing because your customers who are demanding it.
And then a year and a half later.
And just evaporated.
What feels different to you.
About what Youre seeing right now and kind of how do we manage growth to avoid that.
That trap again this time around.
Yeah look I think the remember the business that we have that is contractual which is.
90% of our revenue.
<unk> is going to be there even in a slowdown right youre going to and supply chain dedicated customers continue to need to move their core.
Products and at least the same.
The.
More of us.
We buy on spec is more around rental.
And as you know over the last couple of years, even though we've grown the rental fleet we've certainly.
<unk> been prudent about not growing it too much because of that and then also making the investments on the truck side, where we see less volatility than you would otherwise then youre going to see on the tractor side. So we feel good about that we feel good about.
The investments that we're making there are going to ride out through the cycle well and the changes we've made in how we manage our ability to adjust to the rental fleet.
Quickly by taking trucks from rental and putting them in our lease applications, putting up a dedicated applications. So we feel really prepared for that.
We're preparing for.
A slowdown in a recession I think just like every company is running those scenarios. We're doing the same thing and we feel really.
Good about.
And this idea that our core earnings will continue to grow even in a slowing.
Economic environment is I think it will be testament to that.
Alright, well. Thank you very much that's my question.
Thank you Jeff.
At this time there are no additional questions I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks.
Okay. Thanks, everyone. Thanks for the interest thanks for being on the call and the questions and I look forward to seeing seeing you over the next several months.
Take care.
Ladies and gentlemen that concludes today's conference. Thank you all for your participation.
Okay.