Q3 2023 Ryder System Inc Earnings Call
Please standby.
Good morning, and welcome to the Ryder system third quarter 2023 earnings release conference call. All lines are not the 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. Caitlin Candela, Vice President Investor Relations for Ryder. Mr. Candela, you may begin.
Thank you good morning, and welcome to Ryder's third quarter 'twenty twenty-three 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.
Or do you tell them 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 <unk>, 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.
Good morning, everyone and thanks for joining us I.
I am very proud of our team for delivering another quarter of strong performance. Despite continued challenges in the freight market.
Our operating results continue to demonstrate that the transformative changes we've made to derisk, our business model enhanced 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.
Results for the quarter were above our forecast, reflecting better than expected performance in used vehicle sales.
Lower truck maintenance cost and better performance in our supply chain automotive business.
I'll begin today's call by providing you with a strategic update John.
Todd will then take you through our third quarter results.
Well, then discuss how we're managing through the down cycle, while positioning the business for the cycle upturn.
We'll also discuss our outlook, let's begin on slide four.
Execution of our balanced growth strategy is continuing to drive strong operating performance.
The transformative changes we've made to the business model have increased our earnings and return profile versus prior cycles and provide us with additional opportunities for long term value creation.
In support of our strategy to expand capabilities and accelerate profitable growth in supply chain, We recently announced an agreement to acquire impactful film it services or Iff's.
The transaction is expected to close in early November subject to antitrust approvals and customary closing conditions.
Iff's specializes in contract packaging and contract manufacturing new capabilities for rider in addition to warehousing.
These new capabilities will enable us to expand and strengthen relationships with our existing customers, particularly in our CPG industry verticals as well as attract additional customers across other industry verticals, such as retail health and beauty.
<unk> also brings its blue chip customer base, which will benefit from access to riders capabilities as a fully integrated port to door logistics provider.
Look forward to welcoming iff's employees and customers to rider very soon.
Our initiatives remain focused on enhancing returns.
Adjusted ROE of 21% for the trailing 12 month period remains above our high teens target and reflects strong market conditions in Fms as well as our initiatives.
These initiatives include pricing and cost recovery actions, which benefited returns in all segments.
Our outlook for Aro, we remain strong and we expect to end 2023 at the high end of our high teens target despite ongoing weakness in the freight environment.
Three business segments achieved target EBT margins for the second consecutive quarter that our enhanced asset management playbook is enabling us to generate higher earnings in each phase of the cycle.
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 1.5 million shares under our repurchase programs and completed the 2 million share discretionary program authorized in February of this year.
Our board recently approved a new 2 million share discretionary repurchase program as well as a new 2 million share anti dilutive program that replaces a recently expired program.
Since the beginning of 2021 we have repurchased approximately 15% of our outstanding shares.
Our full year free cash flow forecast remains at approximately $100 million and reflects high lease replacement activity and the accelerated timing of OEM deliveries.
Turning to slide five I am very proud to share the results of this slide because they clearly illustrate the increased earnings and return profile that has resulted from the actions we've taken to derisk and optimize the model enhanced returns and free cash flow and drive long term profitable growth.
In 2018 prior to the implementation of our balanced growth strategy.
We generated comparable earnings per share of $5 95, and ROE of 13%.
This was during peak cycle conditions.
At the time, the majority of our $8 $4 billion of revenue was from F. M S.
<unk> revenue had a three year growth rate of 16%.
Operating cash flow was one 7 billion.
Now, let's look at Ryder today.
In 'twenty twenty-three during a freight cycle downturn.
Our transformed model is expected to generate meaningfully higher earnings and returns than it did during the 2018 peak.
Comparable earnings per share is expected to be between 12, 60, and 12 85 compared to $5 95 in 2018 and ROE is expected to be at the high end of our high teens target well above the 13% generated in 2018.
Through organic growth strategic initiatives and innovative technology, we've shifted our revenue mix towards supply chain and dedicated with 55% of 2023 revenue expected to be from these asset light businesses compared to 44% in 2018.
Supply chain three year growth rate is currently forecasted to be 24%.
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 2.5 billion this year.
As shown here the business is outperforming prior cycles, even when comparing prior peak to current downturn conditions.
I'm proud and encouraged by the results of our transformation, thus far and I am confident that with continued execution of our balanced growth strategy, there will be incremental benefits well beyond 2023 for our customers employees and shareholders.
Slide six highlights four key attributes of our transformed business model that we believe position Ryder for long term value creation, and a more resilient earnings and return profile.
First we continue to operate in large addressable markets with secular trends that favor the outsourcing decision.
Only approximately 5% to 25% of the U S markets in which we operate are currently outsourced providing us with plenty of runway for growth.
Increased market demand for supply chain resiliency near shoring and reassuring trends labor challenges in complex vehicle technology, all make it more difficult for companies to contingent performing the services, we provide on their own and therefore create new opportunities for logistics and transportation outsource.
Second over 85% of our operating revenue is recurring and supported by a high performing portfolio of long term contracts or lease dedicated transportation and supply chain services, we have derisked, our choice lease portfolio by lowering pricing residuals from where they were in 2017.
<unk>.
This significantly reduces the reliance on used vehicle proceeds needed to achieve targeted lease returns and results in higher cash flows coming from more stable and predictable lease payments.
Returns on our choice leaves portfolio have also been enhanced by expanding pricing spreads that are better aligned with customer segmentation.
Approximately 70% of our lease portfolio has already been priced under this updated model and an additional 10% is under contract and waiting vehicle delivery.
This initiative is expected to be fully implemented by 2025 with an estimated total annual benefit of $125 million we've.
We've also diversified our supply chain revenue base through strategic acquisitions, and organic growth, increasing our portfolio in industry verticals with favorable long term trends such as C. P G and omnichannel retail.
We remain focused on managing costs and leveraging scale to drive efficiencies.
At the end of 2022 we had generated over 100 million in annualized savings from our multiyear maintenance cost savings initiative compared to 2018.
In 2023 we implemented additional actions that have provided incremental earnings benefits.
Across all segments, we continue to evaluate ways to leverage our scale and overhead cost and we continue to utilize the zero based budgeting process to prioritize spending decisions and fund strategic initiatives.
Finally, our capital allocation discipline focuses on investments that support our balanced growth strategy.
This includes moderate Fms lease growth at higher returns, which has increased our expected free cash flow profile with positive free cash flow expected in most years and over the cycle.
Over the past five years, we've completed approximately $1 billion of strategic acquisitions, primarily in S. C S, which have added or expanded capabilities in targeted growth areas such as E. Commerce fulfillment last mile delivery of big and bulky goods and multi client warehousing.
In addition, we've invested in innovative technology, such as Ryder share our visibility and collaboration platform Ryder share brings value and increased efficiencies to our customers and has been a key differentiator in winning approximately 35% of new sales and supply chain and dedicated.
Overall, we believe these attributes result in a more resilient model with ongoing growth momentum.
I'll turn the call over to John to review, our third quarter performance.
Thanks Robert.
Total company results for the third quarter on page seven.
Operating revenue of $2 4 billion in the third quarter up 1% from the prior year, primarily reflects contractual revenue growth in all three segments.
Actually offset by lower rental revenue.
Comparable earnings per share from continuing operations were $3 58 in the third quarter down from a record $4.45 in the prior year, reflecting expected weaker market conditions in used vehicle sales and rental.
Partially offset by strong supply chain results.
Return on equity our primary financial metric was 21% and remained above or high teens target.
The year over year declines reflect a weakening used vehicle sales and rental market conditions, partially offset by our returns initiatives.
Year to date free cash flow decreased to 32 million from 887 million in the prior year due to increased capital expenditures and lower used vehicle sales proceeds.
Prior year included $300 million and year to date proceeds from the UK exit.
Turning to fleet management results on page eight.
Fleet management solutions operating revenue decreased 3% due to lower rental demand and as a result of the exiting of the U K.
Partially offset by higher contractual revenue from choice lease and select here.
Pre tax earnings and fleet management were $169 million.
And down year over year as anticipated.
Prior year results reflect record pre tax earnings and fleet management, largely due to 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 in our mid to high Seventy's range, but down from prior year record levels of 83%.
Lower utilization was partially offset by a 1% increase in power lead pricing.
Despite a weaker used vehicle sales and rental environment.
<unk> management E B T. As a percent of operating revenue remained strong at 13, 4% in the third quarter at the high end of the segment's long term target of low double digits.
For the trailing 12 month period, it was above target at 15, 4%.
Page nine highlights used vehicle sales results in North America for the quarter.
As anticipated market conditions for used vehicle sales continue to weaken from elevated levels in the prior year.
Compared with prior year use tractor proceeds declined 31%.
Used truck proceeds declined 30%, reflecting weaker freight conditions.
On a sequential basis proceeds for tractors decreased 8% and proceeds for trucks decreased 6%.
Both better than our expectations.
During the quarter, we sold 6500 used vehicles up sequentially and versus prior year.
Used vehicle inventory increased to 7800 vehicles at quarter end.
It remains in line with our target inventory levels of seven to 9000 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 21 in the appendix provides historical sales proceeds incur a residual value estimates for used tractors and trucks for your information.
Turning to supply chain on page 10, operating revenue increased 9%, reflecting new business and increased pricing.
Double digit revenue growth in Automotives consumer packaged goods and industrial verticals more than offset softer volumes in our omnichannel retail Burke.
Supply chain earnings increased 14%, reflecting operating revenue growth and lower incentive based compensation costs.
Partially offset by lower volumes in the Omnichannel retail vertical.
Supply chain EBT as a percent of operating revenue was 9% in the quarter at the high end of the segments high single digit target range.
Moving to dedicated on page 11.
Operating revenue increased 3%, primarily reflecting the recovery of inflationary costs.
Dedicated EBT was generally in line with prior year.
E B T benefited from inflationary rate increases, partially offset by lower gains on sales of vehicles.
We continue to see favorable driver conditions as the number of open positions and pipes, a little for a professional drivers improve.
Dedicated EBT as a percentage of operating revenue phasing in of 5% in the quarter was in line with the segment high single digit target.
We expect slower contract sales activity in dedicated in the near term consistent with a softer freight environment.
As previously noted we expect 2023 segment revenue growth to be below our high single digit target range.
Segment EBT percent is expected to remain in line with our high single digit target range for the remainder of the year.
Turning to slide 12 year to date lease capital spending of 2 billion was up from prior year, reflecting increased lease replacement and growth activity as.
As well as the accelerated timing of OEM vehicle deliveries.
Year to date rental capital spending of 388 million was below prior year's plant.
Our 2023 forecast for lease capital spending of $2 6 billion reflects higher lease replacement and growth capital versus prior year.
Lease growth is expected to be lower than our prior forecast.
As customers delayed decisions in the current environment.
We now expect the ending lease fleet to be up approximately 5000 vehicles versus prior year.
While ending active fleet is expected to be up approximately 2500 vehicles, reflecting an elongated delivery cycle from trucks.
Delivery Timeframes for tractors are now at normal levels.
In rental are ending fleet is now expected to be down, 13% or 5300 vehicles, reflecting higher rental deployment activity.
Our full year 2023 capital expenditures forecast of approximately $3 2 billion is unchanged from our prior forecast.
We continue to expect proceeds from the sale of used vehicles of approximately $800 million in 2020 three.
I'm from prior year, which included 400 million of proceeds related to the UK exit for the full year.
Full year 2023, net capital expenditures are expected to be approximately $2 4 billion.
Turning to slide 13.
Our 2023 four year forecast for free cash flow is unchanged at approximately $100 million.
It reflects the accelerated timing of OEM deliveries and the corresponding increase to lease capital expenditures.
The forecast for operating cash flow remains at $2 5 billion.
As shown the trajectory of our cash flow continues to improve over time, reflecting growth in our contractual supply chain dedicate a lease businesses.
Each comprise over 85% of writers operating revenue.
Free cash flow profile has changed significantly since the implementation of our balanced growth strategy.
Operator: Please stand by. Good morning and welcome to the Ryder System third quarter 2023 earnings release conference call. All lines are in a listen only mode until after the presentation.
Since 'twenty 'twenty lower targeted lease growth as well as the COVID-19 effects and OEM delays resulted in lower capital spending and higher free cash flow.
Operator: Today's call is being recorded. If you have any objections, please disconnect at this time.
Proceeds from the exit of the UK Fms business also benefited free cash flow in 2022.
Calene Candela: I would now like to introduce Ms. Kayleen Candela, Vice President Investor Relations for Ryder. Ms. Candela, he may begin. Thank you.
The summary on the right side of the slide illustrates the strong free cash flow generated by the business prior to investing in fleet growth.
Calene Candela: Good morning and welcome to Ryder's third quarter 2023 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 expectation 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.
In 'twenty to 'twenty, three we expect to generate approximately 100 million in free cash flow and prior to investing in growth capital. This number is expected to be approximately 500 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 and S. T. S and has helped transform our supply chain business in terms of expanding capabilities as well as rebalancing our vertical mix.
Calene Candela: We're detailed information about these factors and a reconciliation of each non-gap financial measure to the nearest gap measure is contained in this morning's earnings release. These earnings call presentation and in Ryder's filings with the Securities and Exchange Commission which are available on Ryder's website.
Balance sheet leverage of 214% was below our $2, 50% to 300% target and continues to provide ample capacity to fund organic growth and targeted acquisitions as well as to return capital to shareholders through share repurchases and dividends.
Calene Candela: Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer and John Diaz, 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.
With that I'll turn the call back over to Robert to discuss our enhanced asset management playbook and outlook.
Thanks, John Slide 14 provides key highlights from our enhanced asset management playbook, which is focused on optimizing returns over the cycle from our transactional used vehicle sales and rental businesses.
Robert Sanchez: At this time, I'll turn the call over to Robert. Good morning everyone and thanks for joining us. I am very proud of our team for delivering another quarter of strong performance despite continued challenges in the freight market.
In response to weakening used vehicle in rental demand, we are redeploying underutilized rental vehicles to fulfill lease dedicated and supply chain contracts.
In 2023 we expect to redeploy between three and 4000 units to align our rental fleet with demand conditions.
Robert Sanchez: Our operating results continue to demonstrate that the transformative changes we've made to de-risk 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. Results for the quarter were above our forecast reflecting better than expected performance and use vehicle sales, lower truck maintenance cost and better performance in our supply chain automotive business.
This elevated level of redeployment activity is enabling us to fulfill lease contracts sooner and is also contributing to lease fleet growth.
We expect rental power fleet utilization for the full year 2023 to be at the lower end of our target range of mid to high seventies.
In used vehicle sales, we're leveraging our expanded retail sales network.
Since 2019, we've increased our retail sales capacity by 50% by adding physical locations and increasing our inside sales team to capture digital sales opportunities.
Robert Sanchez: I'll begin today's call by providing you with a strategic update.
Robert Sanchez: John will then take you through our third quarter results. We'll then discuss how we're managing through the down cycle while positioning the business for the cycle upturn. We'll also discuss our outlook.
Increasing retail sales volume benefits results as wholesale proceeds have historically been at a 30% discount to retail proceeds.
Robert Sanchez: Let's begin on slide four. Execution of our balanced growth strategy is continuing to drive strong operating performance. The transformative changes we've made to the business model have increased our earnings and return profile versus prior cycles and provide us with additional opportunities. For long term value creation and support of our strategy to expand capabilities and accelerate profitable growth and supply chain.
And finally, we continue to shift our vehicle mix and rental towards trucks, where we see stronger demand trends that have historically been more resilient than those of tractors.
We've reduced our 'twenty twenty-three rental tractor fleet by 18%.
By year end 2023 we expect that trucks will be approximately 60% of the north American rental fleet up from 49% in 2018.
Robert Sanchez: We recently announced an agreement to acquire impact fulfillment services or IFS. The transaction is expected to close in early November, subject to antitrust approvals and customary closing conditions. IFS specializes in contract packaging and contract manufacturing, new capabilities for Ryder in addition to warehousing. These new capabilities will enable us to expand and strengthen relationships with our existing customers, particularly in our CPG industry verticals, as well as attract additional customers across other industry verticals, such as retail, health, and beauty. IFS also brings its blue chip customer base, which will benefit from access to Ryder's capabilities as a fully integrated port to door logistics provider.
Although earnings will be impacted by the freight environment. The successful execution of our enhanced asset management playbook has enabled us to effectively manage through the 20th twenty-three freight downcycle and generate higher earnings in each phase of the cycle.
Turning to slide 15.
In addition to managing through the downturn.
We're also focused on positioning the business to benefit from the cycle upturn.
Although the majority of our revenue is supported by long term contracts that generate relatively stable and predictable cash flows over the cycle.
Each business segment has opportunities to benefit from the cycle upturn.
The majority of our cyclical exposure resides in fleet management with rental and used vehicle sales.
Robert Sanchez: I look forward to welcoming IFS employees and customers to Ryder very soon. Our initiative has remained focused on enhancing returns. Adjusted ROE of 21% for the trailing 12-month period remains above our high-teens target and reflects strong market conditions and FMS, as well as our initiatives. These initiatives include pricing and cost recovery actions, which benefited returns in all segments. Our outlook for ROE remains strong, and we expect to end 2023 at the high end of our high-teens target, despite ongoing weakness in the freight environment.
Our enhanced asset management playbook has been focused on managing these transactional businesses during the freight downturn, while also positioning them to benefit from the cycle upturn.
Improved freight conditions should increase demand for rental and used vehicles.
In rental we intend to grow the fleet as we approach the cyclical upturn to capture this incremental revenue and margin opportunity.
In used vehicle sales will continue to leverage our expanded retail sales network in order to maximize proceeds with the potential to generate used vehicle gains above normalized levels.
Robert Sanchez: All three business segments achieve target EBT margins, the second consecutive quarter, and our enhanced asset management playbook is enabling us to generate higher earnings in each phase of the cycle. 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 1.5 million shares under our repurchased programs and completed the 2 million share discretionary program authorized in February of this year.
An additional opportunity on the horizon for Fms is the potential pre buy activity ahead of the 20th twenty-seven E. P. A engine technology changes.
The industry is generally expecting some level of pre buy activity given the expected impact on upfront cost and maintenance cost implications.
On what we see today pre buy activity could begin as soon as 2025 as we have historically seen higher levels of fleet growth. A couple of years ahead of a change.
We also would expect used vehicle pricing to be supported by demand for the old emissions technology.
Robert Sanchez: Our board recently approved a new 2 million share discretionary repurchased program, as well as a new 2 million share anti-delutive program that replaces a recently expired program. Since the beginning of 2021, we have repurchased approximately 15% of our outstanding shares. Our full-year freecast with forecast remains at approximately $100 million, and reflects high-lease replacement activity and the accelerated timing of OEM deliveries.
Increased engine complexity and costs generally favor the outsourcing decision, which would benefit lease sales activity.
In dedicated improved driver availability and lower recruiting and turnover costs have benefited 20th twenty-three earnings but have been a headwind for new sales and revenue growth.
As the freight cycle strengthens and driver availability becomes more challenging.
We expect to see incremental sales opportunities and improve revenue growth in D. T S. As private fleets seek solutions to address this pain point.
Robert Sanchez: Turning to slide 5, I am very proud to share the results of this slide because they clearly illustrate the increased earnings and return profile that has resulted from the actions we've taken to de-risk and optimize the model, enhance returns and free cash flow, and drive long-term profitable growth. In 2018, prior to the implementation of our balanced growth strategy, we generated comparable earnings per share of 5.95 and ROE of 13%. This was during peak cycle conditions. At the time, the majority of our $8.4 billion of revenue was from FMS. Applied Chain Revenue had a three year growth rate of 16%. Operating cask low was 1.7 billion.
And supply chain.
Weaker volumes in our Omnichannel retail vertical have been headwinds to revenue and earnings during 'twenty 'twenty. Three we continue to believe in the long term growth prospects of our e-commerce fulfillment and last mile delivery of big and bulky goods and have invested in technology as well as an expanded footprint to support this business.
We expect supply chain results to benefit as omnichannel volumes recover and the incremental footprint is leveraged.
We've been pleased with the improved resiliency of the model and now performance during a down cycle and are appropriately positioning all three segments to benefit from the up cycle.
Turning to page 16, we're raising our full year 'twenty twenty-three comparable EPS forecast to a range of 12, 6% to 12 85 up from the prior forecast of 12 20 to 12 70.
Robert Sanchez: Now let's look at Ryder today. In 2023, during a freight cycle downturn, our transformed model is expected to generate meaningfully higher earnings and returns than it did during the 2018 peak. 25 compared to 595 in 2018 and ROE is expected to be at the high end of our high teens target well above the 13% generated in 2018. Through organic growth, strategic initiatives and innovative technology, we've shifted our revenue mix towards supply chain and dedicated with 55% of 2023 revenue expected to be from these asset light businesses compared to 44% in 2018.
Our increased forecast reflects better than expected performance in used vehicle sales.
Ongoing maintenance cost improvements and supply chain automotive performance, partially offset by weakening conditions in rental and Omnichannel retail.
We're also providing a fourth quarter comparable EPS forecast of $2 60 to $2 85 versus a prior year of 389.
Our 'twenty twenty-three ROE forecast is 18% to 19%, which is at the high end of our long term target of high teens and above our prior forecast of 17% to 19%.
Our strong 'twenty twenty-three earnings reflects the transformative changes we've made in the business model.
Robert Sanchez: Supplied chain three year growth rate is currently forecasted to be 24%. As a result of profitable growth in our contractual lease, supply chain and dedicated businesses operating cask low is expected to grow from 1.7 billion in 2018 to 2.5 billion this year. As shown here, the business is outperforming prior cycles, even when comparing prior peak to current downturn conditions.
The year over year decline is primarily due to weaker market conditions, and UBS and rental relative to prior years elevated levels.
As a reminder, our full year 2023 GAAP EPS forecast includes approximately $3 at 96 cents from the cumulative currency translation that was recorded in the second quarter.
Turning to page 17, we believe Ryder is well positioned to increase shareholder value.
Robert Sanchez: I'm proud and encouraged by the results of our transformation this bar and I'm confident that with continued execution of our balance growth strategy, there will be incremental benefits well beyond 2023 for our customers, employees and shareholders.
We see significant opportunities for profitable growth supported by secular trends, our operational expertise and ongoing momentum from multi year initiatives.
We've made transformative changes to our business model and continue to demonstrate strong execution on our balanced growth strategy, which has enabled us to achieve our long term targets increased business model resiliency and outperform prior cycles.
Robert Sanchez: Flight six highlights four key attributes of our transform business model that we believe position writer for long term value creation and a more resilient earnings and return profile. First, we continue to operate in large addressable markets with secular trends that favor the outsourcing decision. Only approximately five to 25% of the US markets in which we operate are currently outsourced, providing us with plenty of runway for growth. Increased market demand for supply chain resiliency, near shoring and reshoring trends, labor challenges and complex vehicle technology, all make it more difficult for companies to continue performing the services we provide on their own.
We remain committed to investing in products capabilities and technologies that will deliver value to our customers and our shareholders.
That concludes our prepared remarks. Please note that we expect to file our 10-Q later today.
We 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 into queue, and we'll take as many as we can.
At this time I'll turn it over to the operator.
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Robert Sanchez: And therefore create new opportunities for logistics and transportation outsourcing. Second, over 85% of our operating revenue is recurring and supported by a high performing portfolio of long term contracts or lease dedicated transportation and supply chain services. We have de-risked our choice lease portfolio by lowering pricing residuals from where they were in 2017. This significantly reduces the reliance on use vehicle proceeds needed to achieve targeted lease returns and results in higher cash flows coming from more stable and predictable lease payments.
<unk>.
And well go first to Jordan Alegar with Goldman Sachs.
Yeah, Hi, good morning.
So you guys get to see the economy from a pretty broad array of businesses lease supply chain rental et cetera.
Maybe give a bit of an assessment of what you're thinking in terms of a bottoming in turn in the freight cycle.
Yeah, Hi, Jordan.
Robert Sanchez: Returns on our Choice Least portfolio have also been enhanced by expanding pricing spreads that are better aligned with customer segmentation approximately 70% of our lease portfolio has already been priced under this updated model and an additional 10% is under contract and waiting vehicle delivery. This initiative is expected to be fully implemented by 2025 with an estimated total annual benefit of 125 million We've also diversified our supply chain revenue based the strategic acquisitions and organic growth increasing our portfolio and industry verticals with favorable long term trends such as CPG and Omni Channel retail we remain focused on managing cost and leveraging scale to drive efficiencies by the end of 2022.
I think.
As we see it now as we see continued to decline the freight cycle was probably.
Nearing a bottom here over the next quarter or two.
We're assuming that.
It will remain soft probably through the middle of next year.
Then as we get into the back half of next year, we would expect things to start to come back up.
Also I would tell you is as you've mentioned that we do we do have visibility across a lot of customers.
This quarter, we saw again continued softness with the transports.
Apparel retail still seems to be relatively soft in housing is probably not.
Surprise.
Things like furniture.
Housing support type products.
Products are down, but we do we do still see strength that we did see some strengthening in the CPG sector.
Robert Sanchez: We had generated over 100 million in annualized savings from our multi-year maintenance cost savings initiative compared to 2018 in 2023 we implemented additional actions that have provided incremental earnings benefits across all segments we continue to evaluate ways to leverage our scale and overhead cost and we continue to utilize the zero base budgeting process to prioritize spending decisions and fund strategic initiatives.
In automotive we saw.
<unk> production are really strong in the quarter and also in industrial industrial a little bit of a mixed bag, but the industrial.
Customers that we have still saw some good strength.
Thank you.
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.
We'll go next to Jeff Kauffman with vertical research partners.
Robert Sanchez: Finally, our capital allocation discipline focuses on investment that support our balance growth strategy. This includes moderate FMS lease growth at higher returns which has increased our expected free cash flow profile with positive free cash flow expected in most years and over the cycle. Over the past five years we've completed approximately $1 billion in strategic acquisitions primarily in SES which have added or expanded capabilities in targeted growth areas such as e-commerce fulfillment last mile delivery of big and bulky goods and multi-client warehousing.
Thank you very much everybody.
Gradually.
Congratulations.
I have a bigger picture question here.
There are a lot of different views about what's gone on air Jordan just asked you when you see things.
Proving.
We're getting some other people say hey, there's this retail inventory destock is done.
We got other companies, saying, Hey, I don't know, what's going to happen because of this UAW.
Situation, we're all trying to figure out kind of what's going on underneath right everything that's happening.
Robert Sanchez: In addition, we've invested in innovative technologies such as writer share our visibility and collaboration platform writer share brings value and increased efficiency to our customers and has been a key differentiator in winning approximately 35% of new sales and supply chain and dedicated.
Kind of along Jordan's question.
If I look on the noise in the headlines and some of the oddities moving around is your sense that we are bottoming here and things feel a little bit better I think you said you don't see it getting better until later next year, but.
John Diaz: Overall, we believe these attributes result in a more resilient model with ongoing growth momentum I'll turn the call over to John to review our third quarter performance.
What's different about this cycle from your perspective, and if I cut through the noise. What do you think is really happening at all.
Our economy right now through your eyes.
John Diaz: Thanks Robert total company results for the third quarter on page seven. Operating revenue of 2.4 billion in the third quarter of 1% from the prior year primarily reflects contractual revenue growth and all three segments partially offset by lower rental revenue comparable earnings per share from continuing operations for $3.58 in the third quarter down from a record $4.45 in the prior year. Reflecting expected weaker market conditions in use vehicle sales and rental partially offset by strong supply chain results return on equity our primary financial metric was 21% and remained above our high teens target.
You know, Jeff it's a good question and I think it's important to remind everyone that 85% of the revenues that rider of contractual so I'm not saying that the cycle is not important for Ryder because the cycle clearly impacts our used vehicle sales in our rental business.
The core business of variety of the contractual Choi.
Choice lease.
Dedicated and supply chain I'd say still remains strong.
Certainly from an earnings perspective, as you know in the third quarter every one of the segments at their hit their earnings profit targets.
We had a strong beat to the forecast maintenance cost came in really strong or weak. We just delivered $100 million of maintenance cost savings, we're doing even more and it was evident this quarter.
Why chain automotive came in stronger than we had expected and even used vehicles sales, which we know is impacted by the cycle.
John Diaz: Year over year declines reflect weakening use vehicle sales and rental market condition. Partially, I'll set by our return finish this year to date, free cash will decrease to 32 million from 887 million in the prior year due to increased capital expenditures and lower use people sales proceeds prior year included 300 million in year to date proceeds from the UK exit turning to fleet management results on page 8 3% due to lower rental demand and as a result of the exiting of the UK partially offset by higher contractual revenue from choice lease and select care free tax earnings and fleet management were 169 million and down year over year as anticipated prior year results reflect record pre tax earnings and fleet management largely due to elevated market conditions and use vehicle sales and rental lower use vehicle pricing in the quarter was partially offset by higher sales volumes rental utilization on the power fleet of 75% was in our mid to high 70s range but down from prior year record levels of 83%.
Came in better than what we had forecasted.
Delivered 21% return on equity even in that type of an environment, which as you remember our peak return on equity in the past was mid teens.
We're now, saying that's going to be our trough return on equity so we're in a different.
A different trajectory than we have been in the past, we announced the acquisition our plans to acquire.
Which is again consistent with our strategy.
To grow our asset light and.
Higher return supply chain business, it is going to give us new capabilities in.
Contract packaging and contract manufacturing that we can then sell to other customers within our supply chain portfolio and then we also announced two.
Sure authorization of two share buyback programs again, continuing to return money to shareholders, We had recently announced.
10% increase in the dividend.
A lot of really good things happening at Ryder, even in a declining and really soft.
<unk> market and that is I think what distinguishes writers.
<unk> portfolio of businesses and business model for me some of the other.
John Diaz: Lower utilization was partially offset by a 1% increase in power fleet pricing. Despite a weaker use people sales and rental environment fleet management evt is a percent of operating revenue remains strong at 13.4% in the third quarter at the high end of the segments long term target of low double digits. For the trailing 12 month period it was above target at 15.4%.
Transports that are there so having said all that I would tell you. We expect those parts of our business, which are impacted by the freight cycle, which are used vehicle in rental we expect those to continue to be soft probably going into the first half of next year, and then probably beginning to pick up in the second half, it's still too early to tell could come in a little bit sooner.
Could come in a little bit later, but that's sort of what were what were.
Planning out right now.
Great. Thank you for that answer.
John Diaz: Page 9 highlights use vehicle sales results in North America for the quarter. As anticipated market conditions for use vehicle sales continued to weaken from elevated levels in the prior year. Compared with prior year use tractor proceeds declined 31% and use truck proceeds declined 30% reflecting weaker free conditions.
My one.
Thanks, Joe.
We'll go next to Scott Group with Wolfe Research.
John Diaz: On a sequential basis proceeds for tractors decreased 8% and proceeds for trucks decreased 6%. Both better than our expectations. During the quarter we sold 6,500 use vehicles up sequentially in versus prior year. Use vehicle inventory increased to 7,800 vehicles at quarter end and remains in line with our target inventory levels was 7 to 9,000 units. Increase sales volumes and inventory levels reflect higher lease replacement and rental beef leading activity. Although use vehicle pricing declined proceed to remain above residual value estimates used for depreciation purposes. Live 21 of the appendix provides historical sales proceeds incur residual value estimates for use tractors and trucks for your information.
Hey, Thanks, good morning, so when I just look at the fourth quarter Guide Q3 to Q4 drop but a bit worse than normal seasonality is there anything of note driving that is that the auto strike or is there just conservatism in there just any color there.
Then usually around now you give us some high level thoughts about next year, just what are the puts and takes you see for 2020 for gains on sale.
Any other drivers as you think about normalized earnings next year. Thank you sure sure Scott as you mentioned the Q3 to Q4 earnings number you'd normally have a seasonal decline in Q4.
Sequentially because.
A lot of slowdown in the back half of the quarter. So you think last two weeks of December things really slow down.
We also as you know in supply chain or in the auto sector.
Typically shutdowns for the holidays. So you have the normal seasonal decline Q3 to Q4 I think the additional decline that we have in the forecast years, primarily a rental business. We are right now expecting rental could be down more than we had expected in the prior quarter.
John Diaz: Turnip is applied chain on page 10 operating revenue increased 9% reflecting new business and increased pricing.
And our forecast and the prior quarter.
Again, that's just our peak right now from what we've seen in the market. We're not seeing we're not expecting a big seasonal pickup in truck rental in Q4, it could still materialize, but here. We are at the third week of October it's kind of the way we're seeing it is not a pick up but.
John Diaz: Double digit revenue growth and automotive consumer package goods and industrial verticals more than offset softer volumes in our omnichannel retail work. Supply Chain Earnings Increased 14% Reflecting Operating Revenue Growth in Lower Incentive Face Compensation Cost, partially outset by lower volumes in the Omni Channel Retail Vertical. Supply Chain EBT as a percent of operating revenue was 9% in the quarter at the high end of the segment's high single digit target range.
Still could happen, but that's really the difference in the Q3 to Q4.
Guide.
In terms of 2020 for puts and takes.
Question in the last call it not a whole lot has changed since the comments I made and I think it's important to know that were consistent with our balanced growth strategy. We expect our ROE next year will certainly be within our stated range of mid teens to low twenties depending.
John Diaz: Moving to Dedicate on Page 11, Operating Revenue Increased 3% primarily reflecting the recovery of inflationary costs. Dedicated EBT was generally in line with prior year. EBT benefited from inflationary rate increases, partially outset by lower gains from sales and vehicles.
Depending on where we are in the cycle. So if we don't get any help from our rental and used trucks you can be in the mid teens. If you get some help we could be in the high teens.
We expect the biggest drivers of earnings growth are going to come from the top line growth of our contractual businesses remember that 85% of the revenue which is lease.
John Diaz: We continue to see favorable driver conditions as the number of open physicians in time to fill for our professional drivers improve. Dedicated EBT as a percentage of operating revenue of 8.5% in the quarter was in line with the segment's high single digit target.
<unk> is dedicated.
Lease and supply chain.
<unk> will be at your target growth rates.
And just as a reminder, leases mid single digits in.
Our supply chain is low double digits dedicated still too early to tell could be off of their targets of high single digits because of the sales.
John Diaz: We expect slower contract sales activity and dedicated in the near term, consistent with a foster freight environment. As previously noted, we expect 2023 segment revenue growth to be below our high single digit target range. Segment EBT percent is expected to remain in line with our high single digit target range for the remainder of the year.
Softness that we've seen this year as the freight market has softened you've got less customers really running to do dedicated but as the freight market comes back you're going to see.
Dedicated sales pick back up and certainly we would expect to be back at those levels.
As far as the transactional rental and used vehicles.
That are more tied to the freight market again, its still early to tell what the whole freight market is going to do but I would expect those to have continued softness in the first half of the year.
John Diaz: Turning to Slide 12, year-to-day lease capital spending of 2 billion was up from prior year reflecting increased lease replacement and growth activity, as well as the accelerated timing of OEM vehicle deliveries.
And then a possible pickup in the second.
Yes.
John Diaz: Here to date, rental capital spending of 388 million was below prior year's planned. Our 2023 forecast for lease capital spending of 2.6 billion reflects higher lease replacement and growth capital versus prior year.
And of that pickup will determine.
Whether they used vehicle sales and rental what the impact of used vehicle sales.
Sales and rental will be.
On our earnings next year.
But again I don't know another reminders, we are going to continue to leverage our zero based budgeting process to find other cost savings opportunities, probably throttling, maybe throwing some of our strategic investments as needed.
John Diaz: Lease growth is expected to be lower than our prior forecast as customers delayed decisions in the current environment. We now expect the ending lease lead to be up approximately 5,000 vehicles versus prior year, while ending active fleet is expected to be up approximately 2,500 vehicles reflecting an elongated delivery cycle for trucks. Delivery timeframes for tractors are now at normal levels.
Again focused on making sure that we deliver on our returns commitments to our shareholders.
And again, it's again, what we expect next year is to again deliver on our goals for the balanced growth strategy with higher highs.
And higher lows.
Can I just try to ask it maybe a little differently. So like you started the year, saying, 11% to 12 of earnings and now you'll do closer to 13, how much of that incremental one to $2 do you think is.
John Diaz: In rental, our ending fleet is now expected to be down 13% or 5,300 vehicles reflecting higher rental deployment activity. Our four-year 2023 capital expenditure forecast of approximately 3.2 billion is unchanged from our prior forecast. We continue to expect proceeds from the sale of use vehicles of approximately 800 million in 2023 down from prior year, which included 400 million proceeds related to the UK exit for the four-year. Four-year 2023 net capital expenditures are expected to be approximately 2.4 billion.
Temporary or more part of like you originally gave us a normalized earnings number and a year ago should we just add a dollar to $2 to that normalized earnings number and that's the new normal if that makes sense.
Yeah, No I would say a good chunk of that year over year improvement I'm, sorry of that forecast improvement was wasn't used vehicles sales right. So you saw.
Used truck prices did not come down.
Steeply as we had originally forecasted so that's what drove a good chunk of that the base business continued to perform really well, maybe a little bit better than what we had originally expected, but I would tell you the big improvement Euro versus our original forecast was.
John Diaz: Turning to slide 13, our 2023 4-year forecast for free cash flows unchanged at approximately 100 million and reflects the accelerated timing of OEM deliveries and the corresponding increase to lease capital expenditure. The forecast for operating cash flow remains at 2.5 billion. As shown, the trajectory of our cash flow continues to improve over time, reflecting growth in our contractual supply chain, dedicated and lease businesses, which comprise over 85% of riders operating revenue.
Merrell around used vehicle sales, partially offset by rental being a little bit worse than we had expected.
But you still feel very good about whatever you told US was normalized earnings Nothing's really nothing is changing there at all absolutely I would tell you more confident now than we were.
At the beginning of the year.
Okay helpful. Thank you Robert.
Thank you Scott.
Well go next to Allison <unk> with Wells Fargo.
Hi, good morning.
John Diaz: The COVID effects and OEM delays resulted in lower capital spending and higher free cash flow. Proceed 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 strong free cash flow generated by the business prior to investing in flea growth. In 2023, we expect to generate approximately 100 million in free cash flow and prior to investing in growth capital. This number is expected to be approximately 500 million.
Robert I'll, just turn to advertising services you mentioned the diversification that you guys have achieved if R&D power.
Are you thinking about diversification today, you can is there more to do on that side.
And.
This makes me to sit there and just any color there. Thanks.
Yeah, you know we're coming from a business that was really originated with automotive right. We were very heavily into the automotive logistics business still a very good business for us, but we're now down where auto I think represents 27.
7% of our revenues.
John Diaz: 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 and SES and has helped transform our supply chain business in terms of expanding capabilities as well as rebalancing our vertical mix. Now, actually leverage of 214% was below our 250 to 300% target and continues to provide ample capacity to fund organic growth and targeted acquisitions, as well as to return capital to shareholders through share repurchases and dividends.
So we've really been able to diversify into CPG.
We diversified into retail e-commerce last mile.
We now did an acquisition tool.
We're in the process of doing acquisition to be able to offer.
Co packaging and co manufacturing services to CPG and some of the other verticals. So we feel really good about where the balances today youre going to see us maybe do some additional acquisitions if they become available.
In some of the other industry verticals, but I think we have a very good balance of business across our supply chain business. Today I think is as shown as we've gone through the last few cycles, where some industry verticals have been up and some have been down and overall supply chain has continued to improve their earnings.
Robert Sanchez: With that, I'll turn the call back over to Robert to discuss our enhanced death and management playbook and outlook. Thanks, John. Slide 14 provides key highlights from our enhanced asset management playbook, which is focused on optimizing returns over the cycle from our transactional use vehicle sales and rental businesses. In response to weakening use vehicle and rental demand, we are redeploying underutilized rental vehicles to fulfill lease, dedicated and supply chain contracts. In 2023, we expect to redeploy between three and 4,000 units to align our rental fleet with demand conditions.
Year over year help healthcare I think is another area that we are probably underrepresented right now we've got a few but what I would call flagship accounts, we wanted to continue to grow that.
Perfect. Thanks for the color.
Thanks Allison.
We'll go next to Brian Awesome back with J P. Morgan.
Hey, good morning, Thanks for taking the question just had two quick ones. Robert maybe you can talk about the puts and takes for used trucks.
Tractors in particular, it looks like things have stabilized, maybe a little bit better than we had anticipated, but you've got some more production ramping up the truckload market is still pretty weak. So I guess looking to see what you would need.
Robert Sanchez: This elevated level of redeployment activity is enabling us to fulfill lease contract sooner and is also contributing to lease leak growth. We expect rental power fleet utilization for the full year 2023 to be at the lower end of our target range of mid to high 70s. In use vehicle sales, we're leveraging our expanded retail sales network. Since 2019, we've increased our retail sales capacity by 50% by adding physical locations and increasing our inside sales team to capture digital sales opportunities.
We need to see happen to sort of reach that residual value, which you're still above by by a good amount.
And then secondly, we've heard more about competition is this part of the freight cycle not too big of a surprise, but I just wanted to see how it was trending from your perspective.
Especially in dedicated where theres been some contract shifting some share shifting.
Based on the increased competition.
Therapy appreciate it thank you.
So Brian Thanks for the question look I think on the used tractor side, we're seeing the decline that we are that.
Robert Sanchez: Increasing retail sales volume benefits results as wholesale proceeds have historically been at a 30% discount to retail pros. And finally, we continue to shift our vehicle mix and rental towards trucks where we see stronger demand trends that have historically been more resilient than those of tractors. We've reduced our 2023 rental tractor fleet by 18%. By year and 2023, we expect that trucks will be approximately 60% of the North American rental fleet up from 49% in 2018.
We had originally expected to begin in Iraq actually I guess, you mentioned earlier came in a little bit better than we expected, but a decline nonetheless, you've got it in our appendix as to where we are from a used truck pricing standpoint, we feel really good about where we are versus our residuals and where we think pricing can go versus our residuals. So we're not concerned.
And I think the cycle is going to play itself out over the next several quarters I think you'll see we've probably seen the biggest of the declines and then you're going to see it over time begin to flatten out and eventually come back as the freight cycle returns.
Robert Sanchez: Although earnings will be impacted by the freight environment, the successful execution of our enhanced asset management playbook has enabled us to effectively manage through the 2023 freight down cycle and generate higher earnings in each phase of the cycle.
As far as new.
Class eight production, that's going to be a driver as to when the used truck market bottoms out. So we think that new production will probably start to slow down as we get into the first half of next year and that'll be helpful for.
Robert Sanchez: Turning to slide 15, in addition to managing through the downturn, we're also focused on positioning the business to benefit from the cycle upturn. Although the majority of our revenue is supported by long term contracts that generate relatively stable and predictable cash flows over the cycle, each business segment has opportunities to benefit from the cycle upturn. The majority of our cyclical exposure resides in fleet management with rental and use vehicle sales. Our enhanced asset management playbook has been focused on managing these transactional businesses during the freight downturn.
New tractor I'm, sorry for used truck prices.
We're very happy.
Happy about the fact that we have.
Banded our retail network and we're now being able to leverage that expanded retail network to retail more of these used trucks as opposed to having to wholesale them. We're also being very cognizant of our inventory and making sure that we stay within our target range, which we're right smack in the middle of that right. Now so we're going to continue to monitor that very closely.
Make sure that those tractors are moved out to the secondary market at good prices, but not allowing inventory to really come up.
Robert Sanchez: And while also positioning them to benefit from the cycle upturn, improved freight conditions should increase demand for rental and use vehicles. In rental, we intend to grow the fleet as we approach the 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 gains. Above normalized levels. An additional opportunity on the horizon for FMS is the potential pre-buy activity ahead of the 2027 EPA engine technology changes.
In terms of the competition I'll tell you yet.
As you saw dedicated especially in dedicated you've seen our our grocery and dedicated slow down sales of softness we're not seeing the same level of.
Private fleet conversion, if you will that we saw last.
Last year, and that's primarily because you've got a very attractive spot rate. So you've got customers, who are taking advantage of that and you have the driver recruiting market has gotten much easier also and therefore not as many private fleets needing help there that is a temporary I believe that's a temporary.
Robert Sanchez: The industry is generally expecting some level of pre-buy activity given the expected impact on upfront cost and maintenance cost implications. Based on what we see today, pre-buy activity could begin as soon as 2025, as we have historically seen higher levels of fleet growth a couple of years ahead of a change. We also would expect use vehicle pricing to be supported by demand for the old emissions technology. Increased engine complexity and costs generally favor the outsourcing decision, which would benefit lease sales activity.
<unk> because the driver shortage is here to stay.
And we're gonna I expected as the freight market comes back you're going to see the driver shortage really.
Exacerbate itself forget it and come back up which will drive a lot more deadly.
Dedicated but in terms of competition look we are very disciplined around our pricing so youre not going to see us get very aggressive on pricing in order to win deals we're going to win the deals where we can add value and the customers willing to pay for that.
That's why you see that the profitability of our dedicated business.
Still remains strong.
Alright, Thanks, Robert I'll very helpful. I appreciate it.
Thanks, Brian.
Robert Sanchez: In dedicated, improved driver availability and lower recruiting and turnover costs have benefited 2023 earnings, but have been ahead win for new sales and revenue growth. As the freight cycle strengthens and driver availability becomes more challenging, we expect to see incremental sales opportunities and improve revenue growth in DPS as private fleets seek solutions to address this pain point. In supply chain, weaker volumes in our omnichannel retail vertical have been headwinds to revenue and earnings during 2023. We continue to believe in the long-term growth prospects of our e-commerce fulfillment and last mile delivery of big and bulky goods and have invested in technology as well as an expanded footprint to support this business.
We'll go next to Justin long with Stephens.
Thanks. Good morning, everyone. This is brady layers on for Justin long I wanted to ask you about the monthly rental trends through the quarter, including how you've seen October trends month to date and maybe your expectations for utilization in rental for both the fourth quarter and early next year.
Yeah, I'll I'll hand that over to Tom to give you the what we've seen in the months, but I will remind you that we talked about it on the on the in the script on the call.
Have brought in the quarter, we brought down actually year over year, we brought down our tractor fleet and rental by 18%.
That was really to match, what we were seeing on the demand side. So one of the things that we're really proud of is from an asset management standpoint, we've been able to really.
Robert Sanchez: Thomas. We expect supply chain results to benefit as Omni-channel volumes recover and the incremental footprint is leveraged. We've been pleased with the improved resiliency of the model and now performance during a down cycle and are appropriately positioning all three segments to benefit from the up cycle.
Just our fleet.
Very quickly to be able to match the demand we're seeing so as we go into next year works I mean, as we go into this quarter, we're expecting continued softness in rental but I'll let.
Tom gave you a little bit of colors, we are expecting some pickup in utilization in the last couple of months.
Robert Sanchez: Turning to page 16, we're raising our full year 2023 comparable EPS forecast to a range of 1260 to 1285 up from the prior forecast of 1220 to 1270. Our increased forecast reflects better than expected performance and used vehicle sales, ongoing maintenance cost improvements and supply chain automotive performance partially set by weakening conditions in rental and Omni-channel retail.
As we get into the holiday season go ahead Tom.
Yes, Thank you Robert and yes, we did mention it earlier, but the demand was a little bit softer than what we.
As expected and forecasted in Q3.
So we did continue to kind of throttle the redeployment process in the asset and our asset management team has done a great job in executing that we had we've done year to date, a little over 3000 rental to lease redeployments, which has helped us move that fleet down.
Robert Sanchez: We're also providing a fourth quarter comparable EPS forecast of 260 to 285 versus a prior year of 389. Our 2023 ROE forecast is 18 to 19%, which is at the high end of our long term target of high teams and above our prior forecast of 17 to 19%. Our strong 2023 earnings reflects the transformative changes we've made in the business model. The year over year decline is primarily due to weaker market conditions in UBS and rental relative to prior years elevated levels. As a reminder, our full year 2023 gap EPS forecast includes approximately $3.96 from the cumulative currency translation that was recorded in the second quarter.
We weren't necessarily expecting to need to do that much in Q3, but as we saw the demand.
Really not be there as we forecasted we continue to to move the fleet down.
So.
We do expect that that softer demand to <unk>.
Can you into Q4, which was different than our original forecast.
Heading here into October.
The numbers are the utilization is right in line with with where we expected it to be.
Right in the mid seventies, right around 75% kind of flat to what we saw in Q3.
Although we do expect a slight seasonal pick up in November and December.
And maybe I'll pick up that.
Seasonally.
Robert Sanchez: Turning to page 17, we believe Ryder is well positioned to increase shareholder value. We see significant opportunities for profitable growth supported by secular trends, our operational expertise, and ongoing momentum from multi-year initiatives. We've made transformative changes to our business model and continue to demonstrate strong execution on our balanced growth strategy, which has enabled us to achieve our long-term targets, increased business model resiliency, and now perform prior cycles. We remain committed to investing in products, capabilities and technologies that will deliver value to our customers and our shareholders.
A little bit lower than what we've seen historically so that's currently what's what's in the what's in the forecast.
We do expect the fleet to come down again, I think sequentially, we got their rental fleet coming down about about another 1000 units to end the year.
Okay, great. Thanks for the color guys.
We'll go next to Brian <unk> with J P. Morgan.
Yeah.
Hey, Thanks, just a couple.
Quick housekeeping I guess.
Robert maybe the impact of the U.
UAW strike and how it's still dynamic and ongoing but have you seen anything yet I think you mentioned ground count was maybe getting a little away a little bit but anything from your perspective to keep in mind.
Operator: That concludes our prepared remarks. Please note that we expect to file our 10Q later today.
Operator: We had a lot of material to cover today, so please limit yourself to one question each. If you have additional questions, you're welcome to get back into Q and we'll take as many as we can.
The fourth quarter.
And then maybe you could just give it a quick high level view of Iff's.
Acquisition is still pending but what are you hoping to get from their types of cross selling you know how the customers are reacting to that and I guess on the contract manufacturing side is to look at this as a margin.
Operator: At this time, I'll turn it over to the operator. Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad.
Operator: If you are a unique speaker phone, please make sure your mute function is turned off to a liar signal tree chart equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Creatives to supply chain or is it sort of in line with the segment.
Thanks.
Okay. Thank you Brian for the question first around the UAW the impact so.
So far it's been immaterial.
As you know.
So I'd just early mentioned that about 27% of our supply chain businesses automotive. It is an important part of our business, but we have a pretty good balance between union and nonunion.
Jordan Alliger: We'll go first to Jordan Alliger with Goldman Sachs. Hi, morning. You guys get to see the economy from a pretty broad array of businesses, lease, supply chain, rental, etc.
Customers. So as we go into the balance of the quarter, we built some of that but we would expect might happen in there but.
Robert Sanchez: You maybe give a bit of an assessment of what you're thinking in terms of a bottoming in turn in the freight cycle. Yeah, Jordan, listen, I think as we see it now, as we see things have continued to decline, the freight cycle is probably nearing a bottom here over the next quarter or two. We're assuming that it'll remain soft, probably to the middle of next year. And then as we get into the back half of next year, we would expect things to start to come back up.
But I think even if you look at even in the worst case scenario probably covered.
The estimate that we've given you so I guess less of a big concern for us right now.
Then under <unk>, we are very excited about the opportunity here, so I'm going to let up.
Steve gave you a little bit of color on on Iff's and how it fits into our.
Supply chain portfolio.
Thanks, Robert Yeah, Brian really excited about this you know I would think of it as an on ramp for our customers. So we do this in just a few locations.
Robert Sanchez: Also, I would tell you as you mentioned that we do we do have visibility across a lot of customers. And this quarter we saw, again, continued softness with the transports. A parallel retail still seems to be relatively soft and housing is probably not a surprise, things like furniture and housing support type products are put down. But we do, we do still see strength and we did see strength in the CPG sector in automotive, we saw a lot of production really strong in the quarter. And also an industrial, industrial is a little bit of a mixed bag, but the industrial customers and we have still saw some good strength.
Our warehouse it today.
But this is additive to the pipeline. So there is a pretty good size pipeline in their portfolio that we are we do not participate in today. So we think that's very exciting it does fit into our port door strategy.
As you think about this business. It is is complex and it is sticky with with those customer relationships. So.
That's attractive to this again 15 locations across the U S. Nine are multi client, which we can serve.
Small startup companies and large companies that have run out of capacity and then six dedicated customer operations, So almost 4 million square feet.
Operator: Thank you. 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 two.
I would like to welcome the team a team of about 1000 employees will join writer here in the next few weeks and really excited about meeting them and getting them as part of rider.
Jeff Kaufman: We'll go next to Jeff Kaufman with vertical research partners. Thank you very much, everybody. Congratulations.
Yeah, Brian the only other thing I'd add.
It is accretive to our results going into next year somewhat accretive.
Robert Sanchez: More of a bigger picture question here, you know, a lot of different views about what's going on. I know Jordan just asked you when you see things improving. You know, we're getting some other people say, hey, this retail inventory, D stock is done. We got other companies saying, hey, I don't know what's going to happen because of this UAW situation. We're all trying to figure out kind of what's going on underneath right everything that's happening.
And then from a margin standpoint, I would say is in line with our supply chain margins longer term.
Okay, Great I appreciate all that thanks, guys.
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, well. Thank you everyone. Thanks for the questions and your interest in Ryder.
I look forward to seeing you as we get out on the road. Thank you.
Robert Sanchez: Kind of along Jordan's question. If I look beyond the noise and the headlines and some of the oddities moving around, is your sense that we are bottoming here and things feel a little bit better. I think you said you don't see it getting better till later next year, but what's different about this cycle from your perspective. And if I cut through the noise, what do you think's really happening in our economy right now through your eyes?
Yeah.
This does conclude today's conference we thank you for your participation.
[music].
Robert Sanchez: You know, Jeff, it's a good question. And I think it's important to remind everyone that 85% of the revenues that rider are contractual. So yeah, I'm not saying that the cycle is not important for rider because the cycle clearly impacts our used vehicle sales and our rental business. But the core business of rider, the contractual choice lease, dedicated and supply chain, I'd say still remain strong. Certainly from an earnings perspective, as you know, in the third quarter, every one of the segments hit their earnings profit target.
Okay.
[music].
Okay.
[music].
Robert Sanchez: We had a strong beat to the forecast. Maintenance cost came in really stronger. We just delivered $100 million of maintenance cost savings. We're doing even more and it was evident this quarter supply chain automotive came in stronger than we had expected and even used vehicle sales, which we know is impacted by the cycle came in better than what we had court. We delivered 21% return on equity, even in that type of an environment, which as you remember, our peak return on equity in the past was mid teens.
Yes.
[music].
Robert Sanchez: We're now saying that's going to be our trough return on equity so we're in a different, different trajectory than we have been in the past. We announced the acquisition, our plan to acquire IFS, which is again consistent with our strategy to grow our asset light in higher return supply chain business. It's going to give us new capabilities in contract packaging and contract manufacturing that we can then sell to other customers within our supply chain portfolio.
Robert Sanchez: And then we also announced to share authorization to share buy back programs again continuing to return money to shareholders. We had recently announced a 15% increase in the dividend. So there's a lot of really good things happening at Ryder. Even in a declining and really soft freight market. And that is the, I think what distinguishes Ryder's portfolio businesses and business model from some of the other transports that are there, so I mean set all that I would tell you we expect those parts of our business, which are impacted by the freight cycle, which are used vehicle and rental, we expect those to continue to be soft.
Robert Sanchez: [inaudible] in the Q-3 to Q-4 guide. In terms of 20, 24 puts in take, I think you asked that question in the last go on. Not a whole lot's changed since the comment time may have been. I think it's important to know that we're consistent with our balanced growth strategy. We expect our ROE next year will certainly be within our stated range of mid-teens to low 20s, depending on where we are in the cycle.
Robert Sanchez: So if we don't if you get some help, we could be in the high teams. We expect the biggest drivers of earnings growth are going to come from the top line growth of our contractual businesses, around 85% of the revenue which is lease, supply chain is dedicated, lease and supply chain, we expect will be at their target growth rates and just as a reminder, lease is mid single digits and supply chain is low double digits.
Robert Sanchez: Dedicated, still too early to tell, could be off of their targets of high single digits because of the sales softness that we've seen this year as the freight market is soft and you've got less customers really running to do dedicated. But as the freight market comes back, you're going to see dedicated sales pick back up and certainly we'd expect to be back at those levels. As far as the transactional rental and use vehicles that are more than high to the freight market, again, it's still early to tell what the whole freight market is going to do.
Robert Sanchez: But I would expect those to have continued softness in the first half of the year and then a possible pick up in the second. I guess the extent of that pick up will determine whether the use vehicle's sales and rental, what the impact of use vehicle's sales and rental will be on our earnings next year. But again, another reminder is we're continuing to leverage our zero based budgeting process to find other cost savings opportunities, probably throttling, maybe throttling some of our strategic investments is needed.
Robert Sanchez: Again, focused on making sure that we deliver on our returns commitments to our shareholders. And again, what we expect next year is to again deliver on our goals for the balanced growth strategy with higher highs and higher lows.
Robert Sanchez: Can I just try to ask you just maybe a little differently? So like you started the year saying 11 to 12 with earnings and now you'll do closer to 13. How much of that incremental one to $2? Do you think is temporary or more part of like, you originally gave us a normalized earnings number in a year ago? Should we just add a dollar to $2 to that normalized earnings number and that's the new normal?
Robert Sanchez: If that makes sense? Yeah, no, I would say a good chunk of that year over year improvement. I'm sorry, of that forecast improvement was in use vehicle sales, right? So you saw use truck prices did not come down as steeply as we had originally forecasted. So that's what drove a good chunk of that. The base business continued to perform really well. Maybe a little bit better than what we had originally expected.
Robert Sanchez: But I would tell you the big improvement year versus our original forecast was primarily around use vehicle sales partially offset by rental being a little bit Worse than we had expected. But you still feel very good about whatever you told us was normalized earnings that nothing's really nothing's changing there at all. Absolutely, I would tell you more confident now than we were at the beginning of the year. Okay, helpful. Thank you, Robert. Thank you, Scott.
Allison Poliniak: Well, the next two, Allison Poliniak with Wells Fargo. Hi, good morning.
Robert Sanchez: Robert, you need to turn to the high chain services. You mentioned the diversification that you guys have achieved so far today. How are you thinking about diversification today? You think is there more to do on that side? Is this a mix of the mix need to shift a bit more? Just any color there. Thanks. Yeah, you know, we're coming from a business that was that really originated with automotive, right? We were very heavily into the automotive logistics business still a very good business for us.
Robert Sanchez: But we're now down. We're auto, I think, represents 27% of our revenues. So we've really been able to diversify into CPG. We diversified into retail e-commerce last mile. As you saw, we now did an acquisition to where we're in the process of doing acquisition to be able to offer co packaging and co manufacturing services to CPG and some of the other verticals. So we feel really good about where the balance is today.
Robert Sanchez: You're going to see us maybe do some additional acquisitions that they become available in some of the other industry verticals, but I think we have a very good balance of business across our supply chain business today. I think as shown as we've gone through the last few cycles where some industry verticals have been up and some have been down and overall supply chain has continued to improve their earnings year over year. Yeah, health care, I think, is another area that we are probably underrepresented right now. We've got a few of what I would call flagship accounts. I would want to continue to grow that.
Operator: Perfect. Thanks to the color. Thanks, Allison.
Brian Ossenbeck: Looking next to Brian, awesome back with JP Morgan. Hey, good morning. Next take in the question.
Robert Sanchez: I said two quick ones. Robert, maybe you can talk about the puts and takes for use trucks. Tractors in particular, it looks like things are stabilized and they go a little bit better than we knew had anticipated, but you got some more production ramping up. The truck glue market is still pretty weak. So I guess looking to see what you would need to see happen to sort of breach that residual value, which you're still above by a good amount.
Robert Sanchez: And then, you know, secondly, we've heard more about competition at this part of the freight cycle, not too big of a surprise, but just wanted to see how it was trending from your perspective, especially in dedicated where there's been some contract shifting some share shifting based on the increased competition, both us there be appreciated. Thank you. So, so Brian, thanks for the question. Look, I think on the use tractor side, we're seeing the decline that we that we had originally expected to begin here actually, like I mentioned earlier, came in a little bit better than we expected, but a decline nonetheless, from Eustric Pricing Stamp Point.
Robert Sanchez: We feel really good about where we are versus our residuals and where we think pricing can go versus our residuals. So we're not concerned on that end. I think the cycle is going to play itself out over the next several quarters. I think you're see, we probably seen the biggest of the declines and then you're going to see it over time, begin to flatten out and eventually come back as the freight cycle returns.
Robert Sanchez: As far as new class state production, that's going to be a driver as to when the use truck market bottoms out. So we think that new production will probably start to slow down as we get in the first half and next year, and that'll be helpful for new tractor, I'm sorry, for use truck prices. We're very happy about the fact that we have expanded our retail network and we're now being able to leverage that expanded retail network to retail more of these use trucks as opposed to having to wholesale them.
Robert Sanchez: We're also being very cognizant of our inventory and making sure that we stay within our target range, which we're right smack in the middle of that right now. So we're going to continue to monitor that very closely and make sure that those tractors are moved out to the secondary market at good prices, but not allowing inventory to really come up. In terms of the competition, I'll tell you, yeah, as you, as you saw, dedicated, especially in dedicated, you've seen our, our growth rate and dedicate is slowed down, sales have softened.
Robert Sanchez: We're not seeing the same level of private fleet conversion, if you will, that we saw last year and that's primarily because you've got a very attractive spot rate. So you got customers are taking advantage of that and you have the driver recruiting market has gotten much easier also and therefore not as many private fleets needing help there. That is a temporary, I believe, at the temporary reprieve because the driver shortage is here to stay and we're going to, I expect that as the freight market comes back, you're going to see the driver shortage really exacerbate itself again and come back up, which will drive a lot more dedicated, but in terms of competition, look, we are very disciplined around our pricing.
Robert Sanchez: So you're not going to see us get very too aggressive on pricing in order to win deals. We're going to win the deals where we can add value and the customer is willing to pay for that. And that's why you see that the profitability of our dedicated business still remains strong.
Unknown Attendee: We'll be next to Justin Long with Stevens. Thanks, good morning everyone. This is Brady Lears on for Justin Long.
Tom Havens: I wanted to ask about the monthly rental trends through the quarter, including how you've seen October trend month to date and maybe your expectations for utilization and rental for both the fourth quarter and early next year. Yeah, I'll hand that over to Tom to give you the what we've seen in the months, but I will remind you that we talked about it on the on the script on the call. We have brought in the quarter.
Tom Havens: We've brought down actually year over year. We brought down our tractor fleet and rent, by 18%. That was really to match what we were seeing on the demand side. So one of the things that we're really proud of is from an asset management standpoint, we've been able to really adjust our fleet very quickly to be able to match the demand we're seeing.
Tom Havens: So as we go into next year, I mean, as we go into this quarter, we're expecting continued softness and rental, but I'll let Tom give you a bit of colors. We are expecting some pickup in utilization in the last few couple of months as we get into the holiday season. Go ahead, Tom. Yeah, thank you, Robert. And yeah, we did mention it earlier, but the demand was a little bit softer than what we expected and forecasted in Q3.
Tom Havens: So we did continue to kind of throttle the redeployment process and the asset and our asset management team has done a great job in executing that. We had, we've done year-to-date, a little over 3000. And then rental to lease redeployments, which has helped us move that fleet down. We weren't necessarily expecting to need to do that much in Q3, but as we saw the demand really not be there as we forecasted, we continue to move the fleet down.
Tom Havens: So we do expect that that softer demand to continue into Q4, which was different than our original forecast, heading here into October. The numbers are the utilization is right in line with where we expected it to be right in the mid 70s, right around 75% kind of flat to what we saw in Q3. Although we do expect a slight seasonal pickup in November and December, maybe a pickup that seasonally is a little bit lower than what we've seen historically. So that's currently what's in the forecast. We do expect the fleet to come down again. I think sequentially we've got the rental fleet coming down about another 1000 units to end the year.
Brian Ossenbeck: Okay, great. Thanks for the call, guys. Well, the next two, Brian, awesome.
Brian Ossenbeck: That's with JP Morgan. Hey, thanks.
Robert Sanchez: Just a couple quick housekeeping, I guess. Robert, maybe the impact of the UAW strike and how it's still dynamic and ongoing, but have you seen anything? Yeah, I think you mentioned ground count was maybe getting rid of the way a little bit, but anything from your perspective to keep in mind into the fourth quarter. And then maybe you can just give a quick high level view of IFS acquisition, so pending, but what are you hoping to get from their types of cross selling, you know, how the customers are reacting to that? And I guess on the contract manufacturing side, you know, this is true. Look at this as a margin of creative to supply chain, or is it sort of in line with the segment?
Robert Sanchez: Thanks. Okay, thank you, Brian, for the question. First around the UAW, the impact so far has been immaterial. As you know, as I just early mentioned, that about 27% of our supply chain business is automotive. It is an important part of our business, but we have a pretty good balance between union and non-union end customers. So as we go into the balance of the quarter, we've built some of that what we would expect might happen in there. But I think even if you look at even though the worst case scenario are probably covered within the estimate that we've given you. So I guess less of a big concern for us right now.
Steve Sensing: So for the IFS, we are very excited about the opportunity here. So I'm going to let Steve give you a little bit of color on IFS and how it fits into our supply chain portfolio. Thanks, Robert. You have Brian really excited about IFS. I would think of it as an own ramp for our customers. So we do this in just a few locations in our warehouse today. But this is additive to the pipeline.
Steve Sensing: So there is a pretty good size pipeline in their portfolio that we are we do not participate in today. So we think that's very exciting. It does fit into our port door strategy. As you think about this business, it is, you know, it is complex and it is sticky with with those customer relationships. So, you know, that's attractive to us. Again, 15 locations across the US, 9 are multi-client, which we can serve, you know, small startup companies and large companies that have run out of capacity.
Steve Sensing: And then 6 dedicated customer operations, so almost 4 million square feet. We would like to welcome the team. Team of about 1000 employees will join Ryder here in the next few weeks and really excited about meeting them and getting them as part of Ryder. Yeah, Brian, the only other thing I got is it is a creative to to our results going into next year somewhat a creative. And then from a margin standpoint, I would say is in line with our supply chain margins longer term.
Operator: Okay, great. I appreciate all that. Thanks, guys.
Robert Sanchez: At the time there are no additional questions. I'd like to turn the call back over to Mr. Robert Santos for closing remarks. Okay. Well, thank you everyone. Thanks for the questions and your interest in Ryder and look forward to seeing you as we get out on the road. Thank you. Be safe.
Operator: This does conclude today's conference.
Operator: We thank you for your participation.