Ryder, reporting sluggish earnings growth, sees ‘trough’ in freight market

The word “trough” came up several times during Ryder System’s earnings call with analysts, as CEO Robert Sanchez and others suggested that the second quarter was the low point of a freight cycle that they see as primed for an upturn.

Sanchez said 2024 will “represent trough conditions in used sales and rental.” Sanchez later said on the Thursday call that return on equity at Ryder (NYSE: R) would “outperform prior cycles despite expected trough conditions and used vehicle sales.” Speaking of used vehicle sales, he said, “I would say maybe we’re seeing some signs of stabilization and maybe a real troughing.”

Short-term numbers showed some weakness at Ryder. Non-GAAP earnings before taxes were $188 million compared to $237 million a year ago. Total revenue was up 10% to $3.18 billion, but that  benefited from a 44% jump in revenue at Dedicated Transportation Solutions to $635 million. Dedicated Transportation Solutions includes Cardinal Logistics, acquired by Ryder earlier this year.

Slow growth at FMS

The flagship Fleet Management Solutions business saw a revenue increase of just 1%, to $1.48 billion, while the contract logistics segment, Supply Chain Solutions, rose 14%, to $1.34 billion. That segment also benefited from an acquisition, IFS Solutions, announced last October. 

Tom Havens, president of Fleet Management Solutions, provided some of the most detailed insights into why Ryder thinks a trough has been reached.

In the rental operations at Ryder, Havens said, there had been six consecutive quarters of sequential demand decline before it recorded an upturn between the first and second quarters. 

“Last year, as we went through the year, demand declined the entire year,” he said, according to a transcript of the earnings call. “So this was the first quarter going from Q1 to Q2 that we actually saw a sequential increase in demand.” Such an increase is normal on a seasonal basis but had not been seen last year.

“I don’t think it signals a recovery in any way but just sort of a normal seasonal improvement in demand,” Havens said.

In FMS’ leasing business, “the story may be even a little bit more dramatic,” Havens said. In that part of the business, there had been 11 consecutive quarters of year-on-year declines in the measure of miles per unit. The size of Ryder’s lease fleet declined during the quarter, Havens said, but the increase in miles per unit could be “an indication that there’s some rightsizing and rebalancing of those fleets when you see the miles finally improve year over year.”

Ryder is confident enough in the potential for an upturn that it increased its forecast for the remainder of the year on the bottom end of the range to earnings per share of $11.90 from $11.75. But the high end of its forecast dipped to $12.40 from $12.50.

Reduced gains from used vehicle sales

Used vehicle sales posted a net revenue gain of $19 million in the quarter compared to a net gain of $55 million a year ago. Inventory at the end of the quarter was 9,500 compared to 7,000 a year earlier, and Ryder sold 6,000 vehicles in the three months compared to 5,500 a year earlier. 

The company’s used truck and tractor pricing were down 27% and 19%, respectively, from 2023’s second quarter. Sequentially, the decline was 10% for trucks, but tractors saw a 5% increase compared to the first quarter of 2024.

Used tractor pricing for the quarter was down 19% from a year ago, though that was a smaller decline than the 41% decline reported in 2023’s second quarter compared to the second quarter of 2022.

CFO John Diez said part of the reason for the increase in the number of units for sale was a reduction in the fleet available for rental, which pushed up the inventories for sale. But no further reduction in the size of the rental fleet is expected, Diez said, so the inventory level should decline.

Diez said the rate of decline in tractor prices has shown “relatively stability” for the prior two quarters, with the numbers skewing somewhat higher because of the sale of some vehicles that had unique properties. Besides that, the year-on-year declines have been in the single digits, “so we’re seeing stability there.”

“We are expecting some sort of recovery based on the capacity demand imbalance that we’ve enjoyed over the last several quarters,” Diez said. “We think we’re getting to the bottom of that, and we may hit an inflection point in Q4.”

At the Dedicated segment, earnings before taxes (EBT) as a percentage of operating revenue was 7.6%, compared to 10.3% a year earlier, but on an outright basis, EBT rose to $37 million from $33 million a year earlier. Supply Chain Solutions EBT climbed 13% to $85 million from $76 million. Its EBT as a percent of operating revenue declined slightly, to 8.6% from 8.7% a year ago. 

But despite the weaker performance as measured by EBT margin in both groups, Sanchez said Ryder was “very pleased” with the performance of the two segments.

“The earnings growth was primarily driven by the base business just performing better,” Sanchez said on the call with analysts. “I think it speaks to the power of these long-term contracts that we have in Dedicated and Supply Chain. Even in this difficult of an environment, you’re actually getting earnings growth from these businesses, which is probably a bit unique given our industry and some of the volatility that we see there.”

Little update on Cardinal

The acquisition of Cardinal Logistics was mostly just mentioned in passing. But the prepared statement announcing the earnings said “integration of the Cardinal Logistics acquisition remains on track and we continue to expect to achieve planned synergies.”

Ryder management has said frequently that its goal is to broaden the company so that its rental and lease business is a smaller percentage of revenue. In the quarter, FMS revenue was about 46.4% of total revenue.

That’s still more than 3 percentage points short of the 2024 goal laid out by Sanchez on the call. “Through organic growth, strategic acquisitions and innovative technology, we’ve shifted our revenue mix towards Supply Chain and Dedicated with approximately 60% of 2024 revenue expected to come from these asset-light businesses compared to 44% in 2018,” he said. 

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