Ryder Reports Second Quarter 2020 Results

Second Quarter 2020

• Q2 total revenue of $1.9 billion, down 16%, and Q2 operating revenue (non-GAAP) of $1.6 billion, down 10% primarily reflecting COVID-19 impacts on commercial rental and automotive activity in supply chain
• Q2 GAAP EPS from continuing operations loss of $(1.41) versus a profit of $1.43 in prior year, reflecting the impacts of higher non-cash depreciation expense due to changes in residual value estimates and COVID-19
• Q2 comparable EPS (non-GAAP) from continuing operations loss of $(0.95) versus a profit of $1.40 in prior year

Business Updates and Impacts of COVID-19

• Anticipate operating cash flow of $1.8 billion to $2.0 billion in 2020
• Expect free cash flow of $1.0 billion to $1.2 billion including capital expenditures of $1.0 billion to $1.3 billion in 2020
• Additional depreciation from change in residual value estimate primarily due to expected delay in used vehicle market recovery and a lowered longer term outlook for used vehicle market values
• Commercial rental demand and utilization improved throughout the quarter; however, remain below pre-COVID-19 levels
• Automotive customer activity in Supply Chain Solutions improved since April due to manufacturing ramp-up and is expected to be at pre-COVID-19 levels in the third quarter, assuming no additional disruptions
• Dedicated Transportation Solutions and Supply Chain Solutions pre-tax earnings as a percentage of segment operating revenue for the quarter were in line with long-term targets of high single digits
• Substantial liquidity of $2.0 billion as of July 27 available to support operations and fund $300 million in remaining 2020 debt maturities
• Effective tax rate impacted by reduction in earnings due to additional depreciation charges and COVID-19 effects

MIAMI–(BUSINESS WIRE)–Ryder System, Inc. (NYSE: R), a leader in supply chain, dedicated transportation, and commercial fleet management solutions, reported results for the three months ended June 30 as follows:

Total and operating revenue for the three months ended June 30 were as follows:

CEO Commentary

Commenting on the company’s response to the challenges of COVID-19, second quarter results, and current outlook, Ryder Chairman and CEO Robert Sanchez said, “Market conditions related to COVID-19 troughed in April for Ryder’s rental, supply chain automotive, and used vehicle sales businesses, and conditions improved sequentially thereafter. The total estimated pre-tax earnings impact was $45 million in the quarter, driven by lower commercial rental demand and reduced automotive activity in supply chain, partially offset by lower overhead costs. In addition, the impact of COVID-19 on current and expected used vehicle market conditions triggered a review of Ryder’s residual value estimates, resulting in increased depreciation and valuation adjustments totaling approximately $49 million in the second quarter. The earnings headwind from this higher depreciation is expected to decline over time.

“This year, we expect to generate free cash flow of $1.0 billion to $1.2 billion driven by cash generated by our sizable portfolio of contractual businesses and reduced capital expenditures. In FMS, we remain focused on actions to increase returns and de-risk the business. These initiatives include ChoiceLease price increases resulting in a mid-single-digit improvement in revenue per new lease unit compared to the prior year. We are on track to realize our 2020 target of $30 million in annual savings from our maintenance cost initiative. In used vehicles sales, we are expanding our retail capacity, growing our inside sales capabilities, and leveraging our digital investment in online sales.

“Supply chain and dedicated profit margins in the quarter were in line with our long-term targets of high single digits despite the challenges of COVID-19 and we remain focused on accelerating growth in these segments. We are launching a national advertising campaign aimed at increasing market awareness of Ryder’s broad range of logistics capabilities and promoting RyderShare^TM, our visibility and collaborative logistics platform. Our customers are benefiting from the platform’s capability to track and manage goods in real time as they move through the supply chain. In addition, based on recent results, we expect the profitability of our Ryder Last Mile business to be in the high single-digit range.

“Going forward, our capital allocation strategy is to accelerate growth in our higher return supply chain and dedicated businesses, while moderating growth and improving returns in our capital intensive FMS business. This strategy is expected to achieve a balance of earnings growth and free cash flow, and over time realize our long-term return on equity goal of 15%. The increased free cash flow is expected to allow us to pay down debt in order to bring our leverage into our target range, continue to pay our dividend, invest in acquisitions and new innovation initiatives, and over time, allow for discretionary share repurchases.

“Ryder continues to work closely with customers to keep the flow of goods and services moving and I remain extremely proud of our workforce. Although we expect the months ahead to remain challenging, we believe the effects of the pandemic are accelerating trends toward e-commerce fulfillment, final mile delivery of big and bulky goods, and onshoring and nearshoring of manufacturing and supply chain operations. We believe this presents a compelling opportunity for transportation and logistics outsourcing to Ryder, and as a leading North American logistics provider, we are strongly positioned to capitalize on this opportunity.”

COVID-19 Impacts to Date and Outlook

The COVID-19 pandemic and measures taken to prevent its spread negatively affected Ryder’s business for a total estimated pre-tax earnings impact of $45 million in the second quarter, including lower commercial rental demand ($55 million estimated impact) and reduced automotive activity in supply chain ($25 million estimated impact), partially offset by COVID-19-related temporary cost savings of $35 million. In addition, the impact of COVID-19 on current and expected used vehicle market conditions triggered a review of Ryder’s residual value estimates, resulting in increased depreciation and valuation adjustments totaling approximately $49 million in the second quarter.

Due to the effects of COVID-19, the company now expects the recovery in the used vehicle market will be delayed beyond the company’s prior expectation of mid-2021. Although we saw stronger than expected volumes in used vehicle sales in both the retail and wholesale markets, we expect pricing pressure to continue through mid-2022. As a result, the company primarily extended accelerated depreciation on vehicles expected to be sold by an additional year through mid-2022 and lowered long term policy residual value estimates, particularly for trucks. Additionally, in order to address elevated used vehicle inventories, certain vehicles were written down to reflect wholesale pricing levels. The estimated impact of the residual value changes in the second quarter includes $31 million from additional accelerated depreciation and valuation adjustments and $18 million of policy depreciation.

Earnings Impact From Residual Value Estimate Changes

These changes are intended to better align vehicle residual value estimates with our current view and outlook for the used vehicle market environment. These estimates are based on management’s view of market conditions and reflect the impact of this change on residual values on the fleet of power vehicles at the time of the change. Management reviews residual values periodically based on current and expected market conditions and, if management’s view of market conditions changes, may adjust, positively or negatively, residual value estimates for the fleet at such time.

Second quarter demand for commercial rental vehicles remained significantly below the prior year and typical seasonal levels; however, demand and utilization troughed in April and improved sequentially thereafter. Rental utilization percentage on power vehicles in the second quarter was 55.9% compared to historical levels in the mid-70s. Ryder took action to reduce the rental fleet size resulting in a decline in 8,600 vehicles or 19% from the prior year. Based on the rental fleet size at the end of the second quarter, every percentage point change in utilization is estimated to impact monthly pre-tax earnings by approximately $1 million until the rental fleet size can be aligned with market demand.

Following April shutdowns, SCS automotive customer activity increased starting in mid-May as manufacturers ramped up production. We ended the second quarter at pre-COVID-19 activity levels and, assuming no additional disruption, we expect activity to remain at approximately these levels during the third quarter.

Ryder took significant actions in early April to temporarily furlough employees and reduce discretionary spending. In addition, the company incurred lower medical costs during the quarter. These items resulted in an estimated $35 million savings in the second quarter. The company does not anticipate most of the lower discretionary spending and medical cost benefit to recur going forward. In July, the company transitioned from temporary furloughs to permanent headcount reductions, primarily in FMS, which are expected to result in estimated headcount-related savings of $12 million per quarter. Second quarter 2020 comparable earnings before tax exclude restructuring and other charges of $13 million related to this reduction.

As highlighted in the prior quarter, the company expects lower lease sales in 2020 which will result in significantly lower capital expenditures. In addition, during the quarter Ryder canceled and deferred lease and rental vehicle orders and redeployed a significant amount of underutilized equipment to fulfill lease contracts, further reducing capital spending. Capital expenditures are now expected to be between $1.0 billion to $1.3 billion for the full year, resulting in anticipated free cash flow in 2020 of $1.0 billion to $1.2 billion, which is expected to be used primarily to pay down debt.

Ryder’s liquidity position remains strong with approximately $700 million in cash in the U.S., $1.2 billion in available revolver borrowings, and $100 million of availability under its receivable-backed financing facility as of July 27, 2020. The company is well positioned to support operations, fund $300 million of remaining 2020 debt maturities, and expects to continue paying its dividend.

The company is not providing earnings guidance at this time as a result of the uncertainty relating to the ongoing impacts of COVID-19. The company expects to resume guidance when business conditions stabilize.

Second Quarter Business Segment Operating Results

Fleet Management Solutions

In the Fleet Management Solutions (FMS) business segment, total revenue was $1.2 billion, down 14% from the year-earlier period. FMS operating revenue (a non-GAAP measure excluding fuel and lease liability insurance revenue) was $1.1 billion, down 8% from the year-earlier period. The decline was driven by a 33% decrease in commercial rental revenue from the year-earlier period due to lower demand. ChoiceLease^TM (lease) revenue increased 1%, reflecting a larger average fleet size and higher prices on new vehicles, partially offset by lower mileage based revenue.

FMS loss before tax was $(104) million compared with earnings before tax of $58 million in 2019 due to $154 million of additional depreciation expense from the vehicle residual value estimate changes in 2019 and 2020, resulting in a year-over-year earnings impact of $119 million. In addition, there was a negative estimated impact of COVID-19 on commercial rental performance of $55 million. This was partially offset by COVID-19-related cost actions and lower medical expenses totaling $20 million. The impact of COVID-19 on current and expected used vehicle market conditions triggered a review of Ryder’s residual value estimates, resulting in increased depreciation and valuation adjustments totaling $49 million. Rental power fleet utilization was 56% in the second quarter, down from 75% in the year-earlier period. The company has taken action to reduce the rental fleet to better align with market conditions, resulting in a 19% year-over-year and a 7% sequential decline in fleet size. FMS loss before tax as a percentage of FMS total revenue and FMS operating revenue (a non-GAAP measure) were (8.7)% and (9.7)%, respectively. FMS earnings before tax as a percentage of FMS operating revenue is below the company’s long term target of high single digits, reflecting increased depreciation and lower rental performance.

Supply Chain Solutions

In the Supply Chain Solutions (SCS) business segment, total revenue was down 20% to $519 million reflecting lower operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation), as well as lower subcontracted and fuel revenues. Operating revenue was down 16% to $405 million compared with the year-earlier period. The decline in SCS operating revenue primarily reflects COVID-19 related reductions in the automotive sector.

SCS earnings before tax of $37 million decreased 19% in the second quarter of 2020 compared with $46 million in 2019. This decrease reflects $25 million in estimated COVID-19 impacts primarily related to lower activity with automotive customers, partially offset by COVID-19-related cost actions and lower medical expenses totaling $13 million. In addition, earnings were negatively impacted by $5 million due to changes in residual value estimates on vehicles used in this segment (which is eliminated in consolidated results). These impacts were partially offset by higher pricing and improved operating performance. SCS earnings before tax (EBT) as a percentage of SCS total revenue and SCS operating revenue (a non-GAAP measure) were 7.1% and 9.1%, respectively. SCS EBT as a percentage of SCS operating revenue is consistent with the company’s long term target of high single digits.

Dedicated Transportation Solutions

In the Dedicated Transportation Solutions (DTS) business segment, total revenue was down 19% to $294 million and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) decreased by 8% to $228 million compared with the year-earlier period. The decline in DTS total revenue reflects lower subcontracted transportation revenue and lower fuel costs passed through to customers, as well as lower DTS operating revenue primarily due to lower sales.

DTS earnings before tax of $21 million decreased 22% compared with $27 million in 2019 primarily due to a negative impact of $7 million related to changes in residual value estimates on vehicles used in this segment (which is eliminated in consolidated results). DTS earnings before tax (EBT) as a percentage of DTS total revenue and DTS operating revenue (a non-GAAP measure) were 7.2% and 9.3%, respectively. DTS EBT as a percentage of DTS operating revenue is consistent with the company’s long term target of high single digits.

Corporate Financial Information

Central Support Services

In the second quarter of 2020, unallocated CSS costs were $11 million as compared to $10 million in the prior year.

Income Taxes

Our effective income tax rate from continuing operations for the second quarter of 2020 was a benefit of 22.2% as compared to an expense of 26.8% in the prior year. The tax rate was impacted by the reduction in earnings due to the additional depreciation charges and the COVID-19 effects. The comparable effective income tax rate (a non-GAAP measure) from continuing operations for the second quarter of 2020 was a benefit of 22.8% as compared to an expense of 26.9% in the prior year.

Capital Expenditures

Year-to-date capital expenditures decreased to $0.6 billion in 2020 compared with $2.2 billion in 2019. The decrease in capital expenditures reflects lower investments in the lease and rental fleets, reflecting lower demand related to COVID-19. The company now expects full year 2020 gross capital expenditures of $1.0 billion to $1.3 billion, below the $2.1 billion expected prior to the COVID-19 pandemic. Lower capital spending is expected to result in full year free cash flow of $1.0 billion to $1.2 billion as compared with negative free cash flow of $(1.1) billion in the prior year. Year-to-date proceeds from sales declined to $218 million in 2020 as compared to $256 million in the prior year due to the sale of property in 2019 for approximately $40 million. Year-to-date net capital expenditures were $378 million in 2020, down from $2.0 billion in 2019.

Cash Flow and Leverage

Year-to-date operating cash flow was $1.1 billion in 2020, up from $1.0 billion in 2019. Total cash generated (a non-GAAP measure that includes proceeds from used vehicle sales) was $1.3 billion in line with the prior year. Free cash flow (a non-GAAP measure) was positive $612 million, compared with negative $(909) million in 2019, reflecting decreased capital spending.

Total debt as of June 30, 2020 was $8.1 billion, up from $7.9 billion at year-end 2019. The company is carrying a higher cash balance due to the uncertainty of the current economic environment. Net debt declined to $7.4 billion as of June 30, 2020, from $7.9 billion as of December 31, 2019. Debt-to-equity as of June 30, 2020 was 377% compared with 320% at year-end 2019, above the company’s long-term target of 250-300%. The increase in debt-to-equity reflects the reduction in equity related to higher non-cash depreciation expense from vehicle residual value estimate changes. Debt-to-equity also reflects a higher than normal cash balance which increased debt-to-equity by approximately 35 percentage points.

Supplemental Company Information

Second Quarter Net Earnings

Year-to-Date Operating Results

Business Description

Ryder System, Inc. is a leading supply chain, dedicated transportation, and commercial fleet management solutions company. Ryder’s stock (NYSE: R) is a component of the Dow Jones Transportation Average and the S&P MidCap 400^® index. The company’s financial performance is reported in the following three, inter-related business segments:

• Supply Chain Solutions – Ryder’s SCS business segment optimizes logistics networks to make them more responsive and able to be leveraged as a competitive advantage. Globally-recognized brands in the automotive, consumer goods, food and beverage, healthcare, industrial, oil and gas, technology, and retail industries rely on Ryder’s leading-edge technologies and world-class logistics engineers to help them deliver the goods that consumers use every day.
• Dedicated Transportation Solutions – Ryder’s DTS business segment combines the best of Ryder’s leasing and maintenance capability with the safest and most professional drivers in the industry. With a dedicated transportation solution, Ryder helps customers increase their competitive position, reduce risk, and integrate their transportation needs with their overall supply chain.
• Fleet Management Solutions – Ryder’s FMS business segment provides a broad range of services to help businesses of all sizes, across virtually every industry, deliver for their customers. From leasing, maintenance, and fueling, to commercial rental and used vehicle sales, customers rely on Ryder’s expertise to help them lower their costs, redirect capital to other parts of their business, and focus on what they do best – so they can grow.

For more information on Ryder System, Inc., visit investors.ryder.com and ryder.com.

Note: Regarding Forward-Looking Statements

Certain statements and information included in this news release are “forward-looking statements” under the Federal Private Securities Litigation Reform Act of 1995, including our forecast, outlook, expectations regarding market trends and economic environment; impact of the COVID-19 pandemic on earnings, depreciation, commercial rental demand, used vehicle pricing, execution and timing for making adjustments to rental fleet size, automotive supply chain volumes, our effective tax rate, and sales for ChoiceLease and other products and services; the adequacy of steps we have taken to mitigate the negative impacts of COVID-19 on our operations; impact of continued automotive production shutdowns on earnings; expected benefits from our strategic initiatives and our multi-year maintenance cost-savings initiatives; our ability to implement our asset management strategy to right size our fleet; performance in our product lines and segments; demand, sales and pricing in used vehicle sales; residual values and depreciation expense; free cash flow; liquidity; dividend payments, cash provided by operating activities, capital expenditures; profitability of our Ryder Last Mile operations; and our ability to obtain our projected benefits from our RyderShare visibility and collaboration tool.

Contacts

Media:

Amy Federman
(305) 500-4989

Investor Relations:

Bob Brunn
(305) 500-4053

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