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Dedicated, Lease Operations Power Ryder Earnings

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Dedicated, Lease Operations Power Ryder Earnings
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Growth in its dedicated and ChoiceLease programs drove a strong second quarter for Ryder System, Inc. (NYSE: R), helping the leasing and rental giant surpass earnings expectations for the second straight quarter. And, according to chairman & CEO Robert Sanchez, investors can expect solid earnings to continue into 2019.

"We feel very good about the contractual growth, the lease growth, as we head into 2019," he told investors on the company's earnings call this morning. "We're already locking in revenue for 2019 and we're only in the middle of 2018."

Ryder announced earnings per share of $1.42 for the quarter, beating Zacks Consensus Estimates of $1.29 per share, on revenues of $2.1 billion, a 17 percent increase over Q2 2017. The company raised its guidance for the full year EPS to a range of $4.71 to $4.91 vs. $4.55 to $4.80 (GAAP adjusted) and comparable EPS (non-GAAP) to $5.62 to $5.82 vs. $5.45 to $5.70.

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Sanchez said that growth in contractual business has been strong and that should drive earnings in the fourth quarter and into 2019. Currently, delivery of new vehicles as part of signed leases are being delayed into 2019 because of manufacturer backlogs. Normally, Ryder experiences about a 4-month delay for tractors.

"All parts of the business are outperforming, including lease sales, but the real issue is the timing [of deliveries]," Sanchez noted.

Dennis Cook, president of Global Fleet Management, said Ryder's lease unit saw 900 fewer vehicles than expected delivered in the second quarter and expects to be 900 short of expectations in the third quarter as well. With that said, Sanchez said the sales team, led by Cook, has already set a full-year record for sales in just the first six months of 2018.

ChoiceLease, Ryder's largest product line, saw revenue grow 6 percent and vehicle growth of 3,100 vehicles year-to-date. The unit is now forecast to end 2018 with 8,500 organic units, up from estimates of 6,500. That growth, Sanchez said, is in part to customers expanding their fleets "due to the strong freight environment."

 Ryder stock performance for the past year. ( Chart:  SONAR  )

Ryder stock performance for the past year. (Chart: SONAR)

Rental vehicles saw double-digit growth in each quarter and July is shaping up to be even strong, Cook said. Rental growth posted 13 percent gains year-over-year in April and May and a 14 percent increase in June.

"There's clearly a shortage of rental vehicles right now; all the competition is adding some," Sanchez said. "We're adding; our fleet will be up 9 percent this year … [but] if you look at our rental fleet we're still below the level we were in 2015. Our plan is to grow it in proportion to our lease fleet (and keep it at about 20-25 percent of the total fleet)."

Sanchez noted that the size of Ryder's rental fleet is actually down 1 percent this year while its lease fleet has grown 19 percent.

Click for the full Ryder Q2 Financials

Within its operating segments, Fleet Management Solutions (FMS) total revenue was $1.3 billion, up 11 percent compared with $1.16 billion in the year-earlier period. FMS operating revenue (a non-GAAP measure excluding fuel) was $1.08 billion, up 8 percent from the year-earlier period. Commercial rental revenue increased 17 percent from the year-earlier period due to higher demand and higher pricing.

FMS earnings before tax were $72.9 million, up 7 percent compared with $68.1 million in the same period of 2017, reflecting higher commercial rental and used vehicle sales results. 

On the used vehicle front, Ryder sold 4,700 vehicles in the quarter, up 9 percent from the prior year, but units on hand for sale dropped to 5,600, down from 7,500. Tractor pricing fell 4 percent while truck pricing was up 8 percent.

There has been particular growth in "newer" used trucks, Sanchez noted, as customers look for cost-efficient options to add capacity. "There has been a very sharp increase in demand for new trucks and freight. I think what you are seeing now is customers who want to buy new trucks and can't due to the delay are buying newer used trucks, which is raising prices," he said.

Sanchez described the rental demand as "robust" and used vehicle results as "better than expected." That growth is not expected to continue, he said, but the strong contractual business should offset any loss in revenue from the rental and used truck segments.

Ryder's Dedicated Transportation Solutions (DTS) segment posted a 21 percent growth in total revenue to $331 million while operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) was up 7 percent to $214 million compared with the year-earlier period.

Growth in new business and volumes among existing businesses powered the gains, Sanchez said, while noting that "secular trends that favor outsourcing …contributed to continued record dedicated sales results."

"You're in an environment where the capacity shortage and the driving shortage, the driver shortage is not likely to be cured anytime soon," he said. Some Ryder customers have moved from truckload services to dedicated fleet operations to secure capacity. "[We've] also benefitted from private fleets looking to put more on their trucks rather than waiting for a for-hire fleet to free up capacity."

In the Supply Chain Solutions (SCS) business segment, total revenue was up 30 percent to $605 million and operating revenue was up 20 percent to $430 million compared with the year-earlier period. SCS operating revenue growth largely reflects new business and increased volumes. Total and operating revenue growth also reflect the acquisition of MXD Group, Inc. (MXD) on April 2, 2018. MXD is an e-fulfillment and last mile delivery provider for big and bulky goods with a national network of facilities. MXD is expected to add approximately $220 million in annual total revenue.

One drag on earnings is high maintenance costs, especially for the large number of 2012 vehicles in Ryder's fleet that are costing it $30 million a year in maintenance. Those vehicles will start to come off the books next year, Sanchez said, helping bring down those costs.

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