DBRS Morningstar Revises Ryder System, Inc.’s Ratings Trend to Stable; Confirms LT Rating at A (low)

DBRS, Inc. (DBRS Morningstar) has revised the ratings trend for Ryder System, Inc.’s (Ryder or the Company) and its related entity, Ryder Truck Rental Canada LTD., to Stable from Negative. At the same time, DBRS Morningstar confirmed the ratings of Ryder and its related entity, including its Long-Term Issuer Rating of A (low). The Company’s Intrinsic Assessment (IA) is A (low), while its Support Assessment is SA3, resulting in Ryder’s final ratings being equal with its IA. The rating of Ryder Truck Rental Canada LTD.’s Guaranteed Short-Term Promissory Notes benefit from a guarantee by Ryder, and as a result are equalized to the Short-Term Issuer Rating of Ryder.

KEY RATING CONSIDERATIONS
The ratings confirmation and trend change to Stable consider Ryder’s resilient operating performance over the last year during the global Coronavirus Disease (COVID-19) pandemic following a very difficult 1Q20. Subsequently, the Company’s earnings generation has improved, reflecting moderating levels of additional depreciation expense related to prior residual value estimate changes, increasing cost savings related to its ongoing maintenance expense reduction initiative, enhanced commercial rental vehicle pricing and utilization, and wider margins on used vehicle sales. Meanwhile, Ryder’s balance sheet fundamentals remain sound, including moderate credit risk, stabilizing asset risk, a solid funding profile, and a sound capital position reflecting improved balance sheet leverage. The ratings also consider a level of customer concentration in certain business segments that is partially mitigated by the quality of the customer base. While Ryder has reported losses the past two fiscal years, we expect earnings to be solid in 2021.

The Stable trend reflects our view that Ryder’s credit fundamentals will remain solid over the medium-term, especially given the improving business environment, moderating headwinds related to the pandemic and the favorable long-term trends in e-commerce. In our analysis, we utilized the macroeconomic scenarios discussed within the DBRS Morningstar commentary “Global Macroeconomic Scenarios: May 2021 Update”, with the moderate scenario as our anchor.

RATING DRIVERS
Over the longer term, material improvement in earnings including larger contributions from the Company’s SCS and DTS business segments, while maintaining its strong operating platform would result in an upgrade of the ratings. Failure to restore earnings to pre-pandemic levels, a weakening franchise reflecting notable customer attrition or a prolonged significant increase in balance sheet leverage, would result in a downgrade of the ratings.

RATING RATIONALE
The ratings consider the Company’s top-tier U.S. commercial fleet and logistics businesses, and significant scale of operations, reflecting approximately 280,000 vehicles, over 63 million square feet of warehouse facilities, and approximately 800 operating locations (maintenance facilities or shops). Ryder’s commercial fleet management franchise is deeply entrenched in the U.S. markets, with more modestly sized operations in Canada, Mexico and Europe, primarily in the United Kingdom. Ryder’s franchise is underpinned by its Fleet Management Solutions (FMS) business its largest revenue generating segment, Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS).

Overall, the Company remains focused on growing its higher performing SCS and DTS businesses, which are both asset light. Indeed, Ryder continues to invest in new technologies for these segments to leverage secular outsourcing trends. In 2Q20, Ryder launched RyderShare, a service that provides clients with visibility on goods moving across supply chains across all participants, and allows the participants the opportunity to share data and communicate with one another, improving labor efficiencies and on-time performance. Overall, RyderShare’s business has tracked approximately 2 million shipments for SCS and DTS customers. Meanwhile, e-commerce has been a tailwind, and Ryder continues to grow its e-commerce footprint, including e-fulfillment centers where unsold products are stored. When orders are received at the e-fulfillment center they are picked, packaged and shipped. Finally, the Company continues to invest in its Last Mile Big & Bulky delivery business. This business provides last mile delivery for items such as refrigerators and exercise equipment. Overall, we see these additional services as benefitting top line revenue growth, as well as further strengthening customer relationships and driving new customer growth, augmenting the franchise.

Although the Company’s 2020 bottom line was significantly pressured by residual value adjustments and coronavirus induced headwinds, we see solid tailwinds for 2021. Overall, Ryder reported a $122 million net loss in 2020, as compared to its $24 million net loss in 2019, primarily reflecting the impact of significant but moderating levels of depreciation expense related to residual value adjustments, the last of which occurred in 2Q20 due to coronavirus concerns. Importantly, used truck and tractor prices have strongly rebounded since the trough of the pandemic increasing expectations of no additional significant residual value adjustments. Additionally, and to a far lesser extent, the 2020 loss reflected pressured rental volumes, due to the difficult operating environment especially during 1H20, partially offset by higher lease revenues. Revenues in 2020 were also impacted by temporary OEM auto manufacturing plant shut-downs which somewhat constrained SCS business revenues. Overall, Ryder’s revenues were down 6% YoY to $8.4 billion despite these headwinds. DBRS Morningstar notes that the Company’s resilient revenues reflect the long term nature of its operating leases and other services, which provide for solid levels of contracted revenue and a diverse set of reliable fee revenues.

Importantly, we view Ryder’s three sequential quarters of sound earnings generation since 1H20, as a positive indicator for future results. Indeed, the Company’s 1Q21 earnings totaled $51 million, up significantly from a $110 million net loss in 1Q20, primarily reflecting moderating levels of vehicle depreciation expense, a $31 million increase in gains on used vehicle sales, improving commercial rental pricing, higher rental utilization (73% compared to 64% in 1Q20), as well as reductions in maintenance expense due to the Company’s multi-year maintenance cost reduction initiative, which has generated more than $50 million in annual savings through YE20. Going forward, we expect these tailwinds to continue, as the Company anticipates a $220 million year-on-year (YoY) decline in depreciation expense, approximately $30 million in annual run rate maintenance cost reductions, higher gains on used vehicle sales, and increases in lease prices upon lease renewals in 2021. Overall, we view these tailwinds as driving earnings improvement in 2021.

The Company’s risk profile remains sound and is well-managed. Asset risk is stabilizing due to the strong rebound in the used truck and tractor markets. Meanwhile, credit risk remains sound, reflecting moderate losses. Indeed, in 2020, accounts receivable write-offs, as a percentage of average accounts receivables totaled a highly manageable 1.2% in 2020, down from 1.4% in 2019, and as a percentage of revenue generating assets was a very low 0.13% in 2020. During 2020, Ryder assisted a number of its customers by granting payment extensions. The majority of these clients have since returned back to their original standard payment terms. We note that that the Company does have some customer concentrations in certain business segments, which could constrain its earnings, especially if a number of these customers were to have financial difficulties. Specifically, within the SCS segment, the top 10 customers accounted for 53% of total segment revenue, and in the DTS segment, the top 10 customers accounted for 44% of total segment revenues in 2020. However, a majority of these customers are investment grade companies, which mitigates concentration risk.

The Company’s funding profile is solid, primarily consisting of unsecured senior debt, as well as a large global committed bank facility. Funding is well aligned with Ryder’s earning assets, and is diverse by source and investor. With its large amount of unsecured debt, the Company’s assets are overwhelmingly unencumbered, providing it with robust financial flexibility for stressful periods. Liquidity remains solid with $1.25 billion of availability under its global revolving credit facility at the end of 1Q21. Finally, capitalization remains acceptable. The Company maintains moderate balance sheet leverage (debt to equity) of 2.8x (2.9x at YE20), which is well within Ryder’s target range of 2.5x to 3.0x, and compares favorably to its large commercial fleet peers.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021): https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 9, 2021): https://www.dbrsmorningstar.com/research/375001/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers, and DBRS Morningstar Criteria – Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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