DBRS Comments on Ryder System, Inc.’s Q1 Results

DBRS notes that Ryder System, Inc. (Ryder or the Company) today reported Q1 2009 financial results that were well below the prior year period, and temporarily suspended its earnings guidance for 2009 due to the current uncertain economic environment. The decline in quarterly earnings was related mainly to lower commercial rental activity, vehicle sales and contractual lease business, as well as higher pension expenses, but in line with revised expectations provided by the Company in early-April. DBRS expects Ryder’s net earnings to be significantly below 2008 levels over the near term, which will add pressure to the Company’s financial profile. However, stronger than expected free cash flow is likely to be used toward debt reduction, and largely offset the impact of lower earnings and operating cash flow on Ryder’s core credit metrics. As such, a rating action is currently not warranted. DBRS rates Ryder’s long- and short-term debt at BBB (high) and R-1 (low), respectively.

Despite the expected earnings deterioration, cash flow from operations is likely to remain reasonable, and net free cash flow should significantly increase (in excess of $400 million). Importantly, depreciation has historically accounted for roughly 70% of cash flow from operations, which provides a high degree of stability. In addition, strong free cash flow, which will be largely a function of lower capex as vehicle purchases are scaled down, will be used toward debt repayment. As such, while coverage ratios are likely to weaken over the near term, they should remain acceptable for the current ratings. DBRS expects cash flow coverage and debt-to-EBITDA in the mid-30% and low 2-times range, respectively, in 2009, which are at the low end of the range of acceptability for the R-1 (low) short-term rating.

While Ryder’s financial metrics are expected to remain acceptable, the Company continues to face several headwinds that could further increase its risk profile. The current freight recession has notably led to reduced demand for new leases, lower lease renewals and a decline in contractual maintenance. DBRS continues to view the full service lease business within Ryder’s Fleet Management Solutions (FMS) segment as relatively stable, particularly in relation to the Company’s commercial rental business and Supply Chain Solutions (SCS) segment. This is largely due to the medium- to long-term nature of leases, the large fixed price component of contracts, and a well diversified customer base. However, the severity of the current downturn has increased the potential for material declines in this business (e.g., sharply lower mileage and renewals), which would increase the Company’s business risk profile. The high degree of macro economic uncertainty with respect to the extent of the current downturn and eventual recovery is a key risk facing Ryder. In the event that financial results weaken beyond DBRS’s current expectations and debt does not sufficiently decline, this could have negative implications for the ratings.

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

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.