DBRS Initiates Coverage of Ryder System, Inc. at A (low), Trend Stable

DBRS has assigned a Long-Term Issuer Rating of A (low) and a Short-Term Issuer Rating of R-1 (low) to Ryder System, Inc. (Ryder or the Company). In addition, DBRS has assigned an R-1 (low) Guaranteed Short-Term Promissory Note rating to Ryder Truck Rental Canada Ltd, reflecting the guarantee from Ryder. Concurrently, DBRS assigned a Support Assessment of SA3, which results in the Company’s Intrinsic Assessment being equalized with the Long-Term Issuer Rating of A (low). The trend on all ratings is Stable.

The ratings and Stable trend reflect Ryder’s well-established position in the fleet management solutions (FMS) market, sizeable scale, and growing presence in Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS), all of which underpin the Company’s strong franchise. Ryder’s sound earnings generation ability that has been demonstrated through both business and economic cycles helps support the ratings. In addition, strong asset quality, prudently managed asset risk, below peer balance sheet leverage, and a funding profile that is predominately unsecured are also considerations in the ratings. The ratings also consider customer concentrations in the DTS and SCS business segments, the potential for regulatory changes that will impact the business, as well as the cyclicality of the business.

The Stable trend also considers the improving operating environment for ground transportation equipment with contract rates and demand for trucks strengthening, although costs are expected to increase reflecting the shortage of qualified drivers. Moreover, DBRS sees the long-term fundamental trend towards outsourcing of fleet management and logistics by large corporations as a positive for Ryder and supportive of the Company’s future growth.

Ryder’s strong franchise is anchored by its leading market position in U.S. truck leasing through its FMS segment that enjoys a well-established brand and market expertise. The FMS segment also offers a broad product set to customers that includes full service leases and short-term rentals. The Company’s DTS segment leverages Ryder’s expertise in the trucking marketplace by offering customers a comprehensive solution to their fleet transportation requirements. Meanwhile, Ryder’s growing SCS segment is leveraging the growing trend to develop logistical solutions that utilizes current technology to improve operating efficiency and productivity. DBRS notes that the SCS segment provides not only consulting services, but also operates warehouse operations for customers.

Ryder’s revenue generation benefits from the medium-term length of its operating leases, which provides a resiliency to earnings during cycles as lease renewals are laddered reducing the Company’s exposure to lower lease pricing. Further, the Company’s full service lease product and other services generate a solid level of fee revenue that can be countercyclical to lease volumes and rates. For 2017, total revenue was up 8% year-on-year (YoY) to a record $7.3 billion, reflecting solid lease and rental revenue growth of 2%. Meanwhile, Services revenue grew a very strong 13% YoY due to new business and higher volumes in the SCS and DTS segments. Overall, Ryder’s operating efficiency has been acceptable with the Company implementing cost containment actions in 2016 and 2015 to counter the effects of the soft commercial rental and used vehicle markets.

For 2017, the Company’s net earnings totaled $790.6 million, up from $262.5 million in 2016, reflecting a one-time benefit from the U.S. tax reform. Excluding the benefit from the tax reform, Ryder’s pre-tax earnings from continuing operations were 22% lower YoY at $313.9 million. Pre-tax results were impacted by higher accelerated depreciation, lower proceeds from used vehicle sales, a restructuring charge and weakness in the commercial rental business due to a challenging operating environment that more than offset higher revenue generation. DBRS anticipates that operating performance will improve in 2018, driven by further growth in full service lease and supply chain segments, disciplined management of fleet inventories, and a modest recovery in commercial rental underpinned by solid economic growth and strengthening freight demand.

Ryder’s balance sheet is sound, underpinned by strong asset quality metrics, appropriately managed leverage, and a funding profile that is largely unsecured. Net write-offs of accounts receivable were 0.15% of revenue generating assets, which although above the Company’s five-year average of 0.13%, are considered acceptable for the rating. Asset residual risk is generally well-managed with the Company reporting solid results on disposal of equipment. During 2017, gains on proceeds from the disposition of used vehicles totaled 10.8% of total vehicle sales, compared to 16.5% in 2016 and 27.8% in 2015. Gains have been reduced by softness in the used truck market due to overcapacity and the upcoming EDL requirement.

At December 31, 2017, Ryder’s total outstanding debt totaled $5.4 billion, of which 91% was unsecured, which is considered “Very Strong” under DBRS’s methodology. DBRS views this low level of asset encumbrance as providing the Company a sound level of financial flexibility in the event of a potential market disruption. Liquidity was solid with total available liquidity, including capacity under the Company’s global revolving credit facility of $577 million, as of December 31, 2017. DBRS considers this level of liquidity as more than sufficient to meet Ryder’s requirements over the next 12 months.

Capital is appropriately managed given the risk profile of the balance sheet and the Company’s solid earnings generation ability. At December 31, 2017, the Company’s debt-to-equity (defined as total debt including the impact of accumulated net pension related equity charge) stood at 191%, a 72 basis points (bps) improvement from YE16. DBRS notes that 50 bps of the reduction in leverage was a result of a one-time benefit from the revaluation of the Company’s deferred tax liability due to the recently enacted U.S. tax reform. Currently, leverage is below the Company’s revised targeted range of 200% to 250%. DBRS expects leverage will migrate to the middle of the range.

RATING DRIVERS
Over the medium-term, DBRS does not expect upward movement in the ratings. However, sustained broad-based improvement in earnings and profitability underscored by strengthening operating efficiency, could result in positive ratings pressure. Conversely, a deterioration in the strength of the franchise as evidenced by a sustained downward trajectory in new business volumes, or earnings could result in the ratings coming under pressure. Further, a weakening in asset quality metrics signaling an increase in risk appetite could result in negative ratings pressure. Lastly, a prolonged increase in leverage resulting from weaker earnings and retention levels could lead to the negative ratings pressure.

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

The applicable methodologies are Global Methodology for Rating Finance Companies (November 2017), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: David Laterza, Head of U.S. Non-Bank Financials, Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President, Global FIG
Initial Rating Date: March 7, 2018
Last Rating Date: Not applicable as no last rating date.

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