DBRS Confirms Ryder System, Inc. at A (low), Trend Stable

DBRS, Inc. (DBRS) confirmed the ratings of Ryder System, Inc. (Ryder or the Company), including the Company’s Long-Term Issuer Rating of A (low) and Short-Term Issuer Rating of R-1 (low). Concurrently, DBRS confirmed the R-1 (low) Guaranteed Short-Term Promissory Notes rating of Ryder Truck Rental Canada Ltd., reflecting the guarantee from Ryder. The trend on all ratings is Stable. At the same time, DBRS confirmed the Company’s Support Assessment of SA3, which results in its Long-Term Issuer Rating being equalized with its Intrinsic Assessment (IA) of A (low). Additionally, DBRS confirmed Ryder Truck Rental Canada, Ltd.’s Support Assessment of SA1.

KEY RATING CONSIDERATIONS
Ryder’s ratings and the Stable trend reflect the Company’s top-tier commercial fleet management franchise, underpinned by its soundly performing Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS) businesses. Ratings also consider the Company’s solid and resilient earnings generation capacity which benefits from the long-term trend towards outsourcing of commercial fleet and logistics management amongst North American companies. The Company’s credit profile is sound, reflecting strong credit quality metrics and well-managed asset risk. Ratings also take into account the Company’s primarily unsecured funding profile and low balance sheet leverage position. Finally, Ryder’s ratings also consider the overall cyclicality of the commercial fleet business, along with some customer concentrations within the DTS and SCS business segments.

RATING DRIVERS
A sustained improvement in earnings and operating efficiency, while maintaining Ryder’s strong operating platform could have positive implications for the ratings. Moreover, a greater contribution from DTS and SCS that further diversifies revenues and deepens client relationships would be viewed favorably. Conversely, a weakening franchise evidenced by material customer attrition, and/or pressured earnings could result in negative rating pressure. Additionally, a weakening in the Company’s credit profile, including deteriorating credit quality and increasing asset risk could have negative implications for the ratings. Finally, sustained material increases in leverage resulting from higher debt levels and/or weaker capital retention could result in downward rating pressure.

RATING RATIONALE
Ryder maintains a top-tier commercial fleet franchise, which is underpinned by its large scale of operations and broad array of services. The Company has a deep presence in the North American markets, and has a smaller footprint in Europe, primarily in the United Kingdom. Ryder’s FMS segment is the market leader in U.S. truck leasing, including class 1 through class 8 trucks. The FMS business offers full-service leasing, leasing with maintenance, short-term commercial rental, contract maintenance, and flexible maintenance services. Meanwhile, Ryder’s DTS segment employs the Company’s strong expertise in the trucking marketplace by offering customers a comprehensive solution, including drivers, equipment, and logistics for their fleet transportation needs. Finally, Ryder’s growing SCS business provides a wide-array of logistics management services that are designed to optimize a customer’s supply chain, by improving productivity and efficiencies of operations, including just-in-time inventory delivery. Of note, the SCS business also designs customer distribution networks and manages distribution facilities.

Ryder’s earnings generation remains firm. The resiliency of the Company’s earnings was evident by its ability to navigate the financial crisis and not report an annual loss. Revenues benefit from the duration of the operating leases and other services, all of which provide for good levels of contracted revenue and a diverse set of consistent fee revenues. Indeed, Ryder had $16.6 billion of contracted future revenue at year-end 2018. In 2018, pre-tax earnings from continuing operations totalled $373.9 million, up 18.9% from $314.5 million in 2017, primarily reflecting a 6.7% increase in lease and rental net income (revenues less costs), a 10% increase in services net income, and a 12.0% increase in fuel services net income. Meanwhile, Ryder maintains sound efficiencies of operations. DBRS expects improved earnings in 2019 driven by higher revenues across all segments.

Balance sheet fundamentals remain strong. Ryder’s risk profile is well-managed supported by good customer underwriting and monitoring, as well as asset risk management that benefits from the Company’s long operating history in the industry. Indeed, strong credit quality metrics illustrate these attributes. During 2018, net accounts receivable write-offs, as a percentage of average revenue generating assets was a very low 0.08%, down from 0.15% for 2017. Meanwhile, for 2018, gains on vehicle disposition as a percentage of sale proceeds was 8.42%, down from 10.83% in 2017. These credit positives are partially offset by customer concentrations in certain segments, which could pressure the bottom line if several of these customers were to have financial difficulties. Specifically, within the SCS segment, the top 10 customers accounted for 56% of total segment revenue, and in the DTS segment, the top 10 customers accounted for 49% of total segment revenues in 2018. However, DBRS notes that these customers operate in a range of industries and are mostly large investment grade corporations, which mitigates this risk.

The Company’s funding position is sound. Funding primarily consists of unsecured senior debt, as well as committed bank facilities. Funding is diverse by source, as well as by investor and is well-aligned with the asset base. Given Ryder’s sizable level of unsecured debt, the balance sheet reflects a large component of unencumbered assets, which provides ample financial flexibility for stressful periods. Meanwhile, liquidity remains appropriately sized for requirements with $733 million of availability under its global revolving credit facility at year-end 2018.

Capital is well-managed, given the Company’s sound risk profile and solid earnings retention. Effective January 1, 2019, Ryder adopted a new lease accounting standard which requires the Company to separate the lease and non-lease components of its ChoiceLease product. The accounting change will result in a material one-time after-tax cumulative adjustment to recognize deferred revenue, which will reduce shareholder equity and increase leverage. In response, the Company has revised its debt-to-equity target modestly to a range of 2.5x to 3.0x, which would still compare favorably to the peer average. At year-end 2018, Ryder’s balance sheet leverage was a low 2.28x.

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

The applicable methodologies are Global Methodology for Rating Non-Bank Financial Institutions (November 2018), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and financials. DBRS 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 had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA