DBRS Morningstar Confirms Ryder System, Inc.’s LT Rating of A (low); Trend Remains Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Ryder System, Inc. (Ryder or the Company) and its related entity, Ryder Truck Rental Canada LTD., including its Long-Term Issuer Rating of A (low). The trend for all ratings is Stable. 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 reflect Ryder’s top-tier commercial fleet management franchise, underpinned by its three well-managed businesses, including Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). With substantially lower additional depreciation expense required to reduce truck and tractor residual values, Ryder’s earnings capacity has rebounded, reflecting higher gains from vehicle sales, improved commercial rental results, and higher ChoiceLease pricing. Ryder’s risk profile is sound, reflecting solid credit quality and an improved asset risk position. Operational risk is well-managed. The ratings also consider the Company’s predominantly unsecured funding profile, high level of unencumbered assets, and moderate balance sheet leverage. Finally, the Company ‘s ratings reflect some customer concentrations within the SCS and DTS businesses.

The Stable trend reflects our view that Ryder’s earnings generation and balance sheet fundamentals will remain sound over the near term especially given the solid demand for transportation and logistics solutions, despite inflationary pressures.

RATING DRIVERS
A sustained material improvement in earnings, including larger contributions from the Company’s higher margin SCS and DTS business segments, while maintaining appropriate balance sheet leverage would result in an upgrade of the ratings. Conversely, a sustained decline in earnings generation, 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
Ryder maintains a top-tier franchise within the commercial fleet management sector, reflecting a large scale of operations and wide array of services. The Company has a deeply embedded position in the North American markets, and has a more moderately sized footprint in Europe, primarily in the United Kingdom, which the Company is exiting. The FMS business provides a number of services to corporate customers including short-term commercial rental, full-service leasing, leasing with maintenance, and contract maintenance. Meanwhile, Ryder’s expanding SCS business offers a broad-array of logistics management services that are designed to enhance a customer’s supply chain by increasing productivity and efficiencies of operations. The SCS business also designs customer distribution networks and manages distribution facilities. Finally, Ryder’s DTS segment provides customers a broad solution to their fleet needs, including drivers, equipment, and logistics for their fleet transportation requirements.

Ryder’s earnings generation capacity has rebounded from the last few years, as depreciation expense related to the reduction in residual values of revenue generating equipment has substantially declined. Indeed, this was reflected in 1Q22 earnings, which totaled $176 million, up significantly from $51 million in 1Q21. The results also benefited from the solid demand for used trucks and trailers leading to increased gains on sales of used vehicles, as well as from revenue growth related to new business and acquisitions at SCS. Additionally, improved earnings reflected the Company’s ability to increase pricing within its commercial rental and ChoiceLease businesses, providing an offset to future inflationary costs. The improved 1Q22 results follow the Company’s sound recovery in full year 2021 earnings with net income of $519 million, as compared to a $122 million loss in 2020. The recovery was driven by a significant reduction in depreciation expenses, higher gains on used vehicles sold, and improved rental vehicle utilization and pricing.

The Company’s risk profile is sound. Ryder’s asset risk is considered moderate, as fleet residual values are at historic lows, providing a strong counter to potential future weakening in truck and tractor values. Meanwhile, credit remains sound, including write-offs representing a moderate 1.7% of average gross receivables (annualized) in 1Q22, and 1.0% for full-year 2021. Nonetheless, we note that Ryder has some client concentrations in certain segments, which could pressure the bottom line if several of these clients were to have financial difficulties. Indeed, within the SCS segment, the top 10 clients accounted for half of total segment revenue, and in the DTS segment, the top 10 clients accounted for less than half. That said, we note that these clients operate in a diverse array of industries and are mainly large investment grade corporations, mitigating this risk.

The Company’s funding position is solid. Funding is predominantly unsecured senior debt that is diverse by source and well-aligned with assets. Importantly, the balance sheet reflects a large component of unencumbered assets, offering ample financial flexibility. Liquidity is appropriately sized for the Company’s needs, including $798 million of availability under its global revolving credit facility as of March 31, 2022. Finally, capital is sound, given Ryder’s improved earnings generation, its good risk profile, and moderate leverage (debt-to-equity; Company calculated) of 2.56x.

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 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022): https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 1, 2022): https://www.dbrsmorningstar.com/research/393065/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.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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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