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 from Ryder, and as a result, is equalized to the R-1 (low) Short-Term Issuer Rating of the Company.

KEY RATING CONSIDERATIONS
The confirmation of the Company’s ratings consider its top-tier commercial fleet management franchise, supported by its three soundly run businesses, Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). Ryder’s solid credit fundamentals include improved earnings generation year-on-year (YoY) driven by higher gains on used vehicle sales, improved rental results due to higher demand and pricing, and solid revenue growth within its SCS and DTS segments generated by both organic means and acquisitions. Meanwhile, the Company maintains a sound risk profile, including well-managed operational risk and credit risk positions. Asset risk is moderate, tempered by still elevated used truck and tractor values and conservative portfolio estimated residual values which are near historical lows. Other credit fundamentals remain supportive of the ratings, including a mostly unsecured funding profile, high level of unencumbered assets, and moderate balance sheet leverage. The Stable trend reflects our view that Ryder’s credit fundamentals will remain sound, despite the developing economic headwinds.

RATING DRIVERS
A sustained material improvement in earnings, including larger contributions from the Company’s SCS and DTS business segments, while reducing customer concentrations within these segments, as well as maintaining appropriate balance sheet leverage and a consistent asset risk profile, 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’s solid commercial fleet management franchise is underpinned by its deeply entrenched position in the North American markets, its large scale of operations, and its broad offering of products and services. The Company’s FMS business offers a number of services to corporate customers including short-term commercial rental, full-service leasing, and contract maintenance. Meanwhile its growing SCS business segment offers customers a wide-spectrum of logistics management services that are designed to improve a client’s supply chain by increasing efficiencies of operations and productivity. Lastly, the Company’s growing DTS segment offers clients solutions to their fleet needs including drivers, equipment, scheduling, fleet sizing, safety, regulatory compliance, risk management, and additional logistics for their fleet transportation requirements. The franchise also benefits from a stable senior management team that is seasoned, with the majority having worked at Ryder for over 20 years.

The Company’s earnings generation improved in 2022, up 67% YoY to $867 million, culminating in a strong ROAE ratio of 29% (Company calculated), driven by enhanced demand, higher pricing, and solid gains on used vehicle sales upon disposition. The Company’s FMS segment’s earnings before taxes (EBT) totaled $1.1 billion in 2022, substantially improved from $663 million in 2021. Improved earnings were driven by better rental results which benefited from limited truck capacity and sustained pricing initiatives, higher gains on used vehicles sold, and lower depreciation expense. Meanwhile, Ryder’s SCS segment’s EBT improved 59% YoY to $186 million, driven by higher business volumes, increasing pricing and cost recovery initiatives. Somewhat offsetting was an increase in incentive-based compensation, along with a $20 million asset impairment charge related to the early termination of a customer distribution center. Overall, and benefiting from its recent acquisitions, improved SCS performance was driven by strong outsourcing trends in warehousing and distribution, as well as solid demand for e-commerce fulfillment and last mile delivery. Lastly, the Company’s DTS segment’s 2022 EBT increased 108% to $102 million in 2022, mainly spurred by higher pricing, new business, higher fuel margins, and gains on sales of vehicles.

The Company’s risk profile is sound. Asset risk is moderate, given the still solid used truck and tractor markets and the Company’s conservative vehicle residual value estimates. Operational risk, which we consider to be a key risk given Ryder’s substantial scale of operations, is well-managed. Interest rate risk is limited with the Company’s moderate level of variable rate debt. Meanwhile, credit risk is sound, as write-offs totaled a modest 1.5% of average gross receivables in 2022. We view positively, declining client concentrations (by revenue) within the SCS and DTS businesses. Overall, the top 10 clients within the SCS segment, accounted for 42% of total segment revenue in 2022, down from 50% in 2021, while in the DTS segment, the top 10 clients accounted for 40% in 2022, down from 50% in 2021. We note that these clients operate in a diverse set of industries and many are investment grade, further mitigating the risk.

Funding is sound, consisting mainly of unsecured debt that is diverse by source and well-aligned with the asset base. Providing financial flexibility, Ryder’s balance sheet consists of a large element of unencumbered assets. Meanwhile, liquidity is aptly sized and well managed, totaling approximately $1.2 billion at year-end 2022, including availability under its revolving credit facility and receivable backed financing program, and cash. Lastly, the Company’s capital profile is solid, with its good earnings capacity, sound risk profile, and acceptable leverage (debt-to-equity; Company calculated) of 2.16x at December 31, 2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: https://www.dbrsmorningstar.com/research/402314/global-methodology-for-rating-non-bank-financial-institutions. (September 2, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The following methodologies have also been applied
• DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023): https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support
• DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023): https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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