Let me know when we are ready. Awesome. Okay. We're gonna get going with our next session. I'll say, you know, what I really like about our conference is the ability to do panels like this, 'cause you're gonna say, "We've got autonomous trucking. We've got ACT Research. We've got Jeff Silver from Mastery Logistics at TMS. We've got Ryder. What's going on here?" Right? I'm telling you, it's gonna be one of the most interesting sessions of the day 'cause we can cover a lot of ground, and we're gonna get a lot of different opinions on a lot of different things. I understand, like, you're all saying, "What am I doing? Why am I next to him? Why am I next to him?" We're gonna... It's gonna be good. I promise.
Thank you. Thank you guys for doing it.
Sure.
I appreciate it. From my left and my direct right and then, and working further right, from Aurora Innovation, we have Richard Tame, the CFO. From ACT Research, Tim Denoyer, Senior Analyst, former Wolfe Research. From Mastery Logistics Systems, Jeff Silver, Founder and CEO. From Ryder, John Diez, CFO. Maybe what I'll give everyone just, you know, two minutes just, you know, quick introduction, of, you know, who you are and then, you know, any quick highlights you wanna say, and then we'll get into it.
Sure.
Richard, we'll start with you.
Thank you very much, Scott. Thanks for having us here. Hi, everyone on the panel there. Yes, I'm Richard Tame, CFO of Aurora Innovation. We're about a six-year-old company. We went public November 2021, and our mission is to deliver the benefits of self-driving technology safely, quickly, and broadly. We essentially are building a product which is the Aurora Driver, and that's the hardware, it's the software, and the data services around that that will allow vehicles to drive through the world themselves. Our first product is gonna be in trucking. We have a roadmap that you can see on our investor relations website. Essentially, our expectation is that by the end of 2024, we'll launch Aurora Horizon, which is our trucking product. That'll be on a lane in Texas between Dallas and Houston.
You'll have Class 8 trucks being pulled, pulling loads without a human driver. Super excited, massive market. You know, that's kinda us dipping our toe in the water, and then we would scale, you know, across the U.S. from there. The same hardware and the same software that powers the Class 8 trucks also powers passenger vehicles. We have a really kinda big market in the U.S. along that axis. There's no reason why this technology can't go international in the future. Yeah, I think that's...
Timeline for first true driver out, right? Not a demo, but.
Sure.
really hauling freight, starting is when?
End of 2024. That's when we say, you know, we wanna launch the product at the end of 2024, that commercialization is, you know, a fleet of, let's call it 20 trucks in Texas that are, you know, hauling freight without a human in the vehicle.
What has to happen to get there? Meaning, are we 99% of the way from a technology standpoint, but we need to get that extra point? Is it we need the OEMs to deliver it?
Yep.
We need the government to say it's okay? What do we need to happen between now and the end of-
2024?
... 2024.
From an internal perspective, we need to close our safety case. The bar for our commercial launch is closing the safety case, which is this big structured argument that came from the aviation industry that allows us to feel comfortable about putting the vehicles on the road without a human in. The reason that's so important is there isn't actually legislation that stops you from doing this. In 46 of the 50 U.S. states today, if we were comfortable as a company having a vehicle drive down the road by itself without a human in, we could do it. There's no re-regulation issue. We have to close our safety case.
In order to fully close the safety case, we work very closely with PACCAR, we work very closely with Volvo Trucks, we think you need to have deep integration with an OEM partner, we're super excited by those relationships. We need a autonomy-enabled truck platform in order to launch. That means it has the redundant steering and the redundant braking that allows you to feel confident in the safety because you're not gonna have a human there to kinda be the redundancy if their system fails.
Tim.
Thank you. I know most people in this room, but I'm Tim Denoyer, with ACT Research. I, as Scott said, was a former Wolfe Research researcher. I've been with ACT Research for about six years now. We also have, you know, really strong partnerships with the manufacturing sector, and we're sort of the data analyst for Classes 5 through Classes 8 commercial vehicles. Forecasting the freight markets has become an increasing, you know, part of our work as we, you know, try to forecast Class 8 truck production, you know, I won't take, you know, I won't go too much into, you know, our current thinking, but maybe the most impactful thing I can say is that our current estimates are that we're on pace to take out something like 100,000 drivers from the population this year, which I don't think everyone fully gets.
Explain that, when what you mean when you say that.
Sure. If you look at just the long-distance part of the BLS transportation employment data, we lost 8,700 jobs in Q1. Annualized, it's about 4% on that population of about 870,000 drivers. You can probably see 40,000 or 50,000 come out of the for-hire fleets 'cause that's what that really represents. The owner-operators are coming out and perhaps the smaller fleets who don't really get into the BLS data, I think they're failing in probably greater numbers. For that, we look at the DOT operating authorities data. We've taken out about 11,000 of those fleets since October of last year.
It got a little easier around earlier this year 'cause spot rates spiked around the holidays, but I think it got worse last week because of International Roadcheck. I think revocations are up because rates have been so far down. You make your own estimate of how many trucks per fleet, but 11,000 fleets have been revoked so far in the last seven months, and it seems like it's 2,000 or 3,000 a month at the moment.
Your point is that we are starting to see capacity exit the market.
Yep.
What does that mean for your retail sales, Class 8 production forecast, 2023, 2024?
Well, 2023 the next six quarters are pretty well baked in, frankly. I think, you know, we're at peak build rates as we speak. you know, I think we built something like 26,000 Class 8 tractors in North America in April. I think it was something like 30,000 in March. we're at, you know, elevated build rates. that backlog has started to come down. We've seen a little bit of an uptick in cancellations. Nothing too much, but we've started to see that uptick. Net orders are way down. Backlogs are down to six months at this current elevated build rate. that tells us that Q4 is really when we're gonna see new builds start coming down.
I think next year, we estimate Class 8 truck production is gonna be about down about 20%. A lot less than normal cycles in terms of the decline, in large part because we didn't overcapacitize the market like we typically do because of all the supply chain constraints.
Okay. We'll get into some more of that. Jeff.
Jeff Silver. I started in this industry in 1984 with a company called American Backhaulers. We grew that, sold it to C.H. Robinson in 1999. Worked for C.H. for a year. Retired, took five years off, went back to school a bit, and then started Coyote Logistics in April of 2006. Grew that, sold it to UPS in 2015. Worked for UPS for three years, the last of which I started the advanced technology group, which was all about autonomous vehicles and trying to figure out when we'd be able to actually have some of those. Left and my son, Andrew, had started a company called MoLo, another freight brokerage after I told him the last thing the world needed was another freight brokerage. He ignored my advice, happily and started this thing.
Was scaling it quickly and needed technology. There is no really good available technology out there, frankly, commercially for brokerages or also for actual trucking companies as well. We started to write software for him, ran into leadership from Schneider. They became a customer and investor quickly, followed by Werner and a few others, including Covenant, who's in the room, Prime, Averitt, and a bunch of others. We have 14 signed clients right now as we build this TMS. It's modern, it's API connected, and it will handle all modes, all sizes. Truckload brokerage, LTL brokerage, actual asset truckload, one-way and dedicated, intermodal, and shipper side, private fleet, et cetera.
Nobody has really undertaken to do one of these at scale since the guys that wrote Innovative, 50 years ago, using COBOL. It's a giant gaping hole in the marketplace that I was not smart enough to figure out existed, except once again, fell into it by accident, very fortunately. It's a super interesting place to be, so. I think relevant to what we're talking about here today, I actually obviously spend a lot of time with our clients and see what's going on with their businesses and how we're able to support them, and what happens in the capacity world from their perspectives.
TMS, it's a term we hear a lot. What's unique about the Mastery system relative to other TMS systems that are out there?
The big thing is that this is aimed for today, at least specifically at very large scaled, very enterprise level folks that do a whole bunch of different type of services, right? That have. I mean, every truckload guy today, except for maybe Crete, who's not a customer, does brokerage as well, as they should. One of the growing, really interesting things, and frankly, the only thing that's really changed in the market, despite what Uber Freight and Convoy are trying to peddle for a long time till they gave up, is this Power Only idea, right? Where you have these large trucking companies that have the ability to manage trailers and trailer pools that are now expanding their relationships with their customers by providing those trailers, but using outside small carrier capacity. It's a growing thing.
We enable that to be super hands-free, for our clients. It's the scale. I mean, this is also the first one that anybody's done that is naturally cloud delivered. You know, all you need is a secure internet connection, and you're good to go. To be able to operate for example, a shipper that's got a private fleet that uses dedicated fleets and uses outside carriers all at the same time, nobody's got anything like that at all.
Okay. John?
Sure. John Diez, Ryder.
Thank you. I'm good, guys, I got it. Thank you. Sorry, just needed a pen.
Okay. Now I understand Richard and I are on opposite spectrums here. The 90-year-old company, $12 billion in revenue. We are a leader in outsourced transportation and logistics services. Our fleet management business operates and manages 250,000 commercial vehicles in North America. Our supply chain business manages end-to-end logistics. We manage today about 95 million sq ft of warehouse space. We also manage a great amount of freight, over $7 billion of freight in the marketplace. Our dedicated business, we employ 10,000 drivers that do deliveries directly for our customers, from their distribution centers to customers or to their storefronts. Broad base, but we are a fleet operator and an operator of various types of equipment.
Yeah, I think we should say, we might be on opposite ends of the spectrum, by that, from a worse perspective, we wanna do what we can do really well, which is be the best at self-driving technology, the software and the hardware. We're partnered with many great companies, including Ryder. You know, we're trying to explore with them the ways that they could help us sort of service the autonomous vehicles in the future because they're experts at that and we're experts in what we do. We really believe that this kind of partnership ecosystem is gonna make us successful and then also help the other companies as well.
Great. John, maybe we'll start with you, 'cause we're calling this a truck capacity panel. I wanna try and sort of tie everyone in a little bit together. Maybe just I'm just curious, starting with you, what's your macro perspective right now? You've got a dedicated business, a leasing business, a rental business. Where are you seeing signs of things starting to get a little bit better? Anything that's still getting worse? Specifically as it relates to capacity.
Yeah.
What are you guys doing from a rental fleet perspective? What are your expectations from a leasing fleet perspective this year?
Yeah.
A lot there, but we'll start with you.
85% of our business is contractual in nature. I think to the question, about 15% of our business is in the commercial rental space. Commercial rental and the other transactional part of the business, which is used vehicles, are really the two areas where we see this capacity issue come in and play a big part. From a commercial rental and UVS perspective, our expectations coming into the year have not changed, which we expected softening conditions throughout the year. Certainly on the UVS side, we expect things to continue to deteriorate through the end of the year. From a commercial rental point of view, first quarter was quite strong. From a historic perspective, it was the second highest utilization for the fleet that we've had.
We did see deteriorating trends throughout the quarter, and we expect that to continue as things continue to soften for the balance of the year. We are seeing the industrial side of the equation be pretty strong still. I think many of the builders still have a back order of orders that they need to fulfill. On the manufacturing side, I think manufacturing is pretty good right now. The auto folks are doing well. I think where we're seeing the weakness is primarily on the housing side, which we saw late last year, and the retail sector, which is starting to show signs of slowing demand there.
From a used pricing perspective, where are we in that cycle? How much further downside risk do you see? Where are you versus your residual value estimates on used?
Good. The cycles are typically from peak to trough, usually normally six quarters. We peaked out in Q2 of last year, so we're in the middle innings, we would say. We still got through the end of the year, that would put us at the sixth quarter mark. With what we're seeing with the freight cycle and the freight recession being pushed out, it may actually even spill over into next year, first quarter and maybe even the second quarter. I would say we're still in the middle innings. Relative to our accounting residual values, we still have significant headroom there. We published that in our disclosure. I would say the truck side of the equation, truck prices are still above prior peak levels. Truck capacity is still pretty tight.
Where you're seeing the softness is on the freight side and the tractor classes. The tractor classes are starting to look more like pre-COVID levels. Clearly, we expect that to continue to soften.
It sounds like if used deteriorates throughout the year, right, we should probably expect full year 2024 gains to be less than full year 2023 gains?
That's correct. 2023 was a record year on gains.
2022.
2022.
2022 was record. 2023 will be down.
2023 will be down.
If we're exiting the year at the low end, right, 2024 is probably down from 2023.
2024 could be down, or flat, right? That's kind of the trajectory of what you could expect.
We're confident that we really don't run any real risk of gains turning to losses like we had in prior cycles.
Not right now for Ryder, right? As we look at our residual values, where we set them, we set them at historically trough levels.
Okay.
We should be fine there.
Okay. You're, you know, hopefully, maybe bottoming by the end of the year, sort of lines up with what Tim is saying about that's when, you know, new production starts to come down again. See how it's all coming together, guys? Tim, talk about your you guys have used truck data.
Yeah.
What you're seeing from used truck, your expectations from a used perspective?
Yeah. No, I would say, you know, very consistent with, with John. I think, maybe I'll add on to what John said in terms of, maybe a little bit more meat on the bone in terms of why there's a good case for used truck prices to bottom at a higher level than prior cycles. You know, first off, we've had just pretty significant inflation in the economy overall. Some of that is gonna play a role. The, you know, margins, you know, net margins in particular for the truckload carriers and the LTL carriers, have been consistently rising. Of course, they're under a lot of pressure this year, but, you know, we think they're gonna decline to a still really good year from a historical perspective.
Even in this rough down cycle, profitability is still well above prior troughs. We think that there's pretty good case for used truck prices broadly, at least with younger equipment. It's tough to draw the line at a certain age, but certainly younger equipment in the market right now, we're seeing still really strong demand. There's this sort of secondary wave of replacement, from all this older equipment that was worked really hard during the pandemic, that is being retired now. There is still really strong demand for equipment with like 300,000 or 400,000 miles on it. That's gonna fade. Yeah. Chris?
I'm just gonna one follow-up, and then we'll get to Chris. We have a mic for Chris. Do we think that, maybe for John or Tim, and then maybe if Richard has a view, if we start to get by the end of next year, you know, some limited deployment of autonomous trucks and maybe more in the future, right? At what point does that start to impact residual values for trucks? Is that something you think we need to think about? Or, you know, is autonomous gonna stay, you know, pretty small for a while, and in your mind, it doesn't really have any impact on residual assumptions?
Our house view is it's gonna take a long time to ramp. I think it's, you know, if you think, you know, way out into the future until when it is scaled up, I think the impact on production is likely. Over the long term, there's not much net change, but if you can get, you know, massive productivity improvements and run a lot more miles, then you're gonna burn through the fleet a little bit faster. But you're gonna need fewer trucks as well. You'll have a period of lower sales followed by a period of recovery.
John, anything you wanna add on that?
I think Richard could speak to this better than I can. I think the regulatory runway here still has a long way to go before it starts having a meaningful impact on the industry. Getting line of sight on what that looks like, whether it's five, 10, 15 years, I don't know. I think we're still waiting for that to be cleared before you start seeing a real penetration in the marketplace.
Do you have customers that are starting to ask you about it, or not yet?
Certainly, customers are asking about it. Where are we in the journey? Clearly, more and more customers are asking about electrification today than autonomous vehicle technology. It's something that everyone, the shippers clearly are thinking about.
Richard, was there anything you wanted to add on to this?
Yeah. No, I think we have a, we have a similar view. I think that, you know, we like to think of ourselves as kind of like, as sort of sensible. You know, we went public and other people went public, and other people had very sort of, you know, in retrospect, kind of crazy assumptions in terms of how many autonomous vehicles would be on the road in year one. Then we said, "Look, like it's brand new technology. The carriers have to learn, everybody has to learn." We were like, you know, and we still say now, like when we launch at the end of next year, as we hope, you know, we're gonna have a small fleet, maybe 20 vehicles, and then it's gonna scale across that.
That doesn't put a limit on how big it can get ultimately. We do think that there's this, you know, it's much more sensible to think of it as a kind of a slow ramp in autonomy, and then it's kinda scaling up over time. I don't think that we think anything different to what those people are saying.
Chris.
I just wanted to come back to something Tim said in his opening comments about 11,000 owner-operators coming out.
Mm-hmm.
We've heard over the last couple of weeks, a lot of large fleets have said that those folks have just kind of moved over and started working at big carriers. Is capacity really coming out?
A private fleet CFO that I talked to recently said, "Who are these people who are hiring all the carriers who've left and now wanna come back? We're not hiring those people. Our trucks are full." There's certainly some of that, yes. I think the bigger part of the debate is how many trucks per fleet are, you know, failing as opposed to... Because the average number of trucks per fleet in the United States is something like 8. If you take out fleets above 100 trucks, it's still six trucks a fleet. We're talking about revocations, not necessarily just owner-operators. Yes, they're probably mostly owner-operators, but there's still several trucks per fleet. We don't know exactly what the number is, we're just looking at the operating authority. I think that's a pretty big number regardless.
I'm not saying I know the precise number. I'm just saying what I can say is that we've never had 11,000 revocations before ever.
We are from our large fleets that we deal with, they are seeing some of those drivers. They are seating some of them.
Mm-hmm.
Private fleet guys generally don't need to fight for those drivers the same way that one-way folks do. They have very little turnover generally compared to for-hire carriers.
Jeff, you're saying in some of your customers, and you talk with some large fleets like we cover.
Yep.
You're seeing them.
They're absorbing some of that.
Right.
Yeah.
Their seated tractor counts were down a year ago, two years ago, and now even though they may not need them, they're, because they can hire drivers, they're doing it.
Yep.
To prepare for the next-
Yep.
.. cycle. Joe, I wonder if you can put your brokerage hat on. You know, I have a view that, you know, we've seen tremendous growth in the brokerage industry over time, and it's in some respects, making the truckload market more cyclical, right? We're seeing peakier peaks. Last couple cycles, we're now seeing, you know, troughier troughs, maybe that's a word, because we're giving a lot of volume to smaller carriers, and no brokerage, you know, prevents the real consolidation in the industry from happening. We've now got Power Only where we're, you know, our advantage, my advantage as a large fleet with three trailers is, you know, that I've got three trailers, and I can do drop and hook, and the guy that's got one truck and one trailer can't do that.
Now, my Power Only, I'm getting in that business, and so maybe that guy's not going... What do you think about this idea that brokerage, right, is making the market more cyclical? I'm not saying that's a bad thing for brokers, but, you know.
Well, I mean...
What do you think?
I don't think so.
Okay.
This market has been cyclical since 1984.
Right.
It will always be cyclical.
Feels like it's getting more so. Do you have a thought on why it's getting more cyclical?
It is not getting more cyclical.
Okay.
I mean, it typically, for the first in the 80's and 90's it really flipped and flopped back and forth every quarter. What has people's perspective all messed up is the pandemic.
Right.
For one thing that took things from, you know, we got through 2008, 2009 where there was, you know, not very much freight, everybody was scared, then we went into some good times. Now the pandemic came, now so we're all trying to recover from the pandemic now, and all the inventory's burning off. I mean, I think that nothing has changed with that at all. What has changed, I'm not here to rip on Uber and Convoy, but I will every chance I get. You know, those guys came in and I think Uber Freight is now, fortunately is now a better actor. They came in and used shareholder money to basically try to support this idea that you could automate capacity, price, and margin all at the same time, it's frankly not possible.
You just can't do that no matter what anybody thinks. That's frankly also not what brokers get paid for. Brokers get paid to absorb the risk of having the right capacity in the right place at the right time and spread that across a large amount of freight and a large amount of carriers' capacity, right? That's what they get paid for. That hasn't changed, okay? Those guys tried to do something differently, it didn't work. Dara came in to run Uber Freight, said, "This is idiotic. We're not doing that anymore." Now it doesn't look very much like Uber anymore, but, you know, in mushing it together with Transplace, it's gonna be a decent logistics company. Convoy sort of given up, and they're trying to compete with DAT now.
I'm not sure what they're doing, but they're no longer out there pricing below the market in a predatory way like they were. That situation has rectified. You're just in this sort of recovery from the pandemic and after the pandemic, and this too shall pass. I, you know, I think the guy that actually writes really well about this guy, about this whole thing is this guy at Michigan State named Jason Miller. If anybody reads him, he's very worthwhile and very data-driven, and he's looking at everything sort of that FreightWaves makes up, and he goes and writes the real answer to it. He's very worth. I don't know the guy, but I really like the way.
You'll make a lot of friends in this room if you know, keep saying stuff like that.
Well, I mean, the other thing to remember as a backdrop of all this stuff is that while I understand that a lot of you folks are trying to figure out what the next cycle is gonna be and what the next sort of market shift is gonna be, this industry will continue to be cyclical. You'll have more capacity and more freight and more capacity and more freight. Freight's never gonna be in the right place for the capacity. There's always this dislocation. If you're good at operating a trucking company and you run a full network, meaning very little deadhead compared to what it should be, so you're sweating your assets and your drivers the right way, you have happy drivers and happy shareholders. That's not gonna change over time.
These other little fly by night things may come and go, but it's gonna, you know, forever, regardless of drivers in the truck or not, it's gonna be a great industry for forever. The other thing to remember is the worst thing for brokers and the best thing for asset guys is stasis. When there's like sort of that right amount of freight and the right amount of capacity for a while and nothing's really shifting, that's a hard time for a broker to make money and a great time for an asset-based company to make money. Today, everybody's sort of both, although there's a lot of little brokers that are not both, that can't do that Power Only thing. Whereas a CH does a lot of Power Only brokerage.
Coyote does a ton of Power Only brokerage with the UPS assets and stuff, so there's the blend. Even while it might seem right now, like things are a little tough, all you need is one good hurricane. Hopefully, nobody gets hurt. The whole thing is just perturbed, the whole thing is different, and everything goes flying in the other way. I don't know how you build that into your models, but that is a non-negligible possibility.
Okay.
It didn't really happen last year, but it's not gonna stay like that.
We talked about this in one of the other panels that, again, we had this International Roadcheck week last week, which, and it's a one-week blip, so who cares? We did see a pretty, you know, if you look at the data, pretty pronounced spike, and all that tells you is that we're probably getting close to a point with capacity that one incremental change can really, you know, turn something, right? Jeff, just one last thought on this. Does a TMS solution, in any way, reduce the cyclicality of the industry over time, or...
No.
... it's a tool. The benefit to a Werner is ultimately what? Should this mean better margins for them over time? Should it mean?
Definitely for any of our clients, it should mean better net margin over time or better EBITDA margin over time and better return to shareholders, right? First of all, some of these folks, most of the companies that come onto our platform have been you know, been using, you know, this innovative system that's on, you know, it's AS400 mainframe COBOL, and nobody's written something to replace it in decades. And to some of them, it's a bit of an existential need, but certainly many of them are trying to operate off a bunch of different TMSs that they bolted on or a bunch of stuff they've written around it.
This allows them to focus to hopefully reduce their tech spend, focus it on their secret sauce, their BI, their pricing models and those things, and lets them operate all their businesses together so that they're taking a solution to the customer. They're taking a capacity solution regardless of, is it their own driver, is it their own power, is it their own trailer? Is it dedicated or one way, or is it outsourced? Is it brokered? I think that idea that these large carriers are taking this solution approach, and they're able to operate it behind that in a super efficient way, will make a big difference to these folks over time.
Yeah. John, I wanna come back to you. We spent some time talking about used. We talked a little bit about rental. All right. Let's talk about the core business, the leasing fleet. What are you guys doing from a leasing fleet perspective, a fleet growth perspective this year? Are you getting all the trucks that you want? Are you seeing opportunities to accelerate some of that fleet growth because the OEMs have extra capacity for you now? What do you think about, like, long-term leasing fleet growth?
Yeah. For us, from a fleet growth perspective, we just raised our expectations there. We were expecting $3,000-$4,000 lease fleet growth. We updated that to $5,000-$6,000. Some of that is capacity that we've been able to create ourselves. With commercial rental softening, we're gonna move some of that equipment and apply that to lease applications. We're still. You know, Tim mentioned the six to eight months out. That's primarily on the tractor side, but most of our orders are out nine to 11 months. Many of our lease customers are saying, "I can't wait nine to 11 months to get my new truck." We've got on-ground commercial rental vehicles that they could take advantage of. We've been redeploying a good number of the commercial rental vehicles that were serving the freight market and repositioning towards lease.
That $5,000-$6,000, how much of the sort of earnings benefit of that do we see this year? How much that gets pushed out to next year? Ultimately, what I'm trying to figure out is, right, and I know it's early, but, you know, I'm just trying to think about some of the puts and takes for.
Yeah. For us.
Ability. You know, puts and takes for you know, even looking out to 2024.
Right. For us, the initial $3,000-$4,000 was coming in towards the second half of the year. You're gonna see the majority of that benefit, 2024. The incremental, fleet that we added from rental, that's here. That will start contributing in 2023. The quicker we put it to work in lease, the quicker it'll benefit the lease, performance there. I would say the majority is 2024, but a good amount will come in in 2023 based on what we're doing with rental-to-lease redeployment.
It strikes me, John, everyone, almost everyone that had full year guidance for 2023 lowered it.
Yep.
In April. Not everybody, but for the most part. You guys, if you, kind of raised it. Are you assuming, what do we need to feel comfortable with this guidance? There's a hope of a, freight's gonna be better in the second half of the year. Do we need that to happen for you, or do you feel like you're got conservative enough assumptions of used getting worse, rental not getting better, where you still feel comfortable with where we're at?
Yeah. I think for us it's just where we set expectations. Coming into the year, I think we were a bit of a departure in that we expected a soft environment throughout the year and a de-deteriorating environment throughout the year. We haven't moved off that. That's kind of playing out, if you will, and I think more and more accepting the fact that we may see a shallow recession here in the second half of the year. It's kind of what we have baked into our guidance. As we look forward, we don't, we don't see a rebound necessary to really hit that guidance. It's more kind of what we expected coming into the year.
Richard, I want to come back to you for a minute. What are the sort of biggest risks in your mind to the commercialization timelines? Like, is it your own technology? Is it PACCAR? We talked about partner. What's the biggest risk that we get to end of 2024 and it's now end of 2025?
Yeah, sure. You know, we have, again, on the investor relations website, we have a roadmap, and we've been executing against the roadmap and sort of ticking off all of the stages that would get us there. You know, we need to continue to go down that path. The technology's in a really good place. The thing that we need to do to launch is to complete the safety case. In order to complete the safety case, then we need to have a truck platform, a redundant truck platform. That's kind of the thing. If you have that, we close the safety case, and that sort of supports the launch. If you don't have that's the biggest challenge.
Between now and end of 2024, what are the milestones we should be watching for you guys to make sure we're on track for that end of 2024?
Yeah, sure. We, at the end, in, you know, when we did our earnings call a couple weeks ago, we said we'd achieve Feature Complete. We outlined three major milestones that would get us to the commercial launch by the end of 2024, the first one being Feature Complete. Feature Complete said that on a launch lane, which is between Dallas and Houston, that the system has all of the capabilities necessary to operate on that. There's no more features that need to be added for that launch lane. After that, we move into a period of validation, continued testing, and that will move us towards the milestone that we have for the end of this year, the end of 2023, which is we call Aurora Driver Ready.
An Aurora Driver Ready milestone means that we've closed the safety case on that launch lane, as much as we can, absent the trucking platform. We think that we'd be sort of, like, 95% closed on the safety case, and if we had a autonomous-enabled trucking platform that we would have been able to launch commercially, we'd be able to have that drive down the road without a human driver. That's kind of a key milestone at the end of the year. We said, like, you know, we've done everything that we can do ourselves in order to kind of get ready to launch, then we would be waiting in 2024 to get the autonomous truck platform in place. You'd have some more validation and some more work to close the safety case on the actual platform, and then that would unlock the commercial launch.
Tim, near-term question. What should we be expecting near, you know, near-term order flow Class 8?
I think it's gonna be soft for a while. We used to have a very tight relationship between spot rates and truck orders that was kind of severed by the pandemic and the supply chain issues. We've been sort of catching up. But we've had $12,000 the most recent month. We think it's gonna be in that range, kind of $10,000-$20,000 through you know, into the fourth quarter of this year when you'll see that seasonal uptick, but not a great seasonal uptick. We think we're in that sort of depressed period until we see freight rates come back, and drive, you know, more order activity probably, you know, sometime next year.
You said you think we're down, I think it's 20% next year.
Mm-hmm.
It's less severe than prior downturns.
Yes.
Is that just because we underbuilt in 2020 and 2021, and we just, we got continued catch-up?
Exactly, yeah.
Are we counting? When do we start to see some pre-buys? I know we've got some things coming in California. We got EPA 2027. When do we start to see some pre-buys?
Yeah. Well, you know, you hear there's actually a little bit of pre-buying happening right now ahead of the California stuff for 2024. We're not even 100% sure that that's going to happen. California has asked for a little bit more time to actually, for EPA to grant the waiver to them to actually go forward on this. There's two different sets of, these are the low NOx standards. There's a whole bunch of different regulations out there right now. But the big one that we think is going to drive the pre-buy is the low NOx rules. California refers to it as the Heavy-Duty Engine and Vehicle Omnibus Regulation. There is some activity, you know-
When is the time? What's the timeline?
2024 is the plan, but it doesn't seem like it's 100%. It's a slightly different regulation than what EPA is planning for 2027.
Okay.
We think that that's essentially the tension there. We do think the national rule that goes into effect in 2027 is gonna raise the price of a Class 8 tractor by about $25,000. Only about $5,000 of that is the technology. The rest is significantly longer useful life requirements and warranty requirements in the rules. That's most of the cost increase. We think that those two things are gonna drive essentially, you know. A very similar historical corollary would be EPA 2027.
John, when you hear that there could be in three or four years, there could be a $20,000-$25,000 increase in new truck price, what? How do you plan for that? How do you get ahead of that? You would be advising fleets gotta buy a lot more in 2025, 2026.
Yeah. I think, look, longer term, the change in technology and making things more complex is good for Ryder. In the short term, I do think you're gonna see a significant pre-buy in 2026. For all the reasons Tim just highlighted. As we prepare for that technology change with our customers, clearly, the first generation of these technology switches typically aren't the best performing units. That's something that we counsel them on, and clearly that would push to more pre-buy activity than you would typically see.
What about California end of the decade? I've been hearing from truckers, even rail, like, that this, like, is a major deal if it happens, when it happens, right? Tell us what's exactly supposed to be happening in California end of the decade, Tim.
You're talking about the electrification rules in particular?
Yes.
The ZEV mandates are, you know, they're very aspirational. It's very difficult for them to mandate as, you know, a significant, you know, the proportion of trucks that are gonna be purchased, but they're certainly gonna try, and EPA's gonna try as well in, you know, these GHG3 regulations, which are later in the decade. The idea is, you know, is really to, you know, push towards electrification. That push is happening sort of on its own. I mean, there's a lot of development happening, particularly in medium duty applications and local stuff like school buses and, you know, not really freight equipment at this point. It's, you know, it's really just meant to sort of push that along.
There's, you know, I think somebody earlier today referred to regulation stacking, and we've got, you know, several regulations now between the low NOx, the GHG regulations, and the ZEV regulations that are all sort of pushing up the cost of diesel and pushing people towards those low carbon alternatives.
What's in your guys' numbers for what percentage of orders, builds are ZEV, you know, zero emission vehicles, five years from now?
Five years from now, it's still pretty small in Class 8 tractors. We're still talking, you know, low- single-digit percentage points. We're probably getting into pretty significant numbers in medium duty, you know, 20%, 30% of the market. Probably higher percentages in different niches like school buses and stuff. Even parts and delivery and a lot of that local stuff is pretty good. In the Class 8 market, there is refuse, there are yard spotters, there are transit buses. It's not gonna be zero in Class 8.
John, what do you think about are you seeing where are you seeing demand for zero emission vehicles? Where how do you think this market evolves? Is it kind of where Class 8, like this, they mandate in California, what do we do?
Yeah. I think, light duty is clearly the economics pencil out that if you're a shipper, that electric vehicle could provide a similar economic return as a traditional vehicle. When you go up the scale to medium duty and heavy duty, I think the economics become even that much more challenged. Clearly, the Class 8 technology that exists today will need to be supported with, state, funding and credits to really make that economically feasible before you see any meaningful adoption. Without the support of the state funding, to support people to go ahead and buy that technology, it's gonna be challenged.
Not to mention the grid challenge, where you can't even charge a car half the time in California. I don't know how they think they're gonna charge the trucks.
The grid infrastructure investments are the biggest sort of bottleneck right now.
I think it was earlier today, we had someone talking about, or maybe it was last night, that they're gonna they're looking at investing more in terminal infrastructure, just like, what's is it Arizona or whatever states like just, you know east of the border, so they could be headquartered there, not based there, not based in California.
Right. Invest in the Union Pacific Railroad, because someone's gonna have to get all the coal there to produce that electricity.
Right. Jeff, what do you think about, you know, for years there was this fear that margins for gross margins in the truck brokerage industry would go from teens to 10%, and some people would say, "Oh, it's going to 5%." Part of this was what, you know, Uber and Convoy were saying, right? Was gonna happen. Maybe some others, right? I don't know, we haven't seen that play out, but is there a long-term case for why, right, we should see higher gross margins, lower gross margins, or we've got a long history of they're around 15%, and that's where they're gonna stay?
Yeah. I mean, I don't think we're getting back to, if you look publicly, C.H.'s margins were, you know, in the 17.5%, 17%, 16.5%, 18% margin for a long time.
Mm-hmm.
I don't think we're getting back there at scale. I don't think it matters, because really what matters is the net margin. With technology like ours and others, it becomes easier and easier to drive net margin off of smaller gross margin, and thus EBITDA margin or actual real return to shareholder value. I think that, yeah, those guys were out there peddling that stuff, but again, that's over, and nobody's trying to do that anymore. Again, remember what the broker's not getting paid to shuffle paper, right? They're paid to take risk. That's what everybody gets paid for. The risk they're taking is to guarantee that the truck is gonna show up. They take risk over time and over space, right? They're betting when they do a bid.
That's another thing that some of these new supposed companies are out there trying to peddle, is that we should get away from annual bids. They have never been in front of a shipper before, and that shipper, the guy that works at that shipper, his bonus is based on hitting a budget, and large shippers can't operate without a budget, right? They're many of them are public companies, and they need a budget. They don't understand that that's what's gonna drive pricing behavior. Frankly, the guy that's in charge of that budget, that gets his bonus based on that budget, his big impetus is to hit his budget or maybe come a little underneath it. He's not trying to get the cheapest price. He wants the service. He wants the quality. What happens if he blows his budget out by too high?
He doesn't get a bonus. If he blows it up by too low, what happens? He gets a bonus, but his budget's cut the next year, right? Some of these guys that tried to come into the industry don't get it.
But when do, when do you think we see that inflection of higher net operating margins? Like, if you look at C.H. right there, they were at a 40% net operating margin. Now they're at a 30%, and I... it looks like they've just, they've sort-- the gross margin hasn't changed a whole lot. It's down a little bit, but they're just spending a lot more on, like, technology, SG&A, whatever you wanna call it, right? And I don't think that's-
I have a solution for that.
I don't know that that's just a C.H. issue, right? It feels like, right, everyone feels like, well, we need to spend more on technology or whatever, and it, for now, it's resulting in lower net operating margins. When do you think we could see the inflection to higher net operating margins?
I guess I'll answer it two ways. One is a commercial for us, right? Because you know, we're not inexpensive. We're an expensive solution, but it's way cheaper than trying to do it yourself, right? The whole idea that some put out there that they want to spend hundreds of millions of dollars a year on technology to try to look like a technology company when they're a trucking company or a broker doesn't make a whole lot of sense, right? Their secret sauce, the way they price, how they accept freight, their interaction with their shippers or their customers and their carriers if they're a brokerage, what they need to actually deliver that capacity solution, that's the important part.
You have, partially because of all the marketing that frankly was Convoy's best asset, was their marketing and what Uber Freight did, attracted a lot of attention to people to invest in the right technology. Those weren't the right technology, but with the right technology, I think you will start to see that. You know, the API connectivity of the world now, the improvements with the in-cab devices that were stuck for a very long time, where you have players like Platform Science out there that are, and Samsara to a certain extent, that are bringing new tech and new capability, will make it easier to drive more profit to the bottom line. I think with the right... as a combination of all those forces, this is a time like there's never been to start driving that.
It sounds like we've got some, we're hopefully at a, in your mind, maybe nearing a cyclical trough in the market. We've got less competitive pressure from people doing dumb things. If we could be smart enough and spend a little bit differently on our technology that, you know, there's a real case for the next few years in the freight recovery for the brokers to have a, you know, really good year.
There's a-
A few really good years.
There's a great convergence of it. I mean, the other big thing that's out there, in support of John's business is there is more and more Coming out of the pandemic, more and more shippers have realized that they need the right dedicated private fleet and dedicated fleet platforms, that they, you know, their idea of not being subject to the market isn't based on brokerage or it's based on getting the right capacity dedicated. It's a really critical thing. That's a big change, that's why, you know, as some companies have pivoted from, you know, a lot of the big public companies and to a very, very positive outcome, have shifted towards much more dedicated and much less just over-the-road willy-nilly freight.
That also becomes easier and easier with the right technology to really automate and drive or margin to the bottom line.
John, maybe to that point, what's your view of the trend between outsource, just outsource lease, private fleet, staying private fleet, outsource lease, or going to more outsourced dedicated?
No, look, the complexity in the marketplace from a leasing perspective, we talked about technology changes, the rising cost of equipment. A leasing solution clearly makes it better and more affordable for those private fleets. I think structurally, you're still facing a driver challenge over the long haul, and people wanna get out of the trucking business and look to outsource to companies like Ryder. When we look at the secular trends for the transportation side of our business, the trends still point to very positive momentum going into the future.
Okay. We gotta wrap 'cause we're at the top of the hour. I just wanna give everyone, you know, just go down the line, you know, something that, you know, we didn't touch on. That you just wanna make sure that we or that you're focused on, or you think maybe we missed in our discussion today. Maybe I'll start with you, Richard, and we'll go.
Yeah. Yeah. Thanks very much. No, I think we touched on a lot of stuff like, you know, we're heads down, we're in a development phase. We are very excited by our roadmap and our progress along the roadmap. You know, I think we would say, you know, there's a lot of noise in the, in the space. There's a lot of noise around autonomy, and we feel at Aurora, at least that we're the closest that we've ever been, irrespective of what the, you know, the outside world thinks at any given time on how autonomy is doing. Like, we really feel like we're on a path to get this launched, you know, by the end of 2024. Once you've launched it, this is just a phenomenal business for us, right? We're built from day one.
It's not a science experiment we're building. We're building a company. You know, our product's gonna enable what we call drivers-as-a-service business model. We're gonna get paid per mile, and we're gonna you know, because we focus on what we can do best, we're gonna be asset light, and we can drive really, really high gross margins, like in the sort of softwares as a service, like 80% plus gross margins. You hear some of the numbers around here, and you're like, you know, this is, this is a technology business that's gonna power all of these trucks on our side. We're just super excited to kinda get there, get a commercial product launched, and then be able to start scaling, and then help solve some of the problems that you've heard some of these other people talk about across the business.
Tim?
Very good. Maybe I'll come back to the cyclicality. I certainly agree with Jeff's comments about the industry being ever more cyclical. I would point out that a couple of things that are currently, you know, really, really negative about this cycle are, we're in sort of some temporary factors like this big destock that we're going through. I think that the freight markets eventually will kinda come back every time we destock, we restock. I'll point that out every time. I would actually make, you know, maybe differ a little bit and point out that I think that the amplitude of the cycles is increasing, if you just look at spot rates, for example. I think we're very close to the bottom.
I think that elevated amplitude's gonna continue, partly because of demographics, with the boomers retiring and the average age of a truck driver at 55 years old. You know, that's been with us for several years. That'll continue to be with us for a while. Partly because I think the transparency that the load boards have provided, which is a relatively new phenomenon, has given both sides of the market more pricing power when things are imbalanced.
Jeff, you plug Jason Miller, feel free. You know?
You? Read Scott's stuff.
No.
Friday Freight.
Friday Freight's great.
Anything, Jeff, you wanna add?
Not really.
Okay.
The absolutely best industry ever to have fallen into by mistake, and I still love being here, so thanks.
John?
Yeah. For us, it's more what we've done with the business model. We talked about cyclicality and the risk that comes along with it. We've de-risked the business. We've diversified the portfolio, beyond the equipment leasing and rental business. We're excited about the opportunities and challenges that are ahead for Ryder and being able to perform consistently through those cycles.
Awesome. I really enjoyed that, guys. Thank you so much. It was great.
Thanks.
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