In an earnings season full of several trucking companies coming through the second quarter better than expected, the earnings report of Ryder was a reminder of how tough the landscape has been.
The truck leasing and supply chain company did better than expected, according to SeekingAlpha in at least one key measurement. Its non-GAAP earnings per share of negative $0.95 beat Wall Street consensus by $0.36. The GAAP estimate of a $1.14 loss was better than consensus by $0.22.
But revenue of $1.9 billion was $70 million less than consensus estimates and was also down 16% year-on-year from the second quarter of 2019.
The company’s discussion in its earning statement about the impact of the pandemic is sobering. Used vehicle sales is a key financial driver for Ryder, and the earning statement said a recovery in the used vehicle market is now not expected until 2022. The company’s calendar had put that recovery at mid-2021. “Although we saw stronger than expected volumes in used vehicle sales in both the retail and wholesale markets, we expect pricing pressure to continue through mid-2022,” the statement said.
Ryder already has prepared for that to some degree, writing down the value of its inventory in the second quarter based on expectations of the residual value of the vehicles.
Ryder did say that the curve of its business was similar to what a lot of trucking companies saw: a “trough” in April, with conditions improving afterward. In total, Ryder estimates that the impact from the pandemic was significant in the second quarter.
“Market conditions related to COVID-19 troughed in April for Ryder’s rental, supply chain automotive, and used vehicle sales businesses, and conditions improved sequentially thereafter,” Ryder said. The total estimated pre-tax earnings impact was $45 million in the quarter, “driven by lower commercial rental demand and reduced automotive activity in supply chain, partially offset by lower overhead costs. “
The GAAP loss of $1.41 per share shows a swing of $2.84/share from the EPS profit of $1.43 in the prior year. However, the red ink in the second quarter was impacted by the writedown of the residual value of the vehicles.
Rental utilization on power vehicles during the quarter was 55.9%, compared to what Ryder said were historical levels in the mid-70s. As a result, Ryder said it has cut the size of its rental fleet by 8,600 vehicles, which is down 19% from a year earlier.
“Based on the rental fleet size at the end of the second quarter, every percentage point change in utilization is estimated to impact monthly pre-tax earnings by approximately $1 million until the rental fleet size can be aligned with market demand,” Ryder said.
Fleet Management Solutions (FMS) is the segment at Rynder that leases vehicles on a short-term or long-term basis to its customers. At the end of 2019, it accounted for 56% of the company’s revenue, according to the Ryder annual report. Used vehicle sales are recorded in that segment.
Revenue in FMS was $1.2 billion, down 14% from a year earlier. Operating revenue, a non-GAAP measure, was $1.1 billion, down 8% from a year ago. That drop included a 33% decline in commercial rental revenue. The segment lost $104 million pre-tax, compared to earnings of $58 million in the second quarter of 2019. However, that loss included the used vehicle writedowns, impacting the number by $119 million.
Supply Chain Solutions (SCS), which involves logistics management, accounted for 29% of the company’s revenue in 2019. That segment in the second quarter improved enough as the three months went on that according to Ryder, “we ended the second quarter at pre-COVID 19 activity levels and assuming no additional disruption we expect activity to remain at approximately these levels during the third quarter.”
Revenue in SCS was down 20% to $519 million. Non-GAAP operating revenue was down 16% to $405 million. Earnings of $37 million were down 19% from the second quarter of 2020.
Ryder’s dedicated division accounted for 15% of revenue in 2019. It saw a decline in revenue of 19% to $294 million and an 8% drop in operating revenue to $228 million compared to the second quarter of 2019.
While those last two segments are less than half of the company, they are targeted for growth. “Supply chain and dedicated profit margins in the quarter were in line with our long-term targets of high single digits despite the challenges of COVID-19 and we remain focused on accelerating growth in these segments,” the earnings statement said. The Ryder “capital allocation strategy” is to “accelerate growth in our higher return supply chain and dedicated businesses while moderating growth and improving returns in our capital intensive FMS business.”