With so much of Ryder’s financial performance dependent on how it performs in used truck sales, and with that market’s importance for everything from a company’s bottom line to the opportunities for an independent owner-operator to get started, Ryder’s third-quarter earnings call with analysts gave insight into what the company says has been a strong market.
Ryder CFO Scott Parker said on the call with analysts the company sold 8,800 used vehicles in the quarter, which was a quarterly record. That was up 66% from the prior year and 40% from the second quarter.
That sales volume was enough that Ryder’s heavy inventory of used vehicles dropped 3,300 from the end of the second quarter. It was during the second quarter that Ryder aggressively increased its estimate for used vehicle sales, which it classifies as its “residual value estimate.” Its accelerated depreciation stretched out into 2022.
At the end of the quarter, Ryder had 10,700 vehicles held for sale. That’s still more than the 7,300 held at the end of the third quarter last year. The target for the end of the year is 7,000 to 9,000 vehicles, and Ryder expects to make that.
The strength in the used truck market helped the company’s third-quarter financial performance.
Not only did Ryder sell more vehicles, but it also realized significantly more in its sales. According to Parker, “tractor proceeds were up 14% and truck proceeds were up 8%. In the U.S., tractor and truck proceeds were both up 9% sequentially.” (The quotes are from the transcript of the earnings call supplied by SeekingAlpha.)
John Diez, president of Ryder’s Fleet Management sector — which is the sector in Ryder selling used trucks — said the improvement was a function of the stronger freight market. “What we’re seeing is owner-operators coming into the market and looking for primarily tractors but also straight trucks as you continue to see the e-commerce space take off,” he said on the call. “You’re seeing a lot of buyers that are coming in and gobbling up not just one but multiple assets at a time.”
The reduction in residual value booked by Ryder earlier this year signaled that it believed the market for used trucks would remain weak. As CEO Robert Sanchez said on the call in reaction to an analyst question about the used truck market, “Yes, it did improve quicker than we expected.”
What Ryder is looking at, Sanchez said, are the numbers in used truck pricing that would be needed to not take any more hits on estimated residual values. Ryder’s estimate was that from earlier lows, prices would need to gain 30% for tractors and 10% for trucks to avoid that.
Pricing in the quarter, Sanchez said, was up about 9% sequentially. “We’ve certainly made some good progress in the quarter in terms of getting to those levels, [so] we will no longer have to make any more adjustments,” he said. And given that the reductions in residual value estimate go out two more years, there is plenty of time for that to happen.
Sanchez cautioned against being too optimistic about the good quarterly numbers on used vehicle sales. He said the accelerated depreciation the company took was “pretty significant” and will be a headwind into 2022. “So as we get into 2022 is when that stuff really starts to lighten up some more and we get into an environment where you have less impact from that,” he said.
Continuing at that pace is not likely, Diez said, if for no other reason than the inventory of vehicles at Ryder is getting tighter. The company expects it to be down at the end of the fourth quarter compared to the third. “So I expect in the short term, I expect good pricing activity for both our trucks and tractor pieces, and that I expect will carry us into 2021,” he said.
But the volume numbers may not be repeated, Sanchez said: “I would expect we’ll be selling fewer vehicles probably in this quarter than we did in the third, but still a pretty healthy level.”
The earlier reductions in estimated residual value do get offset if the numbers for the sales come in better than anticipated. For example, Parker noted that Ryder had booked valuations on used vehicle sales of a $115 million charge for the third quarter. But with the better-than-expected prices, it was closer to $100 million.
The fourth-quarter estimate was $100 million. For now, Parker said, Ryder is not changing that based on how much better the market was in the third quarter.
While the trucking market tends to focus on sales of class 8 vehicles, Sanchez said rentals can give an earlier indication of strength in the trucking and broader economy. When this gets better, he said, “customers will come and rent trucks before they go out and buy and lease … because customers aren’t willing to put down the capital yet.”
Given that, Diez said Ryder’s tractor business is back at normal utilization levels “and demand continues to be strong there now from September into October.”