Having sold 6,300 used vehicles in the second quarter gives Ryder System Inc. (NYSE:R) a front-row seat to the strength of the used truck market, a perspective that CEO Robert Sanchez shared with analysts on the company's second-quarter earnings call Wednesday.
Ryder's earnings are impacted significantly by its proceeds from used truck sales. The relatively weak second quarter the company turned in, however, appears to be far more of a function of a big slide in demand for its leased vehicles under its Fleet Management Solutions segment. On the call, Sanchez said rental utilization of power units was 56% in the second quarter of 2020, down from 75% in the second quarter of 2019.
The used vehicle sales are under that division also. And while the company sold more vehicles in the quarter, it took in a lot less money. On the call, Sanchez said Ryder had sold 6,300 used vehicles in the second quarter, up 24% from the second quarter of 2019 and up 15% from the first quarter of this year. But the prices it received for those vehicles were down sharply, with Ryder receiving 33% less than last year on average for tractors and 9% for trucks. Compared to the first quarter of this year, those declines were 12% for tractors and flat for trucks.
The company also has a lot more to go. Sanchez said the company's used vehicles held in inventory for sale totaled approximately 14,000 by the end of the quarter, up from 8,300 a year ago and well above a target level of 7,000 to 9,000 vehicles. A greater-than-usual number of vehicles coming off leases and downsizing of its own fleet combined to push up the inventory number, Sanchez said.
There are other ways of looking at the inventory numbers. For example, Sanchez said pricing on sales in the U.S. is up 9% from the prior quarter when normalized for age, as Ryder sold a higher volume of older trucks in the quarter. But that is for trucks; Sanchez said the adjusted sales price of tractors was "not materially impacted" when adjusted for age.
Accelerated depreciation on the value of its fleet
The value of the company's fleet and what it can reasonably expect to get in resale value for them was a major factor in the company's earnings as it continues to depreciate the "residual value" of its inventory. The impact of that depreciation in the quarter was $31 million, Sanchez said on the earnings call.
By taking these actions now, Sanchez said, "we're getting a lot of depreciation behind us, and that is going to help create that path to get to a 15% return on equity," which Sanchez stressed several times on the call is the Ryder goal.
For the 12 months ended June 30, the ROE was negative 9.8% at Ryder. For the 12 months ended June 30, 2019, it was 11.9%.
Even if used truck prices rise 10% from the current level of where Ryder is valuing the vehicles on their books, "that is the price we had at the beginning of this year," Sanchez said, noting that such a move is in line with normal volatility. "We believe this will continue to be a cyclical market, and coming off the low lows of this year, we expect it to move up over the next couple of years."
But the used vehicle market has been tough for a while from the sellers' perspective, Sanchez conceded. He noted that the typical tractor sold by Ryder is 7-8 years old and is going to be sold for $20,000 to $25,000, likely to an owner-operator who will accept the lower levels of fuel efficiency of an older vehicle in exchange for the lower price tag on the tractor. But, Sanchez added, "if you look at the cycle over the last couple of years, it hasn't just been older vintage vehicles that have gone down. It's gone down across the board on used equipment."
The residual levels of the inventory can be held steady, Sanchez said, if during the next two years, used vehicle pricing moves up from current levels and increases 30% for tractors and 10% for trucks. It's a number Sanchez said Ryder believes is doable. "These improved pricing levels are similar to those that we've seen in 2018 and '19 for tractors and similar to levels seen at the beginning of 2020 for trucks," he said.
FMS will shrink as other segments grow
Ryder's long-term strategic plan is to have its Fleet Management Solutions division shrink as a percentage of the company; it was about 56% of revenue last year. That slower growth rate, according to the strategic plan, would be accompanied by growth in Ryder's Supply Chain Solutions and Dedicated Transportation Solutions divisions, both of which provide services that are a better fit for an economy moving toward more e-commerce and emphasis on the final mile.
Part of that, Sanchez said, would be to moderate the annual growth in the size of the company's fleet, which at the end of 2019 stood at 85,200 trucks, 82,400 tractors and 45,800 trailers. "We're going to have some growth [in the fleet] but not the 10,000 to 11,000 [per year] seen a few years ago," he said. "And by doing that, we're going to be able to get to 15% return on equity."