Ryder Sees A Steep Drop Coming In The Value Of Used Trucks

Ryder System, Inc. R earnings for the first quarter were notable for the specificity in which the truck and vehicle leasing company spelled out how the COVID-19 pandemic has impacted its operations, including accelerated depreciation that speaks to a weak used truck market.

As a result of the pandemic, the company's depreciation of its used tractor and truck fleet is now based on a "trough," Ryder Chairman and CEO Robert Sanchez said on a call with analysts after the release of earnings for the truck leasing company.

The decision to set the values at that level comes even as the first quarter used truck sales were not far out of line with expectations. Sanchez said that while the average price of a used tractor sold in the quarter dropped 26% from the first quarter of 2019, sequentially to the fourth quarter of last year, prices were mostly flat. 

But the decline in volume that the company started to see toward the end of the fourth quarter led to changes in what it refers to as the "residual values" of its fleet that is to be sold. And that value for tractors was reduced all the way down to what Sanchez said was the "trough" of the company's residual values back in 2002. (For trucks, the trough was 2009, he said.)

Sanchez described the move as "pretty significant" but open to adjustment. "If it comes in better, we'll see some gains and we will adjust," Sanchez said. "The goal over time is to get this used truck business behind us and by taking on the depreciation, that's helping us to do that."

John Diez, president of Ryder's Fleet Management Solutions division, said on the call that there has been a significant decline in used truck sales volume this month. The wholesale market has "dried up," he said, though Ryder is seeing "good retail activity and pricing remains relatively stable."

However, given that the company now sees declines in the market running through the year, when it had been forecasting a reversal in the third and fourth quarters, the decision was made to accelerate depreciation on the fleet's residual values.

The total impact from accelerated depreciation in the quarter was about $27 million, just one part of the $70 million that Ryder says was the size of the impact from COVID-19. 

The fleet is larger compared to last year. At the end of the first quarter of 2020, the average used vehicle inventory at Ryder was 10,300. That's up 41% from a year earlier in 2019. That number was in excess of what Ryder said was its target of 7,000 to 9,000 vehicles, Sanchez said on the earnings call.

The company sold 5,500 vehicles in the quarter, which was actually up 12% from the first quarter of 2019. 

Revenues at Ryder were essentially flat to the first quarter of 2019. And before the pandemic hit, Sanchez said, "through mid-March, first quarter results were well ahead of our prior expectations." Despite the mostly flat revenue, Ryder sunk to an operating and net loss. On a non-GAAP basis, Ryder lost $90.8 million before taxes in the first quarter, compared to a profit of $80.8 million in the first quarter of 2019. Diluted earnings per share fell to a $1.38 loss from a $1.11 gain last year. 

Among the other contributors to that $70 million COVID-19 hit was a significant decline in rental utilization. For April, the rate is expected to be in the low-50% range, Ryder said, compared to a normal range in the low-70s. On the call, Sanchez said the first quarter figure, impacted in March by the first hits from the pandemic, was 64.4%. Each percentage point decline in that rate costs the company $1 million in pre-tax earnings. 

In the earnings statement and the conference call, Sanchez said the company remains committed to recent price increases it put through or planned for its "ChoiceLease Full Service Advantage" program, which it describes as including "bumper-to-bumper maintenance" that also works to "ensure DOT compliance, and identify issues to prevent breakdowns," according to the company's website. 

At the same time, Ryder's earnings also spelled out how it has prepared itself for the rest of the year. Free cash flow is expected to surge; the company's dividend which carries a whopping yield in excess of 7%, is safe. Wall Street liked what it heard, because at approximately 12:20 p.m. EDT, its stock was up $3.60 to $34.30, a gain of 11.73%.