Used Truck Prices High But Ryder's Inventory Low

About 15 months ago, on the company's second-quarter 2020 earning call, Ryder System CEO Robert Sanchez gave some stark numbers about the collapse of the used truck market in the first months of the pandemic.

As a result of the downturn in the market, Ryder R was looking at inventories for the sale of trucks and other vehicles of about 14,000. Its target inventory was 7,000 to 9,000. The 14,000 figure contrasted sharply with the 8,300 in inventory a year earlier, at the close of 2019's second quarter.

And now? Ryder, in its third-quarter 2021 earnings report, said its used-vehicle inventory was down to 3,500 from 4,300 in the second quarter of this year. At the close of last year's third quarter, inventory stood at 10,700, following a significant decline between the second and third quarters. 

The company's target inventory has not changed: 7,000 to 9,000.

But used vehicle inventories at Ryder are not falling to such levels solely on the back of a heavy level of sales. The inventories are just too low to sell all that many vehicles, with Ryder reporting third-quarter sales of 4,900 units. In the second quarter, it sold 6,000 vehicles and in the third quarter of last year, it sold 8,800 vehicles.

Here's the math: If no new used vehicles came into Ryder's inventory this quarter, and it sold roughly 71% of the used vehicle total that it sold in the third quarter, its inventories of used vehicles would drop close to zero. 

Ryder took a significant write-down of the value of its used-vehicle inventory last year, known as its residual value. On the third-quarter call Wednesday with analysts following the release of the company's earnings, CFO John Diez said at the time of that adjustment in 2020, a 10% price increase for trucks and 30% price increase for tractors would be required by 2022 to maintain the residual value estimates set last year.

"Average comp pricing in the U.S. for tractors and trucks are well above our residual value estimates used for depreciation purposes," Diez said on the call, according to a transcript provided by Seeking Alpha. "As such, we are comfortable with our residual value estimates and we do not anticipate the need for any significant adjustments at this time."

Diez said that globally, year-over-year proceeds for vehicle sales more than doubled for both tractors and trucks. Sequentially, the comparison with the second quarter showed tractor proceeds up 32% while truck revenues were up 27%.  

Sanchez suggested on the call that despite the red-hot price market for used vehicles, a peak may be near. Used vehicles sales will be "flat to modestly higher," he said. But the market may be deflated by an increase in the production of new vehicles, which should lead to a normalization of used vehicle inventories.

Throughout the analysts' call, a common theme was how much the tight supply of trucks had impacted Ryder's business, not just in the used vehicle arena but elsewhere as well. 

For example, Sanchez said Ryder's capital expenditures would be lower than projected — which will generate additional free cash flow — because of delays from OEMs in delivering new vehicles to it. 

If the new truck supply returns to some level of normalcy, it will have an impact on the used truck market, Sanchez said: "You'll see the year-over-year comps get a lot tougher, but you'll also see maybe some of the pricing coming down." 

Ryder will be adding trucks, Sanchez said, "but we expect a very tight truck market as OEM production still continues to be somewhat hampered." 

Sanchez added that he does not expect to see relief from that until the second half of next year. 

With new vehicles tough to get for everyone, and with used vehicle prices climbing, the leasing of vehicles from Ryder set a new record: 83% of its rental fleet was leased. A year ago, that figure was 71%.

Tom Havens, Ryder's president of Fleet Management Solutions, said he expects utilization to hit another record in the fourth quarter. And Sanchez said new deals were averaging 4% more revenue per average active leased vehicle. 

The Fleet Management Services division of Ryder, which includes the company's leasing activities, had earnings before taxes of 14.9% of operating revenue for the quarter, beating the long-term target of 9.7%. 

Earlier in the day, before the earnings call, Ryder announced it was acquiring Midwest Warehouse & Distribution System. But on the call, the acquisition came up only in passing, with no analyst asking a specific question about it. 

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