With Ryder System continuing to focus on growth in its Supply Chain Solutions (SCS) and Dedicated Transportation Solutions (DTS) segment as part of its long-term strategy, the company’s first-quarter earnings report touted higher revenue in those groups.
But the overall profitability of the company remains heavily dependent on its traditional Fleet Management Solutions (FMS) segment, which provides slightly less than half the company’s revenue but an outsize amount of its profits. And the performance of that group is still heavily impacted by used vehicle sales.
SCS, which manages various logistics services for customers and also has a growing final-mile presence through recent acquisitions, saw its total revenue rise 10% to $1.2 billion from the first quarter of 2022. Its operating revenue measured on a non-GAAP basis climbed 19% to $879 million.
DTS saw total revenue up 7% to $454 million, and non-GAAP operating revenue rose 9% to $322 million.
Meanwhile, revenue at FMS was down 2% on a total revenue and non-GAAP basis, to $1.5 billion and $1.26 billion, respectively. The revenue figures mean that SCS and DTS together are more than half of the company’s total revenue figure.
But that is not how profits are playing out.
Although Ryder (NYSE: R) is targeting SCS as the engine of future growth, it remains a company whose traditional fleet leasing activities are providing the bulk of the black ink, even if FMS is now less than 50% of revenues.
For the quarter, operating earnings before taxes at FMS were $182 million, down from $249 million a year earlier. SCS had operating earnings of $17 million compared with $43 million a year earlier, though SCS did also take a $30 million in charge in connection with the bankruptcy of a large, unidentified customer.
The DTS segment, which provides dedicated transportation services to customers, saw earnings rise to $29 million from $20 million.
FMS also operates at a significantly higher margin. Its earnings before taxes as a percent of operating revenue on a non-GAAP basis were 14.4% in the quarter, compared to 19.4% a year earlier. The margin at SCS was 1.9% (affected by the one-time charge) compared with 5.8% a year earlier, while DTS had a 9% margin compared to 6.8% a year earlier.
The bottom line is that after other items, earnings from continuing operations at Ryder were $140 million, down 20% from $176 million a year earlier, and the FMS pre-tax earnings exceed that.
Focus on SCS can be seen in acquisitions by Ryder in the last year-plus, including technology company Baton , final-mile provider Whiplash, and Midwest Warehouse & Distribution System. All were folded into SCS.
At FMS, earnings continue to be impacted to a large degree by its used vehicle sales. The large drop in operating earnings at FMS was driven in part by how it did in selling used tractors and trucks.
The differences between the first quarters of 2022 and 2023 are stark. For the first quarter of 2022, Ryder said that used vehicle sales measured by average proceeds per unit were up by 146% from 2021 for tractors and up 109% for trucks.
But for the first quarter of 2023, the average sales price was down 35% for tractors and 16% for trucks from a year earlier.
The percentage decline for the first quarter is also eye-popping when compared with the numbers reported for the fourth quarter. While Ryder does not provide an average sales price per vehicle, it said that in the fourth quarter of 2022, proceeds per unit compared to the corresponding quarter a year earlier were down just 6% when measured by price. So the year-on-year decline comparison dropped 29 percentage points in just three months.
The data on sales volume also showed not just a change from a year ago but sequentially from the fourth quarter.
Ryder sold 5,100 vehicles in the first quarter compared to 3,600 in last year’s first quarter. Sequentially, Ryder sold 6,800 vehicles in the fourth quarter.
Ryder coincidentally had a fleet count of 5,100 used vehicles for sale at the end of the three months. That number has been at the low end of what Ryder management has said for months is the desired level, but it did rise in the first quarter from the fourth, when Ryder said it had 4,300 vehicles for sale.
A year ago, in the first quarter of 2022, Ryder had 3,000 vehicles for sale, up from 2,500 from the fourth quarter of 2021.
It’s a big drop from the end of the second quarter of 2020, the darkest days of the pandemic, when Ryder reported that at the end of that period it had 14,000 vehicles in inventory to be sold.
The decline in used vehicle sales proceeds lands on the Ryder earnings report as a net credit compared to other costs. The size of the decline is not related just to the revenue received for a vehicle sale but also for previously recorded residual values and where the sale compares to the earlier estimate.
That figure of a net cost was $72 million in the first quarter, which acts as a positive to earnings. The prior four quarters had figures of $113 million, $129 million, $113 million again and $94 million, more positively impacting earnings.
That sort of decline in the positive hit to Ryder earnings from used vehicle sales could be seen in the prepared statement of Ryder CEO Robert Sanchez: “As anticipated, earnings decreased from prior-year record levels as market conditions in used vehicle sales and rental continued to normalize,” Sanchez said. However, he also described first-quarter used vehicle sales as an “outperformance.”
The quarterly used sales performance was enough that Ryder raised its earnings forecast for the year just three months after it had made a forecast of 2023 performance that was well under what the company did in 2022.
The full-year forecast of non-GAAP earnings per share was increased to $11.30-$12.05 from $11.05 to $12.05. Other key measures remained flat from the earlier forecast. Ryder’s full 2022 earnings per share was $16.37.
One of the reasons for the increase in the forecast, Sanchez said, was “modestly higher-than-expected used vehicle sales trends.” Its earlier forecast for a significant decline in 2023 earnings compared to 2022 was a return to normalcy from the sky-high revenues it received from used vehicle sales last year.
On a non-GAAP basis, Ryder as a whole had net income of $2.81 per share, down from $3.59 a year earlier. Net income was $139 million compared to $176 million in the first quarter of 2023. According to SeekingAlpha, the earnings per share was 16 cents less than consensus.
“Consistent with our expectations, we delivered strong first-quarter results in a challenging freight environment,” Sancez said in a prepared statement.
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