The Unique Impacts of Two Historic Crises on the Class 8 Truck Market and Where We Go from Here

Steve Katz  

Hi, everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco global smarter perspective podcasts. As return listeners know by now I’m your host, Steve Katz. And if this is your first time with a spoiler, welcome, we’re glad you could tune in. Today we’re joined by Bryan Courcier, a Senior VP and Mitch Hunter director, both of the transportation and construction advisory practice within Hilco valuation services for a discussion about where the class eight truck market is headed in 2023. And what lessons if any, we can learn from historic trends and use truck pricing coming out of other periods of turmoil that might be considered similar to this one. Bryan, Mitch, welcome to the podcast.

Bryan Courcier  

Thanks for having us, Steve. Glad to be back.

Mitch Hunter  

Yes, Steve thank you glad to be on.

Steve Katz  

Yeah, we’re glad to have you guys. Let’s start with you, Bryan. You know, we saw big time capacity constraints in the truck market during the period 2021 22 and shippers and carriers I think pretty much knew that that was a temporary development that has now of course eased. What else can we expect moving ahead and does a cycle like the Great Recession? Teach us anything? That’s a value here in terms of what’s to come.

Bryan Courcier  

You know, Steve at Hilco our team works extensively in lockstep with commercial lenders, ABL shops, equipment, finance entities, private equity firms, and operators, basically everybody who’s invested in the transportation space. So in addition to delivering appraisals, we’re often asked to share our candid thoughts and insights regarding the current market and how that relates to, you know, past historic trends within the industry. This was particularly evident during the most recent cycle, where are discussions with new and long established clients that are invested in that transportation space? sort of want to know what our feedback was related to pre pandemic 2019? And comparing that to the Great Recession? That of course occurred in Oh 08/09. And, and really how they can compare and contrast one another. Yeah. Interesting. Yeah. And, you know, in terms of cyclical values in the transportation space, there have always been normal variances with peaks and troughs, and supply and demand, and high and low values. While there are certainly, you know, some meaningful connections that we could draw between the period of the Great Recession, and what we, you know, recently experienced as a result of the COVID 19 pandemic. From a macro perspective, there really aren’t a great number of similarities between the two occurrences. You know, that’s in regards to domestic transportation and the freight market. So, going into 2008, you have to merge transportation was very strong, and likely neuroses cyclical peak, truck and trailer values were inflated, and equipment was selling at a premium. No one could predict at the time, the values were pricing to take a steep and rapid dive that was sort of outside of the normal, cyclical cycle that transportation sees on a multi year rolling basis. But that’s exactly what happened to the tune of roughly 30 or 40%, on transportation assets dropping over a very short 69 day period. And so much emphasis has been placed on the impact of that time on the housing crisis, that I think a lot of times people forget that we’re really was universal, it affected all aspects of our life and transportation was no exception.

Steve Katz  

Yeah, that’s so true. You know, when people talk now about that time period, the focus is always on the housing bubble. So there, obviously were a number of other areas, including transportation that were effective. affected by that, Mitch, you know, maybe you can pick up from there tell us what else was going on in that lead up period. And afterwards, that’s kind of relevant to examining what we’re going through now.

Mitch Hunter  

Yeah, Steve, I think, it’s important to point out heading into the Great Recession, coincidentally, the EPA happened to mandate that all heavy duty diesel engines were now to comply with updated and more stringent emission standards. So with that, you know, the manufacturers were forced to develop new products, and basically a expedited period. And with that, you ended up with a lot of new products that were relatively untested, and more importantly, untrusted by the operators in the space. So something that did go into that bump we saw in transportation values that 30 to 40%. Was the manufacturers actually allowing customers to Pre buy equipment with the pre emission standards. Basically, that means that any of the engines with a VIN before 2008, they were able to pre purchase those and operate those under the new emission standards. So that obviously inflated the value leading up to 2008. And then, as the recession kind of took hold, you started to see those values drop very rapidly as customers were purchasing and operating some of the new equipment with the new emission standard. And ultimately, that led to like greater breakdown, you know, a challenge at adapting to the new technologies, and ultimately reduced performance in the equipment. And with that, you start to see, you know, in 2009 2010, is that new equipment starts to come back into the market, the secondary market, customers were leery prices fell quite drastically. I think there were some of the products that we had mentioned, the industry would know, well, if the international match MaxxForce went with a DPF filter platform. And that ultimately, you know, is very unpopular. And as those values fell, you know, it kind of cascaded to the greater product offering.

Steve Katz  

So that is very interesting in terms of the sort of pre purchasing aspect of that and the impact that it had. And then from that point, where did things go?

Mitch Hunter  

Yeah, so basically, obviously, the manufacturers, you know, we’re in constant research and development to create engines that not only met the emission standards, but exceeded the customer’s expectations. So with that newer and better products started to roll out over the coming years, ultimately, up into 2019, that pre pandemic level, where, you know, value, values really did begin a gradual and steady recovery. So heading into the more recent times, and up until 2019, they’re looking like the market was approaching a normal trough that by all accounts appeared to be a low waterpoint. And the normal ebb and flow of a multi year market behavior. And in fact, 2019 did see lower demand, lower values, surplus assets in the US market. And a cautious stance by the OEMs. To the pre pandemic state was essentially the opposite stage of the rolling ebb and flow concept as compared with the inflated asset values that we experienced directly before the crash of 2008. So in 2019, you know, it was a low, but compared to, you know, what we’ve seen in the past, not alarmingly low point in the cycle with a prevailing outlook at the time being that the market could go, you know, nowhere but up. So basically, this is kind of where we find that crucial differentiation between the pre recession and pre pandemic transportation markets.

Steve Katz  

All right, I think that’s a great setup, Mitch, for where we want to take this next. So I’ll turn back to you, Bryan, how does what Mitch just ran through sort of the evolutionary cycle and where things ended up? contrast with what you observed in the truck market during COVID? And how did events there affect the used truck market?

Bryan Courcier  

Certainly, yeah, so really, the two turned out to be pretty notably different in the types of sort of macro crises that occurred, they were surrounded by different circumstances. And it really has led to distinctly different impacts with the pandemic, as it spread around the globe, we experience in your stop and OEM production, followed by labor shortages. There were price increases inflation, higher spot pricing, you know, all of these were sort of adding and compounding with one another to lead to, you know, premium us values. This caused us classic trucks to you know, basically skyrocket in price with supply in both the new and US market, becoming extremely sparse, making the period from q1 21 through q2 According to way to really the ultimate seller’s market. Essentially, if a seller had a truck, they could run someone was willing to pay over odds for it during that time with a new equipment largely, you know, I would say unattainable standard utilization parameters for fleet operators were and continue to be today, a long dated and many companies have found themselves keeping vehicles on hand well beyond typical aging and utilization comfort levels. So, you know, an operator my operated trucks, you know, his standard operating procedure may be three to five years max, you know, that timeframe for you know, average annual utilization, and the period for which they keep it in the fleet is really being stretched out to more like, you know, four to six or maybe five to seven years and beyond. So, along with this development, service and maintenance cadences have been strained as well. You know, after all, how can operators effectively keep up Have fleets that grow older and become more worn out? You know, how can you keep them maintained when parts and components are in such low supply, and on backorder. So in the end, maintenance suffers as only the crucial and core repairs on those trucks can be made, while other less critical items are deferred. So you’ve got trucks, they’re increasing in mileage, and they’re growing older, and they’re less well looked after on a regular basis. So, you know, all of those things are sort of in conflict with all of those big market trends, they’re still forcing the value of these trucks up, or were during that pandemic crisis. So in terms of how this all affected the US truck market, I would say in the supercharged pandemic world, the overwhelming consumer demand that was perpetuated by supply chain and labor constraints really catapulted the nation’s carriers, both small and large, into an incredibly profitable window of opportunity. Those that have the fleet to take advantage of spot rates were in a great position. But OEMs amid diminishing resources, were unable to meet unprecedented demand. And as referenced, just a minute ago, new truck customers were forced to look to the US market and extend that useful life of their existing fleets. So in this climate, in turn, it created a highly competitive use truck market driving values at or above retail, and carriers came to terms with purchasing used equipment at an absolute premium. It wasn’t until I would say maybe around q1 of 22, that the average sale price reached its peak in a long trend of moving upwards.

Steve Katz  

Yeah, that’s a great, sort of a great timeline, and waited to take a look at the developments there. And I think, obviously, having you know, being forced to maintain those vehicles in good operating condition over an extended period of time, is challenging and constantly and then you know, those who end up buying them, potentially or, you know, are buying vehicles that have been out there longer, too. So it kind of perpetuates itself. Mitch, you know, as they say, no party lasts forever. US prices ultimately took a hit as we know, what transpired in the second half of 2022 that really drove that. And where do those events leave us from a historical values level today?

Mitch Hunter  

Yep, certainly, that’s absolutely right. You know, I think something that was constant in our industry was, I think we were all kind of tired of looking into the crystal ball and trying to forecast what was going to happen in the future. But as we all know, we did reach a point where we did see a plateau and values granted that plateau, you know, more or less stabilized through the balance of 22. And it wasn’t until the end of the year that we started to see those values taper you know, from the peak of average values being roughly 80% More than the customary depreciation cycles at around the middle of the year. You know, several factors went to work in a consistent predictable downward correction that ran its course to the into q4. We saw storing diesel prices, inflation, the war in Ukraine. And meanwhile, the supply chains easing a bit consumer debt through the roof, and, you know, a bit of a cooling labor market. So all that led to a lack of, you know, consumer confidence, and lack of access to capital, at least affordable capital. And you can almost hear the air come out of the market as it began to return from the stratosphere back to some semblance of normalcy. Even with this fall, the market today is still stronger than it was at the end of the year, in 2019. Use prices for the class eight truck tractors, you know, it’s currently outperforming wholesale and auction values for the same vintage assets from that time. So I think that’s pretty, uh, you know, important to remember. And, you know, despite two plus years of aging and utilization, the end of the year is always you know, try and time for us strike values, we constantly see a dip, q4, especially in December, and it can be as high as you know, 15 to 20% as the new model years are introduced. So the youth truck market saw a decline in average sales price from November to December. values still average 50% above those seen in December of 2019.

Steve Katz  

So, high values persists. Bryan another question listeners are probably asking themselves right now is what can and should we expect moving ahead given this kind of volatility and continued uncertainty? You know, even as we see things easing chip availability, increasing production rising, etc.

Bryan Courcier  

Sure, yeah. Listen, you know the US for many years arguably already in a recession, albeit it’s a much milder one than in 2008. And I don’t know that anybody expects, you know, sort of the dramatics from you know, a little over a decade ago to occur again, while the transportation space has been impacted, we believe there’s still plenty of room to run for softening of retail values and expect to continue correction to take place through the first half of 2023. There are numerous macro factors presently in play that don’t typically exist all at the same time. There’s a tug of war between or I should say within the industry when it comes to use values. Carriers have started to feel the hangover after two years of recording profits as they ease into a more normal cautious course of business where profitability returns once again to that fluctuating ebb and flow that we’re all used to. This will of course, be reflected in US values. Meanwhile, we can expect to see companies which have been extending that useful life of their trucks beginning to release their equipment into the marketplace due to increasing volume. With higher mileage and less comprehensive servicing conducted over the past few years buyers are aren’t likely to be clamoring over those units. Instead, we should anticipate that they will behave shrewdly in their assessment of each truck that goes to market. Different fleets go into market may look the same on paper, but buyers will drill down into the details. So better maintain fleets will yield stronger returns, while fleets with obvious deferred maintenance will suffer when they’re taking the market. With us truck dealers consciously reentering the wholesale market values will feel the pinch. I think aged equipment with high miles will be significantly impacted with slow softening, also affecting late later model equipment as well. negative value adjustments will be compounded by high cost of capital and the softening freight market, as US trucks make their way down from second third tier operators to much smaller regional and local operations. And it’s worth noting that there are still some looming challenges within the supply chain, including parts manufacturing, while semiconductors may no longer be the hot button issue in the press availability remains a challenge for new truck production displaces that continued reliance upon and demand for good use trucks. The key word here is good. And we strongly believe that well maintained inventory that sets itself apart will still be greatly valued moving ahead.

Steve Katz  

All right, helpful perspective there, guys. We’re just about out of time. Is there anything we didn’t cover that you want to add before we wrap up?

Mitch Hunter  

Yeah, I think it’s important to point out that during the high demand load capacity period we’ve been discussing here, you know, did large fleets and transportation operators were restricted from doing the one thing that they typically do with record profits. And that is buy more trucks. So while this clearly was a pain point, you know, for the manufacturers, obviously, they’d like to sell as many trucks as possible. But, you know, they did manage to capture a sliver of the pie through increased cost of goods. And they now also have, you know, a significant backlog of equipment going well into 2024. See, you know, in fact, you know, I think, when you look at new class eight truck orders in 2022, we finished well ahead of accuracy searches, forecasts, in well outpaced those that we saw in 2021. And beyond that order cancellations are below 1%. This of course, means that the truck market is still constrained. And those companies that are in the market for new fleet will likely still slash castes in the userbase, in lieu of waiting too long for new trucks to show up. Ultimately, those opposing factors should lead to a more steady softening and US values versus a feared dramatic fall off the cliff, unmanageable drop in market conditions. We expect to see less volatility and to some extent, a return to a pricing trough that’s reflective of the pre pandemic us to trucking marketplace that we saw in q3 and q4 2019. You know, while new pricing and access to affordable capital remain at their current highs, as Bryan said, late model, well maintained low mileage trucks, you know, will still command a premium. And while it’s not completely clear how the production paused that was traded by most OEMs shutting down for, you know, roughly a year during COVID. And how that’s going to be reflected in US values during the period ahead. It’s certainly logical to expect that there will be a material gap, you know, or a bit of shelf in pricing between pre pandemic vintage assets that remain on the road and incurred, you know, this higher mileage is less consistent maintenance. Verse units produced in or after 2120 21 model year.

Steve Katz  

All right, well, thanks for adding those thoughts. I think it’s very relevant. I’m glad we got those in before we closed out, I think that will help crystallize some of the thinking in terms of how we got here, and where we’re going. So thanks again for that. And guys, really appreciate you joining us today. I know you track all those historic values and trends, and that really contributes to being able to deliver the highly accurate appraisals, which obviously, is the critical piece for lenders in the space and for businesses who are seeking to maximize return on disposition. So given that, I think some of our listeners will want to follow up with you regarding any specific questions about their situations that they’re dealing with right now. What’s the best way for them to get in touch with you?

Bryan Courcier  

Yes, certainly, Steve. We get, you know, emails and calls on almost a daily basis from clients and prospective clients, just wanting to get a sort of check in on the marketplace. So, you know, our listeners can reach out to me directly by phone or by email, my phone number is 720-636-5123. Or you can reach me by email. It’s B as in boy C O U R C I E R at Hilcoglobal.com.

Mitch Hunter  

Yep, and same here. My phone number is 720-520-2904. And the email, it’s m, m as in Mitch, Last Name Hunter, at hilcoglobal.com.

Steve Katz  

All right, guys, thanks again for joining us today. Really appreciate it. Hope to have you back again soon with an update on where things are going. And listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And if you found today’s discussion interesting, be sure to check out our library of other podcasts. You can find them at Hilcoglobal.com forward slash smarter dash perspectives or on your favorite podcast platform. Until next time for Hilco Global. I’m Steve Katz.