The presence of the operating lease certainly propped up business during this downturn.
What’s not as clear is the downstream impact. How much of a bite did it take out of the parts and service labor sales the dealer would’ve otherwise seen? When, and over what period of time, will the short-term lease returns hit “critical mass?” And what will that flood of returns mean for already depressed used values?
Dealers are increasingly sounding the alarm — and at louder volumes. Our newest poll shows that 9 of 10 dealers are concerned about lease returns impacting inventories and prices over the next 6-12 months, with 77% indicating a high level of concern. Recent commentary on our website noted “The high number of leases coming due will create a blockage that is not easily removed.”
Our staff has been inquiring into this area for a while now in preparation for the Dealership Minds Summit (click here to download the 8-page program) August 1-2 in Omaha. We haven’t yet uncovered a source who can speak authoritatively on the short-term lease return numbers to expect, nor when they’ll hit. That no one seemingly has a good handle on industry lease returns is a problem in and of itself.
Both red and green dealers are asking about their own OEM’s lease situation, as well as that of their rival brands. They want to anticipate just how much their local markets could be “messed up.”
In November of 2015, machinery analyst Rob Wertheimer predicted that the glut of used equipment was going to last longer than manufacturers anticipated. He noted that the record volumes of equipment sold between 2010 and 2014 still hadn’t hit the used market. At that the time, just 9% of high-horsepower tractors sold in 2013 had showed up in the used market.
In addition to natural replacement cycles, the short-term leases that revved up as sales fell are going to cause even more pain as they come back in. According to a chart prepared by Lee Samaha in The Motley Fool on March 6, John Deere’s equipment on operating leases peaked in the first quarter of 2016 (a level that was almost matched a year earlier). So, those on short-term leases are about to expire now. Samaha’s report quoted Tony Huegel, John Deere’s director of investor relations, saying that beyond the second quarter, “We largely get beyond that headwind that we’ve been experiencing with those 12 month leases.”
Is the operating lease now a permanent part of the picture? On a conference call last week, Huegel admits he isn’t sure. Noting that some of Deere’s strongest customers are now employing operating leases, he says we won’t know if there’s been a structural shift to leasing until high commodity prices return. In other words, leases will be part of the menu for a while — and no longer just for your customer with lower credit scores.
Piling onto the worries of remarketing managers is the inaccuracy of the residual value calculations — a point one dealer tells us continues to be missed by the industry. He advises paying attention to small town ag banks — as they’re closest to the action and current realities.
In reply to another post on our site, Greg Peterson (“Machinery Pete”) points to dealers who took the financial hit on aged items early on, and have “recently been very aggressive buying off-lease tractors from John Deere Financial, CNH Capital, etc., and making money selling those units.” There are always opportunities.
We reported last spring that Deere was restructuring its leasing terms to get the dealer to own more of the risk. I’ve been told the majors are good at figuring out ways to do that — so that’s one thing here perhaps to “bank” on.
