BUSRide, with the aid of moderator Gerald Lindsay, spoke with representatives of Wells Fargo Equipment Finance, Customers Commercial Finance, and Bus Solutions Holdings about the state of the motorcoach industry and its financial health in 2023.
How would you describe the state of the new and pre-owned coach markets in 2023?
Samuel Smith: In one word, scarcity. This relates specifically to new and late model pre-owned coaches as demand is at an all-time high but due to supply chain challenges, manufacturers really just have not been able to keep up. The net result is increased values as the cost to manufacture certainly increased, and buyers are paying a very good price for late model, high quality used equipment. I think the situation has also opened the door to equipment manufacturers that operators may have not considered in the past but are willing to purchase based on price and availability.
Dave Mendenhall: We are running very late on the current Blue Book. Part of it is that there is very little transactional data to keep track of, but the numbers we are seeing are headed drastically north. So, people are willing to pay a lot of money for those coaches that are available.
Matt Hotchkiss: The used coach prices, especially for the late model coaches, are very high. In fact, it is sometimes uncomfortably high because of the high demand and scarcity of used coaches. This is further exacerbated by the supply chain issues delaying the availability of new coaches. As a result, buyers are forced to purchase a late model used coach at a high price point. As far as new coach prices go, also because of the scarcity of production, vendors are not willing to negotiate, so those prices are tipping on the high end in almost all cases.
What is your impression of the overall profitability and financial health of your customers last year, and going into this next year?
Hotchkiss: In general, companies are making historic margins this year. Since demand exceeds supply, operators are getting the price that they want, which makes their margins very strong. They have problems with driver shortages and expenses, but they can recover those by charging the price they need to make their business profitable. There still are segments of the industry, however, that are lagging. We have a sizeable segment of customers that have not yet turned the corner, for a variety of reasons, but I think one of the biggest would be that they are more contract based. With contract-based businesses, a price is set when the contract is signed and cannot be increased until the contract expires and is renewed. We see some of this in the motorcoach industry but considerably more in the school bus industry. That is probably the biggest reason why some of these companies have not yet recovered, but most of them are doing great right now.
Smith: I agree with a lot of what Matt just said. I think the financial health of most of our customers continues to improve coming out of COVID. 2022 was a good year for margins as Matt alluded to. We definitely noticed that it was a transition year. For most operators it was also the first full year they were running at 100 percent for 12 months since 2019. While demand continues to be very high, headwinds are still prevalent which have resulted in increased costs. In general, I think operators have done a very good job of passing along the required price increases to absorb these higher expenses. For some, these adjustments don’t happen overnight and can be lagged. So far in 2023, we continue to see good performance across the board. The sentiment is positive, and most customers are reporting record backlog. In these inflationary times I think it is very important for operators to monitor costs and make sure the work they are bidding on is profitable.
Are there any major new trends for 2023 motorcoach financing, other than interest rates trending upwards?
Hotchkiss: Many companies have a lot of cash so if there is a new trend, it is that they are paying cash for equipment. We also see companies putting large down payments on the financing because they have the cash to do it and it helps them control their monthly payments. Additionally, with rates being higher, it is another good use of the cash.
Mendenhall: What we are seeing is a lot of larger deals happening right now. I am seeing far fewer one bus transactions than I am seeing 20, 25, 50 bus transactions on the new side. And the preowned side, people are hanging onto their equipment. They are just afraid that if they let it go, they will not have enough equipment to operate to their capacity. It is not like they can just put the quarters in the slot machine and pull out a new unit. Long lead times are causing people to plan ahead, and it seems to be that it is an a la carte bus deal now. People are spending a lot of time getting add-ons into their sales group and that is boosting revenues like crazy.
Many years ago, we would find the useful and economic life spans of coaches would really begin to drop off at about 17 or 18, depending on the application. Then the useful lifespan was around 20, 21. What we are seeing a lot of now in the lieu of availability of ordering new coaches is that the national age of the fleet has aged as people are hanging onto equipment and they are making choices to refurb.
The refurb guys seem to be doing really well and maybe they are going through and putting an engine transmission in, maybe they are doing a little undercarriage work and interiors. So, they are spending a hundred grand and they are extending the life of that coach maybe four or five depending on the application in which they are operated in. Now there is an opportunity to finance some of that. In this environment, it has never been safer to do that. But again, not everyone’s internal facility is really set up to do that. Is anyone requesting you to refurbish? Financing for refurbishment? There’s so much cash out there, I think they’re just paying cash for it.
What is your view of the availability of secured credit for bus purchases this year compared to last year? Is it easier or more difficult to finance equipment now?
Smith: From one perspective it is a lot easier because operators’ financial performance has increased significantly since COVID. From another perspective, we are in a much tighter credit and liquidity market than we were last year. With some of the recent bank failures and economic outlook, the general credit market has definitely tightened. The coach market has historically performed better than some other industries in a recession and we are bullish on the outlook despite headwinds that we may see in the general economy.
The bus and motorcoach industry is a very important vertical at Customers Commercial Finance and we are proud of how we worked with our customers through the pandemic. My advice to operators seeking financing is to work with a lender that understands and is committed to this industry. Matt is a testament to that. I think it is also wise to have more than one banking relationship. We are in interesting times, but things are very good in the motorcoach space.
Hotchkiss: There are two parts to that. One is that COVID caused a lot of lenders to exit the market, so they are simply not here anymore. However, some new lenders have entered the market. Customers Bank and Wells Fargo are both lenders that have been lending before and after the pandemic. Second, as far as current conditions, the banking crisis caused some banks to pull back on lending so they can build up more capital to meet their reserve requirements. But that does not really seem to be impacting most of the coach industry lenders. It is impacting some of the regional and community banks, so there may be banks that coach companies work with that are not willing to lend as much right now. Their interest rates may also have been affected negatively because of the situation. I still think there is plenty of liquidity in this industry, however. Companies who want to buy coaches can find the money.
How important is lease financing to your customer base?
A. Please define and explain the importance for different lease types for varying needs.
B. In today’s market, do you believe traditional loan financing or lease financing is more attractive?
Smith: We offer a full array of products from Loans, to TRAC’s, to FMV Leases. We try to take a consultive approach to help our customers, and they may need to meet certain book or tax objectives. We can present the different options for them to consider but at the end of the day, this is their decision, and they need to pick what is best for their business and may need consult with their accountants.
Right now, we are seeing more TRAC leases than loans, and this seems to be primarily driven by the customer wanting a lower coach payment. I think in today’s rising rate environment, and the rates have somewhat stabilized, that combined with the higher equipment costs, I expect to see that trend continue throughout the end of the year.
Hotchkiss: There are really three motivations to lease. The first being a company wanting a lower monthly payment, which you can achieve by doing any type of true lease where the lender can take the depreciation. A company will need to determine if the lower lease payment is more valuable than the accelerated depreciation. That will be something they have to talk to their tax advisor about.
A second motivation would be to get the lease off the balance sheet. Most of this benefit really went away when the international accounting rules established that most lease liabilities now go on balance sheet. A product called a Split TRAC lease takes a portion of the residual off-balance sheet so a company may still have some off-balance sheet benefits to the lessee.
The third motivation would be a company that wants to return the equipment at the end of the term, in which case they could use a fair market value lease. This puts the end of term risk on the lender provided they are willing to do a lease where they will take the equipment back and remarket it themselves.
We currently are doing predominantly loan financing because that is what our customers are asking for. But we still do a fair amount of TRAC leases and a limited amount of fair market value leases.
In 2023, what advice would you give to operators regarding how to best present their company for financing?
Smith: It definitely starts with having a complete package. In my opinion, the more information you can share with us and the better quality the numbers are, the more competitive financing you will have access to. In today’s environment, if you are a growing company, having a formal accountant prepared statement completed is worth considering. Whether you are starting with a compiled or going to a review, it is a great conversation to have with your lender. We are in good times, but we have to also remember the past four years have been in a lot of ways unprecedented with pandemic, supply chain, and demographic shifts. It is important for the operator to share how they are managing through all of those things. If you are a new customer, what was business like before COVID, during COVID and after COVID?
If you are adding equipment, it will be important to provide justification on why. We are a relationship driven lender and our value add is the ability to dig in and understand our customers. Please be open to questions, we are here to help and want to develop a foundation to build off, to not just help you with that one coach, but maybe a second or third.
Hotchkiss: We always want the complete financial package like every other lender does. The more information, the better. As Sam mentioned, coming out of COVID, 2022 was a transitional year in the motorcoach industry. A lot of companies did not have a great first two quarters, but they had a strong second half of the year. As a lender we want to see what those trends look like. When did the company turn the corner to being a profitable business and begin generating cash flow? We can see that by looking at quarterly or monthly statements that show the progression back to being successful again. The more trend analysis we can see that demonstrates that they have returned to a more normal business environment, then the more willing we are to provide lending.
In 2022, were you aware of any single grouping or area that seemed to outpace others in terms of expense increase? Granted, we all understand the cost of new rolling stock and that the driver shortage has dramatically affected payrolls.
Smith: Yes. Other than the obvious driver wages and rising equipment costs, we have definitely seen an increase in insurance premiums and the insurance market. Last year fuel spiked more than it has in a long time and for some customers it just reiterated the importance of having a fuel escalator clause. Another important element to watch is parts and maintenance. Operators are behind in their replacement cycle and running equipment longer, that will probably contribute to higher maintenance costs, certainly in 2023, but potentially beyond.
Hotchkiss: There is nothing I would add as far as expense increases. I will try to quantify what we are seeing when it comes to labor, fuel, and how we look at these expenses as a percentage of revenue. For labor – and this varies from company to company – we have seen, on average, a 5 percent increase as a percentage of revenue as a result of the inflationary pressures on wages. Fuel is fairly cyclical and has been getting better this year, but last year we saw fuel going up by 2% or 3% compared to the prior year as a percentage of revenue. Both are significant and those are the type of expenses that companies have to overcome with their pricing. In some cases we have seen interest expense increase for companies that utilize floating rate loans or revolving credit facilities.
How do you think the merger and acquisition market is changing currently – is there any new demand for financing as we look down the road for the next few years?
Hotchkiss: Right now, the medium-sized companies in the industry are solid financially. They have great balance sheets, are looking for opportunities to grow, and are finding them. There is a lot of M&A going on where these medium-sized operators are buying other operators. Some of these companies have either aging ownership and do not have a transition plan, or they have simply lost their energy after COVID and do not want to be in the industry anymore. A lot of these transactions have already occurred, and I think we will continue to see that this year and next. It is a good opportunity for these middle-market companies to get bigger and increase their geographic presence.
Smith: I would echo what Matt said. I think there will continue to be some consolidation.
Are emerging technologies affecting coach financing?
Smith: Banks tend to be slow to change. There are not really any new products that represent this giant shift. I would say if anything, we are going to continue to see increased use of electronic documents and e-signatures like DocuSign that are designed to speed up the process and create efficiency. There are also a lot of behind-the-scenes elements that a customer would never see, where financial institutions are using more advanced analytics and tools to process and pull data from different services and reporting agencies.
Hotchkiss: This is not new technology for a bank, but the area that we have to start thinking about is alternative powered vehicles like battery electric, hydrogen fuel cell, etc. There is no question that these vehicles are the future of the commercial vehicle industry. Although less prevalent in motorcoach at the moment than in other applications, including school bus or transit bus, the industry is going to have to start considering these vehicles sooner than we may think. As a bank, we have to start thinking about how we want to finance these assets, such as whether we include infrastructure and charging stations in the financing.
For a lease product on some battery electric or hydrogen fuel cell vehicles, there are tax credits that are available. As a bank, can we take those tax credits and monetize that for the customer and transfer it to them through a lower lease payment. We are definitely planning for zero emission vehicles and how we transition our products to accommodate that.