萊德系統 (R) 2003 Q1 法說會逐字稿

Good morning, and welcome to Ryder's 2003 first quarter earnings release. All lines will be in a listen-only mode until after today's presentation. At the request of Ryder, today's call is being tape recorded, I would now like to introduce Mr. Bob Brunn Director of Investor Relations for Ryder.

Thank you. Good morning and welcome to Ryder’s first quarter 2003 earnings conference call. We would like to begin with a reminder that during this presentation call you hear some forward-looking statements within the meaning of the private securities litigation reform act 1995. These statement, based on management's current expectations, some are subject to uncertainties and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive , market, political and regulatory factors, for more detailed information about these factors contained in this mornings earnings release. And in Ryders fillings with SEC. Presenting on the call today are Greg Swienton Chairman and Chief Executive Officer and Tracy Leinbach , Chief Financial Officer. Additionally Dick Carson Sr. Vice President of Fleet Management and Solutions, Tony Tegnelia Executive Vice President of US Supply Chain Solutions, and Bobby Griffin Executive Vice President of Global Supply Chain Operations are available to answer any question you may have at the conclusion of our presentation. I would now like to turn the call over to Greg.

Thank you, Bob, and good morning everyone. I personally want to welcome each of you to today's call, and as we've done in the past, we're going to keep our prepared comments to less than 30 minutes and leave time for any questions at the end of the presentation. Today we'll be covering in some detail the first quarter results, but we also want to give you updates in our key initiatives and asset management work and provide an earnings outlook at the t end of the presentation.

If. you turn to page 4 on the Power Point presentation, first point is that we be obviously had a very solid quarter in this environment. As you saw from the press release, earnings per diluted share before the impact of any accounting changes were 33 cents in earnings per share for the first quarter compared to 27 cents in the prior year period, and we'll provided some more detail on that in a few minutes. The second point there is lease revenue is slightly down year over year compared to the first quarter, and I think that reflects softness in the economy, and some uncertainty in the marketplace regarding decisions on committing to new long term contracts. Lease revenue was little bit affected but not materially by some abnormally harsh weather condition, and there certainly were some reduced transportation miles run in this sector.

We do believe that lease revenue will continue to remain soft until the economy really shows some consistent and sustained improvement and our customers feel more comfortable with the outlook for their respective businesses. On a positive side, the third point there, we are continually encouraged by continuing results in the commercial rental activity. These results largely reflect the steps that we've been taking as a company to better manage our assets in our rental fleet and we've been able to realize some substantial improvements in both rental pricing and utilization in fact revenues increased by 8% and margin was improved on a significantly smaller fleet size.

Increasing market prices drove fuel revenue, and that's the fourth point on the page. I think as most of aware, fuel costs are largely a pass-through to our customers so there’s really isn’t a material impact on margins. The other point to make on the fuel market in the pass quarter was despite a lot of volatility, we did not experience any interruptions in our fuel supply and we were able to continue service to all customers who required it . In supply chain revenue was down. as we anticipated for a variety of reasons but the decrease was less than we anticipated, partially due to some increased volumes in some accounts, as well as addition of new accounts. And in the international area in revenue, increases were posted in most international operations.

First quarter, 2003 revenue was also little bit favorably impacted by foreign exchange rate translations in the United Kingdom and Canada.

If you turn to page 5, deal a little bit more with earnings. The first point there, from an earnings standpoint, Fleet Management solution returns, although very solid in this environment were negatively impacted by some lower lease revenues, but, in particular, the absorption of pension expense increases. In total for the company, we took on and absorbed $13 million in pension expense, and most of that accrues and applies to the Fleet Management solutions segment. They absorbed almost $12 million of that. So in spite of that absorption, their results were be obviously pretty good.

Supply chain exclusions was obviously most note worthy and the biggest improvement. Its results were impacted by all the things going on operationally, globally that resulted in improvement. There have been significant overhead reductions actions taken by our organization over time, and we are happy to say that the margin improvement actions that we've been talking about for some time have obviously taken hold. In dedicated contracts carriage returns were positively impacted on the revenue side by some of the pass-through revenue, but also on the bottom line improvement due to favorable comparisons versus last year, especially relative to some safety and insurance expenses which were be abnormally high there was not a material impact on the fuel revenue as I mentioned earlier.

On the fourth point of the page, the asset management area really continues to perform extremely well. We've had a reduction in the non-revenue earning equipment of over 1500 unit, or 15% as compared to a year ago, these results, as we've touched on previously, have to do with focus on the retail vehicle sales, reducing early terminations, redeployment of equipment, extending mature leases, and Tracy will cover more of that later in the presentation.

The 5th point we again have had cost management focus in on all overhead areas. That continues as part of our general activity, and in fact central support service costs were reduced for the 9th consecutive is quarter, and can came down by almost $3 million, or 5%. There was a new accounting standard that became effective in January of this year, and it’s related to eventual retirement of long lived assets. We did adopt FSAS 143 this quarter, it resulted in a two cent charge per share, and it is related to the future costs associated with retirement of certain components of revenue earnings equipment. That is principally tires. Now, the implementation of this standard, however, is not going to affect the level of costs that we incur in the future, regarding the disposal of these equipment components, namely tires, going forward, so there will not be a change in the future run rate of operating expenses.

If you turn to page 6, and actually see the layout earnings per share, you'll see that in the first quarter, 2003, we had 33 cent, compared to the 27 cents of 2002. Included in that 27 cents last year was 1 cent of restructuring recovery. We actually had about $300,000 of recovery this year, but that did material change the EPS Number, so is there a 33 versus 27 cents as we've indicated in the cumulative effect of the changes in the accounting principles are 2% for 2003, with the application of FSAS 143, and last year we had the SFAS 142 which was the goodwill charge, and that amounted to 30 cents. There is memo point on EPS impact of pension expense. This quarter we had a pension expense of 21 cents per share, compared to 8 cents last year, so that 13-cent impact was absorbed and overcome by the cost initiative activities.

On page 7, we'll highlight the business segment activity both in terms of revenue, and net before tax, or the profitability of each segment, and I think as we've covered in other meetings, most of the essential support costs allocable to the respective segments are included in this segment net before tax indication. In Fleet Management Solutions, total revenue increased 6%. In the nomenclature that we've always used in the past, that total revenue, if you deduct fuel costs comes up with a dry revenue number of about 1% increase. U.S. rental utilization was about 68% for the quarter, which improved from 64% percent in the prior year. We are having good performance on the rental fleet with better utilization, and in fact our worldwide rental fleet was down about 3% or 1200 units compared to the first quarter.

Imbedded in the 6% total Fleet Management growth was 31% in fuel costs. Revenue, however, in the leasing and maintenance product lines, was primarily driven by a 5% decline in miles and a smaller fleet, and, as I said earlier, new sales have been soft. As many of our customers are still waiting for a sustained economic recovery before they're willing to sign up and enter into long term lease commitments. The MBT impact in Fleet Management is -- some of that softness and leasing, and certainly the $13 million, or almost a $12 million contract in FMS pension costs, resulted in a decline in the segment MBT from $36.6 million to $33.2 million. This obviously was offset by a number of other items including improvement in asset management, rental utilization, and a decrease in interest expense from lower interest rates. Supply Chains revenues the total revenue declined about 1%. The operating revenue, when you deduct freight under management decreased 6 % quarter over quarter-, but those decreases were not as significant as we originally anticipated or, in fact, planned. The more impact item is when you go to the segment MBT there in supply chain in a $09.5 million swing compared to the first quarter last year. So Supply Chain net before tax was $7.3 million, whereas last year, it was $2.2 million negative, and in our last couple of conference calls, we talked about our intention and our plan for Supply Chain to be break even or better, no only for the entire year, but for every quarter, so the margin improvement activities are off to a good start in that regard.

In Dedicated Contract Carriage, revenue is up 3%, and that includes the fuel in that number. The contract carriage MBT improved by $1.9 million, or 38%, but again that was due to be a improvement over last year in safety and insurance expenses, and not due to better fuel margin. And finally, you don't see the total essential support services costs on this sheet. You will see the unallocated share of essential support which on this page increased $400,000. But the total support went down by 5%, or $2.8 million. That gives the total, then, total revenue up 4%, total segment earnings up 25%, and earnings after taxes, and earnings before the cumulative effect of accounting changes up by 24% for the quarter.

So with that as the business and financial overview, let me ask Tracy to cover a few items on capital cash flow initiatives, and asset management.

Thanks Greg if you turn to page 8, I'll take you through our capital expenditure for the first quarter, CAPEX totaled $148 million. That was up $23 million or 18% from the previous year's first quarter. The increase primarily was due to commercial rental purchases and as a reminder last year, we had almost no capital expenditures related to our U.S. commercial rental slate (ph). This year's rental purchase is directed towards replacing and refreshing the slate, and not toward fleet growth. Capital expenditures were also up slightly to full service [inaudible] due to anticipated high levels of vehicle replacement. Our spending level, however, did not increase to the extent we planned, due to the softness the lease market that Greg talked about, and, also, a higher level of use vehicle redeployments and lease term extensions than were previously anticipated.

At this time, we're not going to revise our full year projections for capital. We are on track to spend $153 million of rental capital that was part of our full year plan and most of that spending will take place during the second and third quarters. Lease capital will be the variable for the rest of the year, and I would remind people that we commit to lease capital only when we have signed contracts from customers. If we continue to experience softness the lease sales area, and if we continue to have higher than expected levels of use vehicle redeployments and extensions we would anticipate coming in below our previously stated full year plan for lease, and therefore on our full year capital plan.

Turning to the next page, I would like to comp our first quarter cash flow. The company generated $state million of free cash flow for the quarter. $78 million of free cash flow for the quarter that stays in our preliminary consolidation nets down $20 million form the previous year and that’s state, and that's attributable to the capital expenditure increase I talk about.

Turning to page 10, you can see that our debt levels and our debt to equity ratios continue to improve. On balance sheet debt to equity was 134% at the end of the quarter. I think most importantly total obligations including securitization to equity was 189% at the end of the quarter, that's down from 211% last year, and that improvement came despite a $228 million equity charge that we took in the fourth quarter of 2002 related to our pension plan. I would like to share that we're in the final stages of renewing the annual portion of our $860 million global revolver. This facility provides the back stop for a U.S. paper program, as well as financing for our company's international operations. The annual portion which will be renewed shortly represents $300 million of the total facility. The remaining $560 million portion of the facility matures in May of 2006. So as you can see, we continue to work the balance sheet. Our debt levels are coming down, our debt to equity ratio, are improving, and we have very good liquidity.

If you turn to page 12, I would like to give an update on our 2003 key initiatives. As we discussed in our 2003 guidance call in December, we establish a goal for the full year of between $44 million and $49 million in pretax earnings contributable to be these initiatives, and they really cut across the major areas of our business, maintenance, asset management, supply chain operations, insurance safety, and generally overhead areas. And the actions being taken by our teams are focused not only on near term earnings improvement by process changes that really lay the ground work for continued and sustainable improvements in our business. In .the first quarter we generated approximately $12 million from these initiatives, we certainly have more work to do in realizing our full year targeted number, but are pleased with the start we've had for the year.

As we've done in the past, I want to share some additional information on one of our key initiative areas and that's the asset management area, and these are important initiatives for us, because they have significant earnings impact, but they also impact the efficiency of our capital and our cash flows, and on page 14 as Greg mentioned our non-revenue equipment which we've been tracking for some time was around 8,800 units that's down 1500 units or 15% from the first quarter of last year. That figure includes almost 3,800 units that we have held at our used truck center as part of our used truck operations. We did see some modest improvements in used truck pricing specifically used tractor pricing in the quarter as we did see in the second half of last year. In fact year over year pricing on tractors at the retail level are up about 10%.

While we are seeing improvement in the used truck area, our focus continues to be on running on running vehicles, and having them generate revenues longer in our fleet. And if you turn to page 15, while our redeployments in tractor expansions have declined over the last year, they are higher than what it was in our plan, and we continue to see good market acceptance and good pricing around the leases of used equipment, and the extension of existing lease contract, and we'll continue to do that as long as it makes good economic sense for the company. We are also continuing to see significant reductions in early replacements and early terminations. That means we're doing a better job at running the trucks through their full lease term, and that also means we can realize the full cash value of our lease contracts. At this point I'm going to handled it back to Greg, and he'll cover our full year outlook.

Thanks, Tracy. Our updated earning outlook for 2003 is on page 17 of the presentation, and at this time, we are maintaining our forecasted guidance of $1.95 to $2.00 per share for the full year that we initially provided last December when we talked about our business plans for 2003, and even though we had a stronger first quarter than we anticipated, and we remain upbeat but cautious in our outlook for the rest of the year, given the continuing soft economic conditions that we, and our customers have been experiencing in the general market place in the fist quarter. So I think that this forecast is prudent, given two particular items.

First, as we discuss add couple of times earlier today, sales in the full service lease area in the first quarter were slower than planned, which will impact revenue, particularly in the second quarter, as well as for the full year, and then second it's our expectation that automotive volumes and supply chain, which have been talk about in the industry, and publicly presented, that those automotive volumes are going to be down significantly low in the second quarter than in the first quarter of this year. So for those couple of reasons in a very mixed environment and some others, we think it’s appropriate that we maintain our full year guidance of $1.95 to $2.00, and we are also provided below in this page our current projection for the second quarter 50 cents to 51 cents a share. And for the second half of the year to be in the range of $1.12 to $1.16. That brings you to a total of $1.95 to $2.00, after our 33 cents this first quarter. So with that we will open the call for live questions. I don't believe we had any submitted in advance, so we will go immediately to the live question so if you would press so if you would press “*” 1 on your touchtone pad, the operator would begin the queuing process, and we will take the questions.

Thank you, sir. Our first question comes from. Gary Yablon. Sir would you please state your company name?

First Boston, and Greg How are you?

Great, thank you.

Greg, could you talk a little bit about FCS. I'm guessing this is what's on people's minds as we look through your numbers this number, and could you talk about the sustainability of what’s changing in that business model, and what kind of, you know, margins, you think you can see for the balance of the year, and then I've got in a couple of others?

Okay. Well, thirst of all, I would rather be answering that question than some of the others posed on other calls, and I think you and I are pleased that we've had the results we did in supply chains. I'm going to ask. Tony Tegnelia who’s head of US Supply Chain, where about 75% to 80% of that improvement as been, the other 20% came from Bobby Griffins Internationals Operations area, so everyone contributed but since the bulk three quarter are come from domestic let me ask Tony Tegnelia to comment.

Thanks Greg. Where we see the sustainability of the profitability going out into 2003 and beyond is in improvement is in the areas of our MIP improvement activity, which we began working on, as you may recall, early in 2002. There several hundred basis points in the quality of earnings that we've achieving from those MIP initiatives, and at this junctures we believe that is stainable. Secondarily, we worked very hard in the third and fourth quarters of 2002 to compress our overhead activities particular until the area of it, from the standpoint of supporting our operations, and we believe those programs put in place to really contain those costs will be sustainable going out into 2003, and also going into 2004 and beyond, and there is also several hundred basis points with regard to that initiative as well, so we feel those two major initiatives, which are really propelling the quality of the earnings that you saw in the first quarter will continue, however, we do have some concerns about our in-bound operations supporting our automobile assembly, and related to that are tier 1 volume as well. So the large unknown continues to be the automobile sector as we go out into the balance of year.

let me just clarify of I could. What you're saying, and I don't want to pin you down to specific numbers, but ballpark, but let’s take earnings EBIT of total revenue, let’s say the 2.2%. That's a base, I mean, how do you look at that, either the 2.2%, we're looking at it at operating revenue of 3.2%, how do you look at that? Is that a number to build on, a decent number for the year ballpark wise?

Well, let me speak generally. We believe that the quality of our logistics business is far better than a 3% business we do not feel that we have really reaped all the benefits of the work that we've done over the years from a process improvement point of view within our operations, and event a lot of the work that we've done particularly with regard to our IT platforms that really drive a lot of our operations, so we believe that the quality of our supply chain business, as I said; better than a 3% pretax business, so our objective is to continue to improve and build upon that quality factor with regard to where the earnings really stand, and our objective, of course; through revenue growth, good, quality revenue growth, with very hard-earned new contracts that will lebor(ph) the existing infrastructure that we have in place right now. We feel the infrastructure that we have in place right now from an operations point of view, IT support point of view, and overhead point of view can drive much more revenue without changing that infrastructure, so we feel that we do have a lot of opportunity to grow upon those 300 earnings points, and improve the quality of earnings in our supply chains business.

Thank you f. I could just ask one more question. I guess this would be for Tracy on the pension expense, the roughly $13 million in the quarter, how does that look going forward, and, you know, how do you think about that number? Is that a one-time number? How do you think about what you earned for FMS in the quarter, it's got nearly $12 million in there?

That's going to continue Gary in the run rate for the remainder of the year, as we look at that -- with the bulk of that going to FMS. As we look at it for the year, this has been an expense item for us that has been very variable over the years, and for most U.S. based companies. We believe we're at a higher than normal level of pension expense in 2003, but what that normalized level is going to be going forward for the next two, three years, we can't really say at this point.

The other thing I would add, Gary, is it does continue for each of the quarters this year, and I think when you balance, you know, those initiatives around that page that Tracy showed $12million first quarter and a goal of 40 to 49, at the to pretty much absorb all of that differential, so those initiatives are to handle what was coming at us in the way of pension expense, and I think the ultimate answer to the question that on future years, you know, ultimately the accountants can confirm this, but has to do with where the market ends and closes on December 31st, 2003, so in you have better market performance then you can have a diminishment in the future of that pension expense.

Thank you.

Thank you. Our next question comes from Greg Burns, please state your company name?

JP Morgan, thanks, guys. Maybe I'll start with the pension side. Do you make a pension contribution in the first quarter, and what do you factor it into [inaudible] purposes because I think your contributions were actually less than your distributions last year, and just walk me through what the cash flow hit is, if any, to your contributions?

The last pension contribution was made in the fourth quarter, we did not make one in the first quarter but I'll let Tracy continue?

Yeah, we did not make one in the first quarter for our U.S. plan. Last year our total contribution was $26 million that 16 of that was for our U.S. plan, and we meant made a voluntary contribution in the fourth quarter. We do not anticipate making a contribution this year. We're certainly not required to make one this year for our U.S. plan, and we have the same contribution around our international plan we had last year.

so -- okay. All right. That's helpful. And on the I guess a question for Tony, on the area of the logistics , for the supply chain, can you talk just briefly about the nature of your contract with the automotive guide are the activity based of structures did they gain sharing and assuming volumes do go down how much leverage is there on the down side?

There are several contract structures that we have in our automotive business, and also keep in mind there are contracts specifically with the OEM’s, then also contracts with the tier 1 providers that are also impacted by volume levels as well, but let me talk about our contracts with the OEM’s. We have fixed variable agreements with the OEM’s. Where regardless of volumes a portion of our profitability and recapture of our fixed costs is recovered from the fix portions to fixed in variables. Naturally if the volume of vehicles being assembled falls, then mileage varies, and also whether activities and service that we provide on a line fee basis will also decline, and so our profitability will decline, but we are fixed in variable, providing some return and recovery to our fixed cost but impacted by the variable piece depending upon number of vehicles.

There are also some that are directly variable, and basically deal with just network operations to support line feed operations from the OEM’s that have contracted with certain component providers, those of course, by their nature, if the volume is not there, unassembled vehicles, the miles, are not driven, and, therefore, we do not have an opportunity to bill the OEM’s, so there are two structures with the OEM. With regard to the tier 2 and tier 1, which are component providers to the OEM’s, if they are not selling to the OEM’s because they are not assembling, then the volume of our parts move from them go down as well, and we also do certain activities kidding(ph) activities and other supplementary activities that also drive the assembly operation as well.

So the preponderance of those arrangements are also fixed and variable at the same time. So for both of the types of industries that we serve, that relates to specifically automobile assembly it is predominantly fixed to end variable with a portion of them to the OEM’s being purely variable?

And just to clarify this a little better. I think I understand operationally, but just financially, I obviously don’t have your margins on those individual contracts but is there a scenario where you could be losing money because you're only covering a portion of your fixed cost, or is it sort of under any scenario the cost-plus piece of it will cause you to at least be break-even, and then, you know, you'll get upside when volume picks up if they do that go down, but I'm just trying to figure out could you be in a situation if certain and certain plans drop where you are actually contractually losing money?

No, because we would adjust fleet sizes for those operations, if the volumes drop really dramatically, and when I say we would reduce fleet size, we fleet those operations with a composite of Ryder units, and also a portion of what we call outside carriers or tier one carrier, and what we'll do as the volumes fall or those contracts we will clearly call in fewer outside common carriers to haul the component parts into assembly, and we will employ the Ryder units first in that regard, which is a fixed portion of our cost structures, so the volumes could fall dramatically, and we would still be fine, because our fix cost coverage on the portion of the fleet that is fixed. We typically fleet all of those operations with Ryder units, home unit, we [inaudible] call them, and also outside carrier fleet for the tier 1 carriers, and those are typically the accounts that go away once the volume falls, but the volumes would have to fall dramatically for those contracts on an individual basis or an on location basis to be unprofitable, because of how we structure the fixed cost portion.

And then Greg just a final question on pricing divisions on the leasing market. We're seeing prices go up across the board, when you you talk [inaudible] or truck loader LTL. Is that core related to what you guys are seeing, are you seeing the same type of price increases, or you alluded to a soft sales market, is the pricing different?

Pricing has certainly increased in commercial rental, and I could ask Tracy or Dick Carson if he's on the line, but we're not sure if Dick is connected or not. So I’ll just ask Tracy to answer.

Yes, have seen softness on the lease side, and partially that's a reluctant of customers wanting to damage reluctant tax of customers wanting to commit to long-term, six, seven year contracts, so what we're seeing most of our activity is around rental, and, as I mentioned earlier the leasing of used equipment where the leasing term may only be three years. An din both those areas we are seeing very good pricing. We have been pushing pricing up in those area, and we see many parts of the market following up us there. I think it's still going to be a challenge on the new leasing side, and mostly because of the demand side.

So, I mean, would it be fair to say that rental some the shorter term stuff is up 3% to 5%, and the longer leasing is flat? Is that sort of ballparks?

Enter yeah, I think on rental, you know, we look at revenue per unit, and that's pricing. You know, in some area, it's probably up higher than that, than the numbers you've shared. I don't think we've shared weighted average pricing numbers there, but utilization is the other factor in the revenue per unit. On the new leasing side probably flattish is fair we have been pushing pricing up mostly as a result of just making sure that we improve the quality of some of our contracts so we have not been bashful when we think it's appropriate to push pricing up on the new side, but from a general market stand point, flattish is, probably appropriate.

Okay thank you very much.

Our next question comes from Jeff Kauffman Please state your company name.

Fulcrum, thank you. And I apologize if I missed this because I got on n on the call a little late. Question on rental utilization, question on fleet sizing, question on you mentioned with Greg Burns question your incremental pricing on some this business, but can you give us some sort of sense of the incremental metrics are in the business with respect to Fleet sizing and equipment utilization?

Okay. We did mention already for rental utilization, we improve about 400 basis points. We went from about 68% to 64% this quarter over a year ago, the Fleet sizing on rental we said was down about 3%, and then your last point, your last question, Greg, I mean Jeff?

Yeah.

Your last point was that I didn't answer yet.

I'm sorry -- the -- well, 68%, you're not upsizing the fleet with that kind of utilization, I guess is where I'm going.

And is his point. The fleet is down by 3% over a year ago.

Okay. And incremental pricing on the full service lease contract say where you were versus a year ago, and versus where you were three years ago?

I would say in general, and I'll let Tracy get into more specifics one of the things we measure in terms that process and that sizing is the economic value added for every deal, and the average EVA for those leases has actually improved over time, so that would be an important indicator of the types of returns we're getting on the deal, and Tracy if you want to add further to that.

No, I think if you look back over the last three years, I think our prices is better around new leasing.

Uh-huh. Is there any magnitude your comfortable sharing with us in terms of the materiality of the differences in the EBA between deals, say, a year ago, and deals three year as ago?

No, we've general not shared that level of detail.

Okay.

What we have shared publicly was the compared to about three some a half, four years ago, there were about 40% some were negative EVA, and that was the place we didn’t want to be. And now I think it’s about 3% Yeah, and the other think I want to emphasize and when we talk about pricing, that's on our original deal.

The other important piece for us is running those trucks through the full lease term, and implementing all the components and revenue at any opportunities within the contract, and I think that's more powerful than the general pricing levels that we see in the marketplace.

Okay. Thank you.

You're welcome.

Your next question comes from Ed Wolfe, please state your company name.

Hello, Ed Wolfe, Bear Sterns.

Hello, Ed

I just want to keep commenting on the logistics of that, after four quarters of losses to have a big swing, I just want to see if there's anything seasonal or any one time in this quarter as the fist question, then take it from there.

This is Tony, as I had mentioned earlier, there are really two things that are propelling the earnings, and lets take then one at a time.

First of all, the margin improvement or MIP activity really started early last year, and that is coming to fruition now, so that is not seasonal, that is changes of processes in our operation, changes of procedures in our operation on the floor, and with the designed fleets, and also changes of our controls at the same time. Not only will that be sustainable in the existing operations, but, also, as we implement new operations at the same time. So the only benefit that would vary there would be volumes with our existing customers, and that's something that we're very hopeful that the industries that we serve, that the volumes will pick up with our customers customers. Again, with the overhead work that we did that, we don't see that seasonal either. I mean, this was fundamental hard core contraction, consolidation, keeping the best of the best approach when we review the teams, and we don't find that seasonal at all at the same time either, so the two elements that did propel our earnings this year are really not seasonal.?

I'm sorry, Tony, I'm a little slow to the take. I understood the first, the processes you have been doing. Would you go over the second?

the second was we went through an overhead review of all the support areas to our operations, and really compressed the size of the effort, and compressed the size of the teams, in order to improve the productivity of the overhead support group.

So what's the head count on, say, from a year ago to where it is now?

I would say overall its down slightly over 10% perhaps those overhead support groups. So I think overall, again to your point, that would not be seasonal either. We feel that the existing infrastructure of the operation can sustain revenue growth, and then those headcount areas would not grow with new business, only the direct variable operations piece that relate to taking on new business would really grow, so those over head numbers should be sustainable as well. Working very, very hard to keep the overhead flat as revenue grows.

Is there any pricing component. I know you've been trying to weed out the contracts that don't get there. Is that part of this too?

We did last year flush out all of the accounts that were not contributing positively to Ryder's returns. That process is complete. The business we have right now is a result of MIP, and other also other pricing initiatives is business that we want. So that flushing process is over, and I would also add that the work that we did with MIP, and also the work that we did with overhead will force our future pricing to be more competitive at the same time, so when we price new businesses it will with these new procedures that make us more competitive in the market place, and also the component of our bids that include overhead will also be lower as well, because of this overhead containment initiatives that we had at the same time. So we reap benefits on an ongoing basis and it also makes us more competitive with new bids as we go to recapture those costs in the form of new pricing.

When I look at the MBT 3% margin, assuming your customers customer stay flat where they are, would you expect that to stay at 3%, or get worse for some reason, or what would you expect?

Well, we're always hoping to continue to improve the quality of earnings, and as I said we are not satisfied with 300 basis points. We feel that the operation can generate more than that. We are not satisfied with the 3%, and we're going to work hard to increase that throughout the balance of the year regardless, even though we are concerned about auto production, the impact that has on our inbound operations, and also our direct relationship with the OEM’s.

Thus far in the second quarter, knowing what you know in the sense of auto production, would you guess that that 3% is sustainable?

Well, we'll have to see. We're still getting results in from the EOM’s with their production schedules we will see how that goes..

Okay. Switching gears, Greg and Tracy, when you gave guidance at the beginning of the year, then confirmed it today for the full year, was it in your plan that logistics would have this swing, or is this sort of upside and you're being conservative on the rest of the guidance-- or is leasing environment sort of worse than you would have thought?

That’s probably a fair characterization. We certainly didn’t have this big a positive impact swing on supply chain this early, so we'll take it because we got it, and as Tony says, appropriately cautiously, we don't know how that will appear in the second quarter and beyond, especially if we continue to have softness in not only automotive, but there is no great strength in telecom and technology either and that is an impact. On the Fleet management side, I think we are softening that forecast a bit, which counter acts that positive, because in this environment, customers of ours in their customers, very cautious -- you know, there is business in the pipeline, we know where it is, we know we can be competitive , but they area little reluctant to pull the trigger until they are confident that the entire economy their businesses and their customers’ businesses are strong enough to commit for the long term.

Can you break out the rough break out of the sectors ,I. you did this before I apologize -- on supply chain side in term of what percent is auto, what telecom is, that sort of thing?

That may be in the appendix.

IT about 62%-38%, something like that. We're about 60% to 62% in automotive and 38% to 40% on our electronics high-tech point of view. Pretty much split.

And, Tony, the 62%, how much of that roughly OEM..

How much of that is OEM. I would say slightly over half of that is direct EOM, not including tier 1.

Okay. And then one last question. Historically commercial rental has been a great leading to current indicator of not just leasing, but, also, the economy. Is that something that you find to be true? It’s something that I have noticed over the last five or six year covering the company. Does that give you reasons to may be look into increasing the leasing fleet in the near term?

I mean it's certainly something that I've noticed over the last five years covering the company. And that s that something that you look to maybe be increasing the rental fleet in the future. I think rental has been an indicator of the direction of the economy. I thinks at this point it may not be, because new customers not wanting to commit to the long term, may be using rental as a vehicle -- pardon be that term -- as a vehicle to take advantage of flexibility, without a long-term commitment. At the same time, I think we would consider, especially if we are doing some leasing activity, pulling units from the rental fleet, that we might have to do some replenishment of the rental fleet, so that would not be out of the question.

Yeah, and, Ed, I think on rental, it can be an indicator, but as we dig into where that rental demand is coming from, we're still not seeing our existing customer base flex up in terms of their overall fleets, we are bringing in new customers around rental, and I think it's an indication of the reluctance to make the big capital investing or sign the longer leases at this time.?

Is that something your doing, are you do act better job of getting to new people?

Absolutely. This has been our focus for the last two year, that, you know in a very slow economy, we recognized we needed to do more about generating transaction in this area, and it has been more around the marketing. We do a lot of direct mail, marketing, all directed towards driving transactions, and we've been doing a lot of training around our rental representatives, the people that work the phones, and the rental counters, and we continue those investments during the tough times, and it's paying off for us now.

Within the $890 million at CAPEX with guidance, what is the assumption in there for growth rates for both the leasing and commercial fleets, and how much of it is just, you know, replacement?

Well, on our original forecast, and as I confirmed today on rental, that’s the really around the replacement. So the $153 million Global number is around replacement and refreshing the rental fleet. On the lease side, I think our original plan when we discussed that, that's mostly around replacement, as well there. There was a little bit of modest growth built in to the fourth quarter, as we get to the back of the year, that really doesn't impact our revenue and earnings that greatly in 2003, but we did have a bit of ramp up, put most of it was around replacement.

Okay. Thank you very much everybody for the time.? You're welcome.

Our next question comes from make Mike Manelli, please state write your company name.

Morgan Stanley. My question was to supply chain, looking at your business plan for the year given in December, you guys almost got to that number in the first quarter, and my question just really comes down to in terms of where the upside came in the fist quarter, and it really on the margin improvement side, and you've taken more costs out than you thought, or are we making it up on the top line or getting a little bit of help from both there?

This the Tony. It's pretty much even split. Several hundred basis points basically where we came out on the MIP initiative, and we believe that those accounts, you know, are staffed appropriately from a wage rate point of view, and headcount point of view, and also from a management point of view, and then on the overhead piece as well, and we like where the overheads are as well. We think we can lever that infrastructure to take on more revenue, so it's pretty much split from the MIP, and also where we were on the overheads. We did not have revenue growth in the first quarter, as shown on the material presented, and, as Greg has mentioned to you, we still continue to be hopeful that the telecom companies volumes will pick with their customers, and also our micro-processing accounts, as well, will show some growth at the same time, but the big bet the automobile production, and, how that will drive revenue.

Is it safe to say in the fist quarter, your automotive revenues were higher than you thought heading into the first quarter?

Enter yes, they were.

And heading over to the leasing side for Tracy. I think you indicated you were sort of seeing flattish pricing an the long term, you know, full service leases right now. My question to you we have the new trucks that are costing substantially more, and you haven't taken, I don't believe a huge of those engines yet, but with costs going up, have customers been willing to accept a higher rate on that business as equipment costs increase?

They have. So as you mentioned before, we do price the increase and the invest, costs, as well as any up increased maintenance cost that we think are appropriate based on the pricing of the engines, so where people have decided to commit to new equipment they are accepting the higher prices. I think if we talk about people wanting to use rental, customers moving toward rental and shorter term issues, there is an element of the engine issue in that end. We think most of that issue is around the economy, but used equipment and rental fleet are a way of postponing that new engine decision. But for those that are making that decision, you know, with the support of companies like Ryder, they are paying that higher price.?

Okay. And one kind of final house keeping question here. I believe the original guidance when you guys get in December to the pension plan, year over year [inaudible audio] looks like $50 million to $60 million, it looks like now about $52 million, is that $4 million change sort of where you guys ended up at December 31?

That's right.

We had, I believe, the plan call on December 15th, and you don't get the final answer until December 31st so I think it was just an estimate.

Okay. Great, makes sense.

Okay. Thank you. Our final question today comes from Andy Fineman (ph). Please state your company name.

Meridian Management. Thank you. The -- first of all, on, you know, the capital spending discipline on the leases, and buying stuff until you sign up the business, and overall in the quarter, but let me just ask, if you -- you know, you said that the lease capital was mostly replacement, so the question is, if you don't renew those contracts, can you still earn $2, or does that have to go down, because, you know, you'll have less business? You know to, what extent do you have to replace those long-term leases in order to get to your earnings projections maybe for this year and next year?

Well, an dishes I'll take Andy, I'll take that question. The renewal, I think that there is another factor as well. So to the extent we're enjoying higher levels in those two areas versus having to go out and buy new equipment, we are keeping and getting the revenue associated with that, so that's something that we're trying to build into the structure of our business, so we can get better long-term returns, and we've really pushed the envelope in some areas. Again, we only want to do that when it makes economic sense for us on the long term of running the vehicle, and also market acceptance, but market acceptance as we've talked about has been very strong. On the other short fall on leasing, there is risk in meeting our Fleet Management solution number, and I think Greg alluded to the fact that remaining at our full year number, despite some strength in some other area, that's an area of concern for us, and we'll keep an eye on it as we go through the year, and keep an eye on it from a marketing decision some our customer base.

I think in logistics, you said that last year you washed out the last contract that was not contribute be positively to Ryder returns. Now let me just clarify does that mean that was the last contract that wasn't a positive EVA, or does that mean that it doesn't wasn't, you know, contributing income?

It wasn't contributing margin, which is the earnings on the account, after all the overheads are allocated to the account.

Okay. So contribution margin?

Yes.

So you still have a way to go to get all the accounts to the point they are EVA positive; isn't that correct?

There are a number of contracts that still have a way to go to get it to the EVA level we're satisfied with.

And that's the goal isn't it?

Absolutely.

And also I -- oh, let me ask you this. If have you sent out the annual reports for last year, because I didn't get one?

Yes, absolutely. And if you don't have them, let us know, because we want to make sure that you vote your shares, too.

Okay. I -- great. Last thing net debt. Just can you tell me -- you know, I like to take out the cash. I think it was $104 million at the end of the year. Do you know how much cash you had at the end of the quarter? I like to calculate net debt, not just total debt?

I don't have that right here. We can get that for you, though.

Okay. I appreciate that. I ask the same question every quarter, and just the receivables, do you have any? You were down to zero at the end of the year, did you sell any new receivables during the quarter?

No, we did not

So you're still at zero.

That's right under the receivables selling program, we're not in that market right now.

Great. You're doing a great job, and I was particularly pleased with the supply chain earnings this quarter, so keep it up.

Greg Swienton Thank you, Andy I don't think we have any more calls so I'll turn it over to the operator.

Thank you, I'll turn it over to Greg Swienton. .

Thank you nor your attention. It's a little before noon. We've met our time frame. Thank you all for attending, and have a good day.

Call concluded at 11.56 a.m.--- 0