萊德系統 (R) 2004 Q2 法說會逐字稿

Good morning and welcome to Ryder System second quarter 2004 earnings release. All lines will be in a listen-only mode until after the presentation. Today's call is being recorded. I would like to introduce Mr. Bob Brunn, Group Director of Investor Relations for Ryder. Mr. Brunn, thank you, you may again.

Thank you. Good morning and welcome to Ryder's second quarter 2004 earnings conference call. We'd like to begin with a reminder that in this presentation you will hear some forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission. Presenting on the call today are Greg Swienton, Chairman, President and Chief Executive Officer, and Tracy Leinbach, Executive Vice President and Chief Financial Officer.

Additionally, Dick Carson, Senior Vice President of Fleet Management Solutions, Tony Tegnelia, Executive Vice President of U.S. Supply Chain Solutions, and Bobby Griffin, Executive Vice President of International Operations, are available to answer any questions you may have at the conclusion of our presentation. With that, I'll turn the call over to Greg.

Thank you and good morning everyone and welcome. Today we'll cover our second quarter results, update you on a number of other items, including our outlook for the remainder of the year and then open the call for questions. I'll begin with the second quarter results and for those of you who are following on the Web, we'll begin on page 4 with the second quarter results overview.

Earnings per diluted share were 97 cents for the second quarter, as compared to 55 cents in the prior year period. The second quarter's earnings included a 21 cent gain in EPS related to the previously announced sale of the company's headquarters facility. Excluding this gain, earnings were 76 cents, up from the 55 cents last year or 43%. Earnings in the quarter also include a net restructuring and other charge of 4 cents.

This net charge includes a 5 cent charge related to the termination of an outsourced information technology infrastructure contract during the quarter. Cost reductions or benefits associated with the termination of this contract will expect to be gained at the start of next year in 2005, after a transition phase this year. There will be another 5 cents in costs associated with this transition and we will cover this in the outlook later.

Fleet Management Solution posted strong revenue growth of 11%. That's 9% on the dry revenue basis, which excludes fuel. U.S. lease revenue increased for the quarter due to our acquisitions of General Car and Truck Leasing and Ruan Leasing. Lease revenue was also up in Canada and the UK operations. We continue to see increased confidence with our lease customers as they begin to renew and in some cases expand their long-term lease contracts. Revenue associated with these contract signings has largely not yet begun to impact our P&L due to the usual time lag between the time we sign new contracts and the time the new equipment is delivered. We are optimistic that these positive sales trends will continue and expand in the second half of the year.

We also posted very strong 20% quarter-over-quarter growth in commercial rental revenue, another good indicator of stronger market conditions. The increase in rental revenues for the quarter resulted from improved pricing, higher utilization, higher levels of rental activity, as well as from the rental vehicles obtained through our acquisitions. The net before-tax earnings in Fleet Management Solutions were up 58%. FMS earnings as a percent of dry revenue were up 360 basis points to 11.5%, which exceeds for the first time in recent periods the 10% target we established some time ago for this segment.

We'll continue FMS results if you will turn to page 5. From an earnings standpoint, Fleet Management's results benefited from our recent acquisitions, improved rental performance, stronger vehicle gains, and lower pension expense in the quarter. And we're pleased that this quarter's results for FMS continue to prove the strong earnings leverage that we believe exists in the overall business and think that we are in the early stages of demonstrating this earnings leverage on profitable growth.

In Supply Chain Solution segment, total Supply Chain Solution revenue was down. The U.S. revenue was down as we had anticipated due to certain customer contracts that were not renewed in the prior periods, as well as to reduced volume levels in the U.S. automotive sector. This decline in revenue is partially offset by new contract startups.

We do expect pressure on SCS revenues to continue in the near term and are focused on winning and converting the pipeline of new business to operations as quickly as possible. In earnings in Supply Chain, those were up 22% as compared to the second quarter of 2003, due to reductions in overhead costs as well as to improved operating performance in International Supply Chain operations. While we're pleased with this quarter's results in Supply Chain Solutions, we do have a cautious outlook for this segment for the remainder of the year due to the considerably slower net top line revenue growth.

In Dedicated Contract Carriage, our revenue declined slightly due to non-renewals of some accounts and this reduced segment margins. Finally, the cost management focus that has become a part of our regular business process has continued. We're on track to realize the 13 to $18 million of initiative savings that we planned and mentioned earlier this year. And these cost reductions contribute to the earnings and also continue to enhance our competitiveness in the marketplace.

If you turn to page 6, our earnings per share for the quarter, EPS increased 42 cents to 97 cents as compared to 55 last year. And as you will note in the memo items, the earnings per share of the gain of 21 cents on the sale of the headquarters facility is noted. The earnings also note the 4 cent charge from restructuring and other items. The first quarter 2003 included a 1 cent recovery credit. We've also highlighted in the footnote the impact on earnings of pension expense, net total 15 cents per share for the second quarter this year as compared to 22 cents per share last year.

There is a $2.3 million share increase in the average number of diluted shares in the calculation versus prior year's quarter. That's due primarily to the number of stock options exercised and secondarily to the impact of the higher stock price on our employee stock purchase and option plans. The increase in the Ryder share price has increased the fully diluted share calculation as more options are now in the money.

Earlier this week, we in a press release announced that we completed our 2-year, $90 million stock buy back plan in which we purchased just under 2.5 million shares at an average price of $36.32 per share. We also announced the implementation of a new 3.5 million share repurchase program. And this new program allows for repurchases equal to the number of shares issued as a part of our employee stock purchase and option plans as of May 1st, 2004.

On page 7, year-to-date earnings per share increased from 88 cents last year to $1.50 and that is before 2 cents last year in the accounting changes. Again, we've highlighted in the footnote, subtracting the 22 cents for the gain on the building, as well as a 1 cent gain of the an outer complex parcel associated with the building sale. We've already included our net restructuring charges for the first half of 4 cents and the year to date EPS impact of pension is 31 cents in 2004 versus 43 cents last year.

On page 8, in the business segment numbers for the second quarter, total revenues in total for the quarter were up 6%, pretax earnings increased by over 47 million or 87%, and Fleet Management Solution's revenue was up by 11%. Fleet Management Solution's earnings were up a strong 30 million or 58%. And that increase was largely driven by the impact of the acquisitions, strong commercial rental performance, improved gains on vehicle sales and reduced pension costs.

Commercial Rental Utilization in the quarter was also strong at nearly 78%, which is up almost 7 percentage points from last year. We are continuing commercial rental rates increases in utilization and see a good opportunity going forward on both those accounts. In Supply Chain Solutions, while revenue was down on a gross basis for 5% in the quarter, net before-tax earnings were up 22% from 7.4 million last year to 9 million this year.

On a percentage basis NBT as a percent of operating revenue was 4%, up from 3.1% in the second quarter last year. Dedicated Contract Carriage we saw a 2% decline in revenue, primarily due to the non-renewal of certain contracts. DCC earnings declined $400,000 or 4%.

Earnings after all essential support service costs improved to 56% or improved by 56% before the restructuring and other recoveries or 87% including all these items and the quarterly net after tax earnings were up 83% at 63.6 million, compared to 34.7 million last year. And on page 9, on the year to date basis, revenues in total were up for the first half of the year 4%. Pretax earnings increased by over 70 million or 81%. FMS revenue was up 8%. The Fleet Management Solution earnings were up 63%.

The increase again was largely driven by the same items as we noted for the second quarter, namely acquisitions, commercial rental performance, reduced pension costs, and in Supply Chain Solutions, while the total revenue was down 5%, operating revenue, which is defined as the revenue excluding the freight under management, that was down 2% on a year-to-date basis. The SCS year-to-date net before tax earnings were 16.5 million, up 12% over the prior half year last year. And on a percentage basis, net before tax in SCS as a percent of operating revenue was 3.6%, up from 3.1% last year.

Dedicated Contract Carriage, we saw the 2% decline in total revenue, primarily due to the non-renewals of certain contracts, and this negatively impacted the year to date earnings by $1 million or 6% compared to last year. Year-to-date earnings after all essential support services cost improved by 61% before restructuring and other recoveries or 81% including these items. On a year-to-date, net after-tax basis, we were up 81% compared to last year. At this point, I'll turn it over to Tracy, who will cover a number of items, beginning with capital expenditures.

Thanks, Greg. Turning to page 10, year-to-date capital expenditures before acquisitions totaled $568 million, up $155 million or 38% from the prior year. Higher capital spending is in line with our planned expectations and as Greg mentioned earlier, we've driven by increased activity in our lease business from both new and replacement activity.

Our capital plan for the year anticipated lower levers -- levels of term extensions in 2004 and more customers committing to replace their lease units. In the first quarter we started to see this trend towards higher replacement activity materializing along with some capital spending for fleet additions. And this trend continued in the second quarter. As a reminder, we do not order equipment for our lease product line until we have a signed contract from customers. Lease capital expenditures of $337 million for the year to date was up 53%. This reflects spending for vehicles that we have already taken delivery on from OEMs. In addition to the spending on this page, our order bank for leased vehicles is up significantly over last year and this would relate to sales activity, signed contracts in the first half of the year.

In commercial rental, increased year to date spending largely reflects timing impact as we placed new equipment orders earlier this year and were able to get that new equipment in for our peak rental season. We anticipate only modest additional commercial rental spending in the remainder of the year.

The $149 million in year-to-date acquisition expenditures relate primarily to the purchase of Ruan Leasing which we closed in on March. On a full year capital plan basis, we're -- we called for $1.2 billion in capital spending this year before acquisitions. Of the $1.2 billion, approximately 200 million of the capital is related to growth of our fleet and the remainder represents a maintenance level of spending for our lease fleet and a refreshment of our commercial rental fleet.

At this point in the year, we expect to hit our full year preacquisition forecast of $1.2 billion. This spending would reflect a significant turnaround in leasing activity following 3 years of negative lease sales, which resulted in a 9% decline in our lease fleet over the prior 3-year period.

On page 11, you can see our total debt levels remain fairly constant with the prior year-end. Balance sheet debt is up $65 million for the first half of the year due to the impact of higher capital spending, but as a percent of equity is unchanged from the prior year at 135%.

Ryder's total obligations of $2 billion are up $34 million as compared to last year-end, total obligations as a percent to equity at the end of the quarter were 144%, down slightly from the 146% at the end of 2003. This improvement in the leverage ratio was a result of increased equity balance, which at the end of the second quarter was just under $1.4 billion, up $50 million from year-end and that reflects improvement in earnings net of share repurchases and dividends.

As those of you who follow us know, from a funding standpoint the company matches the average duration of our debt with the average life of our assets. In doing this we utilize both fixed and floating rate debt to achieve this match and generally target a mix of 25-45% of variable rate debt. At the end of the quarter, the company's variable rate portion of the debt was near the mid-point of this range at 33% of total obligations. The company has significant capacity to support what we see as strong profitable growth opportunities going forward.

As we previously announced during the quarter, we completed a new $870 million, 5-year global revolving credit facility. Our previous facility was slightly smaller and was a split 1-year/5-year structure. This new facility gives us very strong liquidity and in addition, we have a number of other financing vehicles available to us to support growth in the business.

Finally, I would like to highlight that during the quarter we received from Moody's a change in our outlook from negative to stable and that's with our existing BAA1 rating.

Turning to the next page, you will see that based on our preliminary consolidation, the company used $38 million in free cash flow in the first half, as compared to generating a 125 million in the prior year. The negative $38 million in free cash flow this year does include $149 million in acquisition spending. The year-over-year swing of $163 million in free cash flow is driven by the acquisition spending as well as the increase in capital expenditures I mentioned previously.

Cash flow was also impacted by a $50 million contribution to our U.S. pension plan during the quarter. At this time, we don't have further plans to make additional contributions to the U.S. plan this year. Including our international pension plans, full-year pension contributions are expected to total $65 million for the year.

The improvement in our net earnings and higher proceeds from sale of used vehicles contributed positively to free cash flow for the first half. And cash flow also benefited from the proceeds on the sale of our headquarters building by $37 million.

Turning to page 14, I'll give you an update on our asset management area. Our performance in this area has a significant impact on our earnings, as well as our capital efficiency and free cash flow. We continue to see used tractor sales prices firm in the market and anticipate this trend will continue during the year. We have taken a number of steps to enhance our used vehicle sales capabilities, including expanding our retail used vehicle sales network to facilitate the sales of a higher number of vehicles this year.

As a result of those efforts, in the second quarter we sold 38% more vehicles than in the prior year and year-to-date, we're up 33%. The higher number of units sold combined with the firming tractor prices contributed to higher sales proceeds and higher vehicle gains in the quarter.

We continue to focus on reducing the number of non-revenue earning vehicles in our fleet. And this number was brought down by 3% from the prior-year period. The non-revenue earning vehicles in our fleet are made up of 2 very different components. The first are vehicles which have not yet begun to earn revenue and the second being those vehicles that are no longer earning revenue. First, the number of vehicles not earning revenue, this did increase during the quarter as expected, reflecting the higher level of replacement and new sales activity in lease. And we would expect this number to grow and move in alignment with our sales activity.

The second area, no longer earning vehicle (which we define as vehicles that have not earned revenue in the past 30 days), this number was down significantly versus prior year's second quarter reflecting the higher used vehicle sales and strong asset management practices. And we want to continue to work at bringing down this number. As those of who you have followed us are aware, the company's placed a lot of emphasis over the last several years on these asset management practices and we're maintaining that same level of focus going forward.

On page 15, you can see that year-to-date vehicle redeployments are up modestly and term extensions are down by 37% as we anticipated in our plan. We continue to focus on maintaining low levels of early replacement and early termination, which are vehicles coming back from leased customers. At this time, I'd like it turn the call back over to Greg to go through our earnings outlook.

Thank you. On page 17, we'll share the earnings outlook. You may recall last December when we presented our business plan, we provided a forecast for the year 2004 in earnings per share of $2.35 to $2.45. We have since increased that full-year EPS forecast 4 times since then, 1 at each earnings call and once during the announcement of each acquisition.

We are now going to increase that forecast for a fifth time. The previous forecast was for a range $2.70 to $2.82. On an equivalent basis, including the 21 cent second quarter gain in the sale of the headquarters facility, our forecast for comparative purposes is now $2.79 to $2.85 per share on a full earnings announced basis and you add the 21 cents back, that brings the full year forecast to $3.00 to $3.06. But for equivalent basis, $2.79 to $2.85 is what we would compare our last forecast of $2.70 to $2.82 in regards to.

That forecast for the rest of the year comes from the establishment of a 75 to 78 cents per share forecast for both the third and the fourth quarters. And our forecast for the year and the third quarter and fourth quarter includes some additional costs related to the information technology infrastructure contract termination that we mentioned occurred during the second quarter. It is our expectation that these costs will total 2 cents in the third quarter and 3 cents in the fourth quarter for a total full year impact of 10 cents per share. And we do not expect these costs related to this termination to continue into next year, 2005. The items of the 2 cents and 3 cents in the respective quarters are already included in the forecast numbers of 75 to 78 per share.

Our outlook for the remainder of 2004 in Supply Chain Solutions is for continued softness in top line revenue, which will hinder our ability to deliver bottom line earnings improvements in the second half compared to last year. Longer term though, we believe Supply Chain presents strong growth opportunities and we have taken a number of steps to reinvigorate profitable growth in this segment, as well as in the Dedicated Contract Carriage segment.

Our outlook for Fleet Management Solutions in the second half is much more robust, as we are already seeing positive signs of growth. Commercial rental growth has increased and our customers are signing for higher levels of replacements and new vehicle additions in full service lease. In the near term, therefore, we are looking primarily to the FMS segment to deliver the strong earnings leverage that we believe exists throughout the company.

With that, as our prepared remarks, following the Web, we are now going to open up the call for questions and answers and I believe that the instructions from the operator for you to get into queue and ask your question is to dial star, 1.

Yes, sir, that is correct. If you would like to ask a question, please press star, 1. You will then be prompted to record your name. To withdraw your question, you may press star, 2. One moment please for the first question.

Our first question comes from Greg Burns. Please state your company name, sir.

Hi, J.P. Morgan. Greg, what, if any, is the ongoing corporate overhead impact from the sale of the headquarters?

The only impact we would have from selling it now before we move into the next one is we have a lease-back, so we probably will have -- and it's already incorporated in our earnings forecast, $200,000 per month or about 1.2 million in costs through the end of this year, if there's anything else, Tracy, that may be worth noting --

No, you'd have to back off the -- some interest savings from the cash against that number, but that would be it.

But the net effect, once you get past the one-time items is basically even between the new and old?

Well, there's no other further impact from what I already mentioned this year, and we'll be moving and getting out of this lease-back situation here into next year at probably end of the first quarter- start of the second quarter. So basically, you know, that's flat.

Okay. And on Supply Chain, you're sounding a little cautious there. Maybe I missed it. I understand you're trying to prune some business but is it simply some revenue caution given, you know, some profitability that you're trying to improve there or is there something in the marketplace either, you know, aggressive competition or something in the way of outsourcing? I guess when might you become, you know, more positive on sort of the top line outlook, given, you know, what we think are pretty good growth prospects?

Yeah, I'll let Tony Tegnelia comment on some of that, but I'll make an introductory remark. I think that we think that the growth prospects are good as well. What we are facing and what we thought we'd -- have had a better chance of overcoming already is a couple of significant contracts that did end at the end of last year, and we had anticipated that the business that we are and would be signing would be larger and having a more immediate effect than it is, so that's slowed a bit. So that means the impact will be a diluted a bit in the second half of this year and that's why I've been more cautious on the outlook and I'll let Tony add further comment.

Greg, there are really 2 dimensions to our revenue growth outlook. The first is the new sales. And our new sales year-to-date are actually up significantly over our new sales last year, year-to-date. As a matter of fact, they're almost equal to our entire sales for all of calendar 2003. However, they are still not where we wanted them to be at this time when we started the year.

Our pipeline is very robust. It's actually double what it was at this time last year and at the beginning of the year and we feel that that bodes very, very well from a revenue growth point of view going on into 2005. The deals are larger, they are taking more time. We haven't lost any of them and we like the margins that they all have, and they do play into our sweet spot.

The second dimension to our revenue growth is the volumes on our existing customers. Some of our existing customers are enjoying a bit of a rebound in the economy, particularly on the high tech side. However, on the domestic automotive assembly side, the volumes that we are seeing in the production levels are lower than we had anticipated in the fall of last year and at the beginning of this year, and we do not necessarily see that automotive inbound assembly business picking up much on the second half of 2004, and that will impact our performance for the second half the of the year and as you may know, that automotive inbound assembly business is about 30% of our revenue.

Got you. Okay. Thanks a lot.

You're welcome.

Our next question comes from Jon Langenfeld. Please state your company name.

Good morning. Robert W. Baird. Nice quarter. Thanks for having the call. A couple of things here. First on FMS, the signings progress, I know last quarter you talked about some pretty healthy new contracts. I think you were talking in the range of 60% growth year-over-year and some of the strongest levels in 3 or 4 years. Can you give us directionally what happened in Q2 and at the first part of Q3 here?

Sure. Dick Carson is here and I'll let him comment.

It continues to be pretty -- pretty active marketplace. Our year-to-date new accounts are up 54% over last year and our fleet additions are up 41% over last year. So there's pretty good -- pretty good activity in the marketplace and we -- we're taking advantage of it and we feel like we're getting a good share.

Are those numbers based on -- so the 41%, that would be the number of fleets out there that added not necessarily the number of trucks, obviously?

That is additional dollars in business.

Dollars of business, okay. And the same on the new number?

Yes.

Okay. Great. That sound fabulous. I'm assuming, Greg, that kind of plays into what you talked about earlier. You really haven't seen a lot of that in the first half of the year, that's more second half of the year type revenue?

Yes, and some into next year and I think that that matches up with how the capital is aligning and Tracy, if you had a further comment?

Yeah, I would just on the numbers that Dick shared and those are very positive trends for us. We also have a lot of just replacement activity that wasn't taking place over the last couple of years and in fact, you know, we are always fighting fleet reductions, so the numbers Dick shared are gross add.

There are always some reductions that are taking place in your fleet, so you can't just look at that -- that gross number Dick gave you. But --but clearly our sales activity has been net positive and, again, I'd frame that against over 3 years of net negative trends that have led to a 9% reduction in the fleet over the last 3 years. So it's a significant turnaround for us. We're building momentum. We hope to see more net growth, you know, as we continue through the year and then obviously when those vehicles are delivered we would see it in the revenue line.

Good. Good. Now, the leverage on the FMS side, obviously some very strong leverage there and I know you're getting some of that from commercial, some from the acquisition side. Is there any reason to think, focusing in on that acquisition leverage, is there any reason to think that the new sales that you get would have any more or less leverage than what you received from the acquisition revenue you brought in?

It should be roughly in the same range because a lot of the value that we had from the acquisitions was folding in the activity with the shops and the people and the infrastructure and the billing system we already had. So it may not necessarily be quite as strong, but it should be in those approximate areas for those reasons.

Is the leverage that you saw in the quarter -- I mean, is as much of that being driven from the commercial rental side as it is the acquisition -- the full service lease revenue?

Certainly. The commercial rental is very strong and maybe there is another aspect of the commercial rental strength that also connects to future strength in leasing. I guess the category that we have internally is awaiting new lease revenue. And there's a certain amount of the -- of the customers who haven't received their new equipment yet end up renting from us and that revenue goes into the rental line. Over time, that will convert to the lease line.

Right. And so there's no reason to think these margin levels here, Q2 margin levels aren't sustainable, if not expandable in the near term?

Well, certainly I think the phrase "sustainable" is a fair one.

Okay. And then moving on to the SCS side. Tony, we've talked with companies like UPS and Excel and asked them about kind of the deals that they were seeing and the size of deals and they didn't seem to feel that there's much of a difference over the last couple years in terms of size. And I know talking with yourself and with CNF (phonetic) you guys are kind of echoing the same tune, which is smaller deals, pipeline still strong. Just wondering, is there a competitive disadvantage you see yourself at with regards to some of those players that are emerging, larger players here in the U.S.?

No, I don't think we're at a competitive disadvantage against those major players at all. As a matter of fact, I still feel that we have a competitive advantage with our relationship with our sister division - where a component of the solution requires equipment and I also think we have a competitive advantage as it relates to technology. I would stack our technology capability in the more complex solutions that require high tech portions against any of our competitors.

We don't see it the same as they do. We are seeing higher deals, higher size deals on the revenue piece than were parts of our pipeline in the past and they play to our distribution management sweet spot that does require good high tech solutions as part of the service offering. We like those very much because when you solve the customer's problem with a very complex high-tech component of the solution, being technology, then there's a much greater probability that you'll sustain that relationship for a very long period of time because you integrate into their legacy systems and to other activities and fundamentally they're much more reliant upon you and it's very difficult for them to disengage the relationship.

So I do not see us having any competitive disadvantage against those major players. I actually see two advantages that we have against them and we like the bigger deals. We're seeing bigger deals and particularly those that have a high tech element and technology element and we think those are very good for sustainable revenue growth.

I'm going to add one other component to this in answer to your question. Bobby Griffin, who is also with us. I think he flew in here and landed at 5:00 A.M from an international trip. He's responsible for International Operations and a big portion of that is the Supply Chain Solutions in the international regions and I'll just ask him to comment. I won't ask him to say exactly where he's been or what customers, but generally in terms of their perception of our capabilities and performance, I'd like to have him comment from the other regions of the world.

I'd like to echo what Tony just stated, that we also in international marketplace are starting to see and enjoy opportunity in terms of reward for large deals. And we basically in the international arena have taken advantage of the great reputation that we enjoy here in the United States and also the customer base, which allows us to compete as well as -- as well as -- earn new opportunities in the international marketplace and some regions of the world we have a very, very strong relationship with existing customers because of that.

And as Greg mentioned, I did just come back and recently was awarded some very large opportunities that should earn us revenue opportunity, particularly going into the year 2005, but they are going to be larger than normal. And the technology -- technology capabilities that we have as well as the relationships that we have with certain key customers have given us that benefit.

Great. Sounds good. Congrats on the new business and thanks again.

You're welcome.

Let me just add one point, this is Tony. Typically in our competitive environment, we go very well head-to-head against the larger players. Excel, UPS, it's 1, 2, 2, 1, 1, 2, 3 with the same players when the down-select process is over. And so we're right up there in the top 2 or the top 3 or the top 1 spot after the down-select process is over against those large players and we don't feel competitively disadvantaged whatsoever against those big names and those big revenue bases.

In fact, the more complicated it is, the more competitive Ryder becomes.

Thank you. Our next question comes from Ed Wolfe. Please state your company name.

Hi, good morning. Can you talk a little bit about the ability to get vehicles from manufacturers right now, what the backlog is looking like and if that's getting pushed back a bit right now?

Sure, and there's no question that lead times have extended a bit, but I'll let Dick Carson give you a little bit more detail and flavor on that.

Thank you, Greg. Lead times are growing. We had a very good run over the last couple of years. We were able to get trucks in 60 days and put them on the road.

That's out to 4 months, maybe even 5 months now. And we anticipate it's going to be difficult for the next period of time, for quite a period of time because the manufacturer's capacity to build more trucks is not all that elastic, can't be expanded all that easily and they have a big order bank of their own that they're trying to manage. We do have the ability to manage our own auto bank by prioritizing the vehicles that we've got in the pipeline for growth, put them at the front of our queue and we can put rental and replacement vehicles in the right order to allow us to get vehicles to give customers and get the growth revenue.

When you talk about growth, that's for the rental side?

No, for the leasing side. Rental growth, we can actually support rental growth with the fleet we have. We won't grow that fleet substantially unless we see demand uptick a lot from where it is. Really we're trying to get lease trucks in here and get the lease revenue on the books.

And which tractors generally are you using, which manufacturers?

Well, we never reveal which manufacturer we're using, but we use them all. All of them have auto banks that are very robust. All of them have lead time issues on Class As. We're -- we're able to manage our issues internally by putting the priority on the trucks that we need to put revenue on the book, new revenue on the books, and get them in as early as we possibly can.

What's your best guess when the order books kind of close for '05? We're starting to hear by the end of this year '05 could be closed. Are you hearing any of that?

No. I still think the lead times are going to continue to grow. We haven't heard anybody turning down orders. We do have a -- an agreement with some manufacturers about how many trucks they will build for us in the next two years. So we are not at risk for being shut out of production. We have slots that have been allotted to us. We're anticipating that we'll get those trucks in the time frame we've agreed to and we're working with the manufacturer to make sure that the trucks we get first are the trucks we want most.

And historically how does it work if somebody orders a truck that takes 12 months to come and by the time the truck comes, they don't want that? Greg, I think in your remarks you said you have contracts that are firm. Historically does that work out or is this new territory in terms of the firm contracts?

No, we have some history of that. We've had a history where it did take a year to build a truck. The contracts are good. People -- people can cancel a contract with us to the extent we can still cancel the vehicle, which hasn't been possible lately because the build times are so short. But it takes a year to build a truck. Someone could still change their mind. And' we could still change our mind.

Sometimes we will redeploy the truck into other things. If the trucks are hard to get, we'll use that truck -- keep the order -- and use the truck for another customer. But we can still have the option of canceling an order if we give the manufacturer sufficient lead time to implement the cancellation on their end.

And from the customer standpoint, I'd add, you know, if they're already running a vehicle with them, obviously we can work and we have the capability to run that truck longer if we have to. If it's a new customer, or if it's expansion, that's where we can leverage our rental fleet, you know, to meet that customer's needs while we're waiting for that truck as well. That's a good advantage for us in the marketplace.

And the rental fleet, the idea is to keep that relatively flat through year-end?

Well, the idea is not to -- not to get carried away with the idea that rental is going to be great forever. We don't want to build a fleet up to fleet for a boom when we might -- when it might not always be a boom. So we try to fleet for what we think is an average -- average amount of demand and then we price into the increased demand, taking advantage of it and when demand shrinks, we try to keep enough of the rental fleet in a position where we can dispose of it.

So we have some flexibility to go down. We don't like to take too much advantage of going up too large because we've been through booms before and we've learned to manage them better than our history is. As we have matured, we've learned to manage it better.

Right.

You talked that the utilization has very much improved. Where is the fleet in terms of size versus a year ago?

It's up some. 1000 vehicles. But that's --

What percentage is 1000?

Yeah. We order so it will be delivered -- the new ones will be delivered in the beginning of our busy season and we'll trade out of the ones we're going to dispose of at the end of our busy season. So there'll be a seasonal bubble that we'll go through. But we don't anticipate growing it dramatically, unless this business cycle continues to expand or the habits of the buying public change to where rental is a much more -- is used much more than it's been used historically to take care of business needs.

One of our folks in the room with a quick calculator just estimated it's about 4% up, to answer your question.

That's kind of at the end of June?

That would be more of a year-over-year -- since the end of the year or beginning of the year we're actually up about 8%, which will happen because we do flex up as we go into the peak of the season.

Okay. And how high can utilization rates get if you're at 73, what's kind of a peak utilization?

We'd like to believe we can get into the 80s. You know, some of them are off the road for repair and maintenance, some of them are switching from one application to another. We never -- it would never be 90. There are days when some classes are 90, but generally to the mid 80s would be a good -- a good utilization. We think we're in good spot there.

We calculate this on a 7-day week. So if you have customers who bring them back on Friday and they are not re-rented until Monday, there's 2 days, so there's 2/7 of that calculation that goes out. If things are really so heavy that you were carrying those over and they were keeping them over the weekend, you would see their utilization go up. But there's a natural decline that will happen over weekends.

That makes sense. When I look at the guidance, the $2.79 to $2.85, excluding the gain. How much -- what's your assumption in there for gains on sales going through the rest of the year?

On used vehicle sales?

The equivalent of the 10.6 million gains on equipment sales that you listed this quarter.

I would say we're -- for the second half we're probably looking at an average of what we saw in the first half.

Okay. So just kind of double the year and that's where you're at?

Yes.

Yes.

That's exactly -- that's good.

Thanks a lot for the time everybody.

You're welcome.

Thank you. Our next question comes from John Barnes. Please state your company name.

Credit Suisse First Boston. Good morning, guys.

Good morning.

Good morning, John.

Greg, if you had to take a look at your businesses today and compare them to where we were in, you know, the last peak of an economic cycle, I guess in late '99 and 2000, where do you think your business stands today versus that period of time?

Well, that's about when I started. In fact, I haven't felt like I've seen too many peaks during the economic cycle. I would say that in answer to your question, that we probably collectively feel a lot better about our cost structure and infrastructure relative to that peak and we now have some things in place, such as centralized asset management, that didn't exist at that time. So I think in terms of dealing with, planning for and gaining leverage from the peak, we feel considerably stronger and I think that the results reflect that.

Okay. All right. Tony, if you look out, you know, you talked about the pipeline is in pretty good shape. I think you referred to it as robust. A couple of things; you know, can you give us an idea of where you stand in terms of, you know, kind of converting that -- the pipeline into new business wins, you know, what kind of success you're having there?

And then, you know, also, you know, as you look at the pipeline, can you give us an idea of how much of that business is business that is a brand new customer that you've never done business with and how much of that pipeline is business where you've got 1 or 2 facets of the -- you know -- the Supply Chain management already and you're just as you put it, spreading the tentacles out a little bit?

Okay. John, your first question with regard to conversion. Our general pipeline is double what it was this time last year and at the beginning of the year as I had stated. But our in-the-hands of customers where we've already done the design, already worked through the technology proposal, already made the presentations to the customers is actually up even much more than double.

So for a number of those opportunities, we are in the process of either working through some verbals or in the process of conducting tours at existing locations because they're very interested in us and we made the final down-select, the number 1 or number 2 position. And again, the in-the-hands of proposals, going through tour mode and things like that, and having them look at preliminary drafts of the nature of our contracts is up even more than the double of the pipeline. So we feel very good about that and as I had stated earlier, we think that bodes well predominantly for 2005 because it may be tough to really impact dramatically 2004 on that basis.

With regard to your second question, on the composition of the pipeline, as well as the composition of in-the-hands of customers, it's about a 60/40 I would say. Where about 60% of it is with existing customers, particularly in our automotive and industrial side of the house and about 40% of it is with brand new customers within our [inaudible] side of the house as well. So I'd say overall it was about 60/40, and our hit rate historically has been better with existing customers where we already have execution credibility well-established and where we're already integrated into those organizations and we are simply division-hopping or subsidiary-hopping or adding more distribution centers or adding more locations. So to the answer your second question, I would say roughly about 60/40.

Okay. Alright guys, that's what I had. Thanks so much.

You're welcome.

Our next question comes from David Ross. Please state your company name.

Legg Mason. Good morning, everyone.

Good morning.

Good morning.

I wanted to talk a little about dedicated. You know, why, you know, there were non-renewals with the supply/demand dynamic out there and the truckload space, it seems like a lot of carriers are looking to look up capacity going into the second half of the year and I was wondering what the tone of business is there in general and why it's not growing more.

I'm going to ask Tony Tegnelia to comment on that. Last December to try to gain some synergies on what we're doing in transportation and freight management, we've worked on trying to work those groups together with Supply Chain. So that's why I'm going to have Tony speak to the DCC question you asked. Okay?

Dave, a couple of points about DCC. We are in the process right now of continuing our integration of DCC into our Supply Chain side of the house where we have very strict processes and procedures and methodologies for operations and we think that's going well.

We are in the process of reconstructing our sales and marketing force and also our sales and marketing strategies in that product line, and I think most importantly, we're going through a process of refreshing and modifying the business model on DCC so that we can go competitively against what's in the marketplace today called Really Dedicated Capacity, which is a different model than our more pure Dedicated Contract Carriage operations.

Some of the business that has been terming out, that we have not been renewing, is going to reverse outsourcing, where they're taking it back to private fleet and some of the dedicated operations, where all of the drivers and the network and the vehicles have been purely dedicated to the customers are going to dedicated capacity, where it would be up against the more traditional irregular route truckload drive and carrier and we're in the process right now of modifying and refreshing our model to go head-to-head against that slightly different change of model. The pricing is a bit different. And it's more competitive in dedicated capacity than it was in dedicated resources and we're also looking at your overhead structure there and our pricing there as well so that we can re-gen the sales growth that we know we need to do.

Along with rebuilding that sales force, we are also rebuilding the pipeline in that organization as well. We feel that this rebuilding process and this business model modification process will continue through all of 2004 and we believe we'll have improvements in 2005.

Thank you, that was helpful. The other question I had is your rental fleet, could you kind of break down the rental demand I guess by class of tractors?

Rental demand by tractors?

Basically what I'm trying to get at is Class A tractor.

Class A is in the 80s.

Okay.

Very busy.

What's the year-over-year growth in that?

In the fleet?

Yes.

300 more tractors on the road.

Okay. Thank you very much.

You're welcome.

Our next question comes from Jon Langenfeld. Please state your company name.

Baird. A couple of follow-ups here. Greg, was the restructuring that you talked about in the IT system side, was that anticipated back in December when you gave your outlook?

In December, last December?

Yes.

No.

Could you give maybe a little background on kind of the decision process there and then also what sort of benefits that provides, you said potentially in the '05 year?

In 2005, it's premature to say because we're still calculating that and we would incorporate that when we do the 2005 plan. And the first part of that question?

Just wondering what the -- what the -- maybe some background on why you're transitioning out of this contract.

Sure, John. I'll handle that. We've been looking at our IT area for a number of years and I think have shared, you know, a number of different changes that we've made that have helped us reduce costs in a lot of areas, improve delivery. In this particular area, it's a contract-run infrastructure services. It -- we were involved in a long-term contract and it was something that we have been evaluating. I think the decision point for us was really getting to a point where the termination penalties on this long-term contract combined with the cost savings we thought we could get made sense. So we think this does have good pay back. And also, our readiness to in-source this in the organization because the organization has been going through a lot of change. So part of not doing it earlier was readiness as well as the financial termination penalties. So it will give us cost savings that will be part of the plan outlook we share later in the year, and also gives us the flexibility now that we're out of this long-term contract, we think to manage the cost more effectively over a number of years going forward.

And you will be fully transitioned on your own as of '05?

Yes, by the end of the year.

End of this year, okay. And then, sorry to be redundant. On the headquarters building, Greg, I think you threw out a number of 1.3 million additional. Is that a monthly expense?

No, that's for the last 6 months of this year on --

Okay.

Lease-back.

That's what I figured. And then a modest decrease in terms of as you get into that new facility, a modest decrease in expenses related to that versus what you were paying for the first 6 months of this year?

Yeah, I think on the cost, once we're into the new building, if you incorporate kind of all-in costs, I think it will be probably close to a push. We're not looking for a big move up or down related to the new facility. It is a much smaller facility than we have today. We're in a very large facility that's not very efficient. And it's also -- we're in a facility that would require significant investment to keep it running.

So on an economic basis, it was certainly good economic move for us but we're not looking for a big P&L move, particularly since it's a leased facility versus an owned facility year-over-year. Lease-back is a little bit more expensive but it's a transitional. It's only transitional until we get into the new building.

Okay. And then, finally, free cash flow side, you know, always a little bit difficult to get the hands around. But is there any reason why in this cycle if you just look at maybe a 5 to 6% fleet growth, why Ryder would necessarily -- why they couldn't stay free cash flow neutral to positive under that type of growth scenario?

Well, we would be even now if it wasn't for the acquisition.

It's possible; John, obviously the big driver's obviously going to be earnings and the proceeds on the used -- on the used equipment. You know, we haven't necessarily -- I don't want to speak to, you know, kind of a point estimate on growth, but it would just be as simple as the proceeds and the profit margin and obviously if both of those improved that would move the break-even point.

And I guess just looking at what you've done on the financial discipline side, you know, I guess I'm just -- what I'm trying to drive towards is, you know, you look back over the 10-year cycle from the mid '90s onwards, there was no free cash flow generated. You know, just trying to get some confidence level that, you know, if you're at a modest GDP type growth of the fleet, is that the point that Ryder's still okay from the standpoint of free cash flow? It sounds like you're saying, yeah, that's probably okay.

Yeah, we do. I mean, obviously if we get into stronger growth periods but again, as long as those contracts are rated right and we've got good discipline around the assets, which we do, that frankly that would be positive for us.

The '90s cash flow, we're under a very different model. And so much of that capital spend during the '90s was around early replacement, breaking leases early and that's just -- that's key in our new model is that we don't do that. And that's why we're continuing to share with you our asset management activities and results on page 14 and 15.

Well, great progress. Look forward to seeing more. Thanks.

You're welcome.

Thanks, John.

Thank you. I'd like to now turn the call over to Mr. Greg Swienton.

Okay. I think if that was the last call, we've just about hit our hour. So thank you all for your participation and your support and have a good safe day and nice weekend.