萊德系統 (R) 2004 Q4 法說會逐字稿

Good morning and welcome to Ryder Systems fourth quarter 2004 earning release conference call. 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, you may begin,

Thank you, Tina. Good morning and welcome to Ryder's fourth quarter 2004 earnings conference call. We'd like to begin with a reminder that in this presentation will you hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on managements 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 mornings 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 Greg Highland, Executive Vice President of Fleet Management Solutions; Dick Carson, Senior Vice President of Fleet Management Solutions; Tony Tegnelia, Executive Vice President of the U.S. Supply Chain Solutions; and Bobby Griffin, Executive Vice President of the International Operations, are available to answer any questions you may have at the conclusion of our presentation. With that I'l turn the call over to Greg.

Thanks, Bob, and good morning to everyone. I'd certainly want to welcome each of you to today's call. Today and this morning we will review our fourth quarter results and year-to-date, update you on a number of other items and review our outlook for 2005 and then we'l certainly open up the call for all of your qua -- question when would we're done. Let me begin with an overview of our fourth quarter results, which for those of you following on the -- on the Powerpoint on the web is on page 4.

Earnings per diluted share were $0.96 for the fourth quarter 2004 as compared to $0.61 in the prior year period. Our fourth quarter results included a net $0.14 benefit related to the completion of our 1995 to 96 Federal Income Tax audit, partially offset by provisions made for loss contingencies related to recent developments in the audit of the 1998 to 2000 period which still remains open. Excluding this tax benefit, our earnings per diluted share were $0.82 as compared to $0.61 in the prior year, and as compared to a range of 75 to $0.78 per share projected during our last call in December. Overall, while the fourth quarter can always have some uncertainty to it associated with the holiday season, we saw good strength through the quarter. Fleet management solutions posted revenue growth of 17 percent, on 10 percent on a dry basis excluding fuel revenue versus the prior year. U.S. lease revenue increased for the quarter primarily due to our 2 acquisitions from early in 2004.

While we continue to experience positive sales trends versus last year with increases in both replacements and expiring leases and growth in new lease business, there is often a lag in revenue versus sales. We're optimistic that our positive sales trends will continue and expand, given improved confidence among our customer base and execution of our sales initiatives. We've also experienced for the first time, in probably over four years, modest organic growth in the size of our leased fleet. We continue to see strong revenue trends in our commercial rental product line with 22 percent growth quarter-over-quarter, consistent with the improvement we saw in the third quarter. The increase in rental revenues for the quarter resulted from both improved pricing and higher levels of rental activity as well as from additional rental vehicles obtained through the acquisition. Net before-tax earnings and Fleet Management were up 62 percent. Fleet management earnings as a percent of dry revenue were up 400 basis points to 12.4 percent.

Continuing on page 5, from an earnings standpoint Fleet Managements results benefit -- benefited from our acquisitions, improved commercial rental performance, stronger vehicle gains and lower pension expense in the quarter. We are pleased that this quarters results for FMS continue to prove the strong earnings leverage that we believe exists in the overall business and we expect to continue to demonstrate good earnings leverage on future revenue growth. Turning to the Supply Chain Solutions segment, while total Supply Chain Solution revenue was up, operating revenue was essentially flat for the quarter. Revenue from new contract start-ups during the quarter offset anticipated revenue declines from certain customer contracts that were not renewed in prior periods. Fourth quarter earnings in Supply Chain Solutions were down versus the prior year, as we identified last year our prior year results were favorably impacted by approximately $3 million related to customer incentive payments and a resolution of some contractual matters. Earnings in dedicated contract carriage were down for the quarter, a decline in revenue due to termination of accounts was exacerbated by upward operating cost pressures.

Turn to page 6 we'll comment on earnings per share for the fourth quarter. Reported earnings per share increased by $0.35 to $0.96 as compared to $0.61 per share last year. Excluding the net tax related benefit I previously mentioned, fourth quarter earnings would have been $0.82, up $0.21. Fourth quarter results in both 2004 and 2003 also included a net restructuring another charge of $0.03. Restructuring charge in 2004 was related to the in-sourcing of an information technology infrastructure contract. This charge was previously identified during our third quarter earnings call and was included in our fourth quarter forecast. We've also highlighted, in the memo item in the footnote, the impact on EPS of pension expense that totaled $0.15 per share for the fourth quarter in 2004 as compared to $0.19 per share in 2003.

A 400,000 share increase in the average number of diluted shares outstanding, versus the prior years quarter, is due primarily to the number of employee stock options exercised. As a reminder, in July of 2004 we announced a 2-year, 3.5 million share repurchase program designed to mitigate the impact of employee stock purchase and option plans. During the fourth quarter we repurchased approximately 500,000 shares and this brings the total number of shares repurchased under this program to 1.4 million shares at an average price of 46.08 per share. The 27 percent tax rate in the quarter was positively impacted by the net tax benefits related to our Federal Income Tax audits, excluding this benefit the tax rate would have been 37.8 percent for the quarter.

Continuing on page 7, full year earnings per share increased to 3.28 compared to 2.12 per share before accounting changes in 2003 or as compared to 2.06 including 2003s accounting changes. Excluding the $0.23 per share gain from the sale of our headquarters complex that was previously reported, as well as the $0.14 per share net benefrit -- net benefit from the tax resolution this quarter, earnings per share would have been 2.91, up $0.85 or 41 percent over the prior year. As highlighted in the footnote, this year's results included a net restructuring charge of $0.06. The full year EPS impact of pension expense was $0.60 in 2004 compared to $0.82 in 2003. The 34.9 percent tax rate for the year was positively impacted by the net tax benefit in the fourth quarter related to our Federal Income Tax audit. Excluding this benefit, the tax rate would have been 37.7 percent for the year. And finally, our full year return on capital improved to 7.7 percent as compared to 6.5 percent last year.

Turn to page 8 regarding the business segments for the fourth quarter. Total revenues for the quarter were up 12 percent while pretax earnings increased by $24 million, or 39 percent. In Fleet Management Solutions, revenue was up from the prior year by 17 percent or 10 percent excluding fuel. Fleet Management Solutions earnings were up 34.4 million or 62 percent. The increase was largely driven by the impact of acquisitions, strong commercial rental performance, improved vehicle gains and reduced pension costs. Commercial rental utilization in the quarter was strong at 77.9 percent, up almost 2.5 percent from the fourth quarter 2003. We are continuing to focusing on driving higher commercial rental rates and utilization. Rental results are also benefiting from lease customers who are now awaiting delivery of new lease vehicles and are utilizing rental equipment on an interim basis.

In Supply Chain Solutions total revenue was up 5 percent in the quarter. Operating revenue which excludes freight under management was flat. Net before-tax earnings were down from 13.9 million in the fourth quarter last year to 11.4 million this quarter. As I mentioned earlier 2003s results benefited by $3 million from strong customer incentive payments and contract resolutions in the fourth quarter of 2003. On a percentage basis NBT as a percentage of operating revenue was 4.6 percent in the fourth quarter, down from 5.6 percent including the 3 million of positive items last year, but above the 3.8 percent realized through the first three quarters of this year.

In Dedicated Contract Carriage were we saw 1 percent of decline in revenue due to non-renewals of customer contracts partially offset by increases in fuel cost that were passed through to customers. Net before-tax earning declined from 11.5 million to 6.8 million due to the impact of these contract reductions as well as to increase safety and insurance expenses and to higher driver related costs. Unallocated essential support costs were up largely due to higher performance based compensation earned, and Sarbanes-Oxley compliance costs that were not allocated to the business segment. Earnings after all essential support costs improved by 36 percent before restructuring and other charges, or by 39 percent including these items. Our quarterly net after-tax earnings were 62.6 million for the quarter, or 53.4 million excluding the nex -- net tax benefit, up 36 percent as compared to 39.4 million in the previous year.

Turning to page 9, the full year total revenues were up 7 percent while pre-tax earnings increased strongly by approximately $119 million, or 56 percent. In Fleet Management Solutions, revenue was up from the prior year by 11 percent, or 8 percent excluding fuel. FMS earnings were up by almost $118 million or 60 percent. The increase reflects strong earnings leverage on incremental revenues from acquisitions and commercial rental, as well as stronger gains on equipment sales and reduced pension costs. In Supply Chain Solutions both total and operating revenues were down by about 1 to 2 percent. Supply Chains' full year next before-tax earnings were 37 million, down 7 percent from 40.1 million in the prior year.

On a percentage basis NBT as a percent of revenue was down slightly from 4.2 percent to 4 percent. In Dedicated Contract Carriage we saw a 2 percent decline in total revenue primarily due to non-renewals of certain contracts and this negatively impacted full year earnings which are down 5.7 million. Full year earnings after all essential support service costs improved by 48 percent before restructuring and other recoveries, or 56 percent improvement including all of these items. Our full year net after tax earnings were 215.6 million, or 191 million excluding the headquarters sale and tax benefit. Therefore up 45 percent as compared to 131.4 million in the previous year. At this point I'll turn it over to Tracy Leinbach, our Chief Financial Officer, who will come -- cover a number of other items beginning with capital expenditures.

Thanks, Greg. Turning to page 10, full year capital expenditures before acquisitions totaled just under $1.2 billion for the year, up $440 million, or 61 percent from the prior year. Higher capital spending was driven primarily by increased activity in our leased business, where our full year spending totaled $863 million, versus $459 million in 2003. Our capital plan for the year did antes -- ticipate lower levels of term extensions in 2004 as customers began to replace lea -- lease units at a higher rate. We saw this trend towards higher replacement activity throughout the year along with some capital spending for additions of new lease vehicles.

Our actual full year capital spending came in slightly under our original business plan. As you may recall, at the end of the third quarter we had expected our spending to be under our plan by an additional $80 million. Our final results came in above that expectation due to heavier than forecast lease vehicle deliveries during the fourth quarter. And, as Greg mentioned, we were pleased we saw organic growth in our lease fleet during the fourth quarter.

In commercial rental, full -- full year spending was up modestly year-over-year as we had minimal increases in our fleet size outside of the units we acquired as part of the acquisition of Ruan. The 149 million in acquisition expenditures relates primarily to this purchase of Roan Leasing Company in March of 2004.

On page 11, you can see our total debt levels have declined while equity as increased as compared to the prior year-end. Balance sheet debt is down $33 million for the year and is down as a percent of equity at 118 percent. Including our off balance sheet debt total obligations of $1.9 billion are down $25 million as compared to the prior year-end. Total obligations as a percent of equity at the end of the year were 129 percent down from 146 percent at the end of 2003. Our equity balance at the end of the quarter was roughly $1.5 billion, up from $1.3 billion at the end of 2003, as the company's improved earnings were partially offset by 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. We utilize both fixed and floating rate debt to achieve this match and generally target a mix of 25 to 45 percent variable debt. At the end of the quarter the company's variable rate portion of debt was near the -- the midpoint of that range at 37 percent of total obligation. The company has significant capacity and liquidity to support our needs and future growth opportunities. As we accelerate growth we would expect, and are comfortable, with increasing the financial leverage of the company.

Turning now to the next page, you'll see that based on our preliminary consolidation, the company generated $156 million in free cash flow for the year as compared to $269 million in the prior year. The $156 million in positive free cash flow this year includes $149 million in acquisition spending. The year over year reduction, of roughly 113 million in free cash flow, was driven by this acquisition spending as well as by higher levels of capital spending on lease vehicles. The improvement in our net earnings, higher proceeds from the sale of used vehicles and the impact of lease financing contributed positively to free cash flow results during the year. Cash flow also benefited by $44 million from the sale of our headquarters complex.

Continuing on to page 14, you may recall that we laid out our business -- when we laid out our business plan for 2004 we established a target for cost reductions and process improvement initiatives of 13 to $18 million. Based on our full year performance we exceeded that target with approximately $20 million realized during the year. We continue believe there are good opportunities to improve our business processes and reduce costs going forward. In fact, our 2005 business plan outlined an additional 9 to $13 million of targeted cost savings for 2005, which are backed up by detailed implementation plans. We're also investing this year in some areas of the business, such as in our shop maintenance systems, which will result in improved efficiencies in future years.

Turning to page 16, I'd like to update you 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 prices firm in the market and anticipate this trends will continue in the near term. We've taken a number of steps to enhance our used vehicle sales capabilities, including expanding our retail used vehicle sales network. As a result of our efforts in the fourth quarter we sold 13 percent more vehicles than in the prior year. The higher number of units sold, combined with modestly firming prices, contributed to higher proceeds and stronger vehicle gains when compared to last year.

We continue to focus on reducing the number of non-revenue earning vehicles in our fleet. That's made up of 2 components. Vehicles that have not yet begun to earn revenue and those vehicles that are no longer earning revenue. The number of vehicles not yet earning revenue increased during the quarter reflecting higher level of sales and replacement activity and lease. We would expect this number to grow modestly as the volume of lease activity an new vehicles coming into the fleet increases. The number of no longer earning vehicles, which we define as vehicles that have not earned revenue in the past 30 days, was down versus the prior year reflecting higher used vehicle sales and improved rental utilization. Our focus is on continuing to expand our sales efforts to effectively manage the number of no longer earning units. At this point I'd like to turn the call back over to Greg to review our earnings outlook.

Thanks, Tracy. On -- turning to page 18. In December we presented our 2005 business plan and we provided a 2005 EPS forecast range of $0.55 to $0.58 for the first quarter, and 3.20 to 3.30 for the full year. And at this time we are maintaining these EPS forecasts. As we discussed during the business plan call, our focus is on profitable growth in all our business segments. In commercial rental we expect continued improvement in both pricing and utilization levels. Our performance during the fourth quarter, as well as the initial weeks this year, continues to confirm our belief that the rental market remains strong. We plan to increase our rental fleet size in selected vehicle classes, with strong utilization trends, while decreasing our fleet size in other classes. Our overall rental fleet size is planned to increase during 2005 but will remain well below its historical peak level. Additionally, our rental fleet is appropriately aged and depreciated to allow to us reduce capacity in the unexpected event that economic conditions should weaken.

In fully service lease and maintenance our sales results in each quarter of 2004 improved over 2003s results. Additionally, while they remained at modest levels, we're encouraged that our fourth quarter net lease sales were the strongest quarter of the year. We are clearly focused on improving our results going forward in both knew sales and in customer retention. We have a detailed action plan in place in the sales arena and are working through our plan with the same diligence that we have shown in other areas of the business. The organization clearly understands our mission in this area and I am confident in our ability to execute what our fundamental sales management and execution initiatives to improve our organic growth rate and lease going forward.

In Dedicated Contract Carriage we're continuing the work that has been underway to enhance the value proposition of this service to customers and prospects. We are focused on improving targeting of those accounts that value the high service levels we can offer in this product line. We're also continuing to increase the alignment of this business segment with our Supply Chain Solutions area in order to leverage the strong operational processes that we've had good success with in Supply Chain and believe that over time we'll see stronger results from the Dedicated segment. In supply chain solutions we're somewhat cautious about the near-term impact of volume levels in our U.S. automotive related business.

We are pleased, however, that we've begun to see results in new contract sales due to our 2004 initiatives. For example, you may have seen in the press re -- recently that we were awarded a new piece of business with General Motors for their Lansing facility. While we aren't able to share specific details, it is an example of an important new contract win resulting from our sales effort. In this award, as with many others, there is a long lead time for operational start-up to occur and, therefore, for revenue recognition to begin. However, over time we expect to benefit from these types of successes in new Supply Chain awards.

Before we go to the live Q&A session I wanted to address one question that has already come up. As you may have noted our fourth quarter 2004 revenues came in higher than was forecast during our December business plan call. As a result, some of you are interested in understanding our view of the 2005 revenue growth projections that we provided in December. If you look at the numbers, you'll see that our actual 2004 revenues were in fact about $100 million higher than previously projected. Approximately 60 percent of the variance was due to fuel revenue and fleet management, which is largely a pass through to customers, as well as to freight under management revenue and supply chain. These items are harder pre -- harder to predict and are not major drivers of profitability in the business. In fact that's why we break them out separately when we do our reporting.

The other 40 percent of the variance was in operating revenue. We're pleased with the performance in the fourth quarter across the business which was higher than forecast, particularly in rental and supply chain. The higher than projected operating revenues were largely due to strong commercial rental performance and stronger than anticipated volumes in supply chain. As I said earlier on the call, we continue to expect commercial rental to perform strongly during 2005. However, we are more cautious around projected automotive volume levels and supply chain. While we continue to believe that the revenue growth rate outlined in our 2005 business plan should be achievable in terms of the dry operating revenues of the business we are not updating our forecast at this point. At this time I'd like to turn the call over to the operator who will open up the call line for additional questions.

Thank you sir. At this time if you wish to ask a question, please press star 1 on your touchtone phone. You will be prompted to record your name. To withdraw your question you may press star 2. Again, to ask your question please press star . Our first question today comes from John Langenfeld, please state your company name.

Robert W. Baird. Good morning.

Good morning.

Good morning, John.

A -- a couple of questions here. First on the -- the lease -- full service lease side, I guess it's encouraging. You -- you talked about the best sales quarter of the year. You talked about the fleet growing. How about on the retention side, how has that trended through the year and -- and how would you anticipate that going forward?

We -- we haven't disclosed a lot of information because it has a fair amount of sensitivity competitive wise. However, I will say that in the tracking that we've done, the retention levels have improved and we've had a much better year in '04 than we did in '03. And I think it's also an upside for the business.

Okay. So moving forward to '05 you think there's opportunities that still remain there?

We think there are opportunities and that is our plan. It is our plan both in numbers and in the way we're having our -- our organization perform.

And then do you have signs, I mean you -- you gave the data point in terms of the best sales quarter of the year, but I guess are there other signs that when you look at the sales strategy and -- and the change in the sales sater -- strategy that it's working and that you're on the right track?

I'm -- I'm convinced it's on the right track. You know, there's a lot of components that -- that comprise sales efforts, sales results and then ultimately revenue recognition. I think that we have a stronger, more capable team. I think we do much more measurement and focus in a lot of key areas that I think everybody now understands and I see a lot more deliverables in terms of results. So, a lot of those things are qualitative but I think they comprise a lot of good, positive effort.

The other thing is, that there's been a run up to all of these changes. You know, a couple of years ago we -- we said first we'd -- we'd thought we'd see the replacements, then we'd begin to see the new additional sales volume which we're beginning to see. And as those sales and pieces of business close, there's also a lag from the time that the equipment can be ordered to the time it's delivered. So, we think that we'll continue to see that -- that gradual improving level of performance.

Okay. Good. And then on the asset side, what -- what would be the cause of the -- the run up on the new replacements -- or early replacements, excuse me, and -- and is that a good thing? Can you reminds me how that works?

You're probably on the appendix page.

Yes.

I think that wo -- you showed a little bit of increase.

Mm hmm.

There is a little bump up there, probably due to a couple of specific customer instances that that might have made sense to do. That's not a trends that -- that we believe goes anywhere back to or near past practice. So we want to keep it down at lower levels, but occasionally those will come up.

Okay. But nothing to read in there? And -- and then I guess finally on the guidance, can you remind me how you've accounted for options? It look like from the footnote disclosures you do about 8 to $0.10 a year in -- in option expenses and how that factors into your guidance once you get to the second half of the year.

Right. For 2005 we have not factored in any options expense. In the second half of the year when that law goes into effect, then we will disclose the -- the current numbers and then that will be identified.

Yes, John, for -- for what you'll see in 2004 on a pro forma basis will be at $0.12. We did have some years that it went lower than that because of some forfeitures, but $0.12 is the current level.

Okay. Great. Thank you.

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

Hi. Credit Suisse First Boston. Good morning, guys.

Good morning.

Good morning, John.

Greg, if -- if -- if I recall from your guidance, a look at December and -- and the time we spent together since, you've talked a little bit about the cost saving initiatives are going to be a bit slower in '05 than they were in '04, just the magnitude of the cost save. But, I'm curious in -- in spec -- with specific focus on the dedicated contract management and -- or carriage and the supply chain management, you know, is there some magic bullet that -- that helps you, you know, begin to reap some immediate cost benefit there or is this a matter of you need additional transaction volume through those two pieces of business to see a material change in the profitability of those two units?

Well, as many thing in life, John, I wish there was a single easy solution or a -- or a silver bullet. There isn't. And I think that your question encompasses some -- some different aspects in various parts of the business. I think in terms of cost initiatives, we believe we have opportunities in the company and we're going to keep after them. We've also said that even our more traditional business, in fleet management, we think we have good cost initiatives. In fact built into every managers plans in that segment, as in all others, they've got cost initiatives to work on productivity improvements, technology enhancements, to finds the additional cost initiatives that just make sense in the way that we want to improve our business. So they're not -- they're not, you know, to the order of magnitude that we've had in past years but they'e significant and they will add improvement to the company.

In supply chain we've done a lot of margin improvement. I think our issues now there are to leverage what we already have in place and I think when we -- we see the revenue recognition from the sales that we've made and the volume improves, especially in automotive, I think that you will see that leverage immediately. On the third, on Dedicated Contract Carriage, I think we have several things to do. We've made some organizational realignments that I mentioned.

We want them closer associated with Supply Chain so we can take advantage of transportation management, back haul opportunities, logistics engineers. All of whom have done a fantastic job in turning the Supply Chain business around to profitability a couple of years ago. And at the same time I think we need -- we frankly need to a better job in sales and marketing and targeting, which is what the plan is in Dedicated Contract Carriage. So, you know, there's no single answer to all of them but I think we know what we need to do and we are targeted on all of those.

Okay. In terms of the dedicated business, I think you indicated that was the business that saw the higher driver related cost and also some insurance adjustments. Can you just provide a little bit more detail on that?

Sure. And -- and Tony Tegnelia is here and he's managing that segment. I will let him comment on that.

John, let me mention to you that the earnings decline in the fourth quarter was basically split 50/50 between the 2 areas on the insurance costs and also on the driver piece. Let me address the driver piece first. First of all, there is a shortage of drivers out there and we continue to compete in the marketplace to find those drivers. But we did see, in the quarter, about 100 or so, 150 basis points of increased costs as a result of those driver wage increases.

We have a very, very comprehensive recruiting and selection and training program for those drivers that has been in -- put into place and we feel that during 2005 we will -- we will balance out that issue and resolve that issue on the driver cost. So we feel very good about that. A large portion of our open driver positions today, which are being filled with outside temporary drivers which is more costly, about a 25 to 30 percent premium, is for growth opportunities, not necessarily for our turnover on the base fleet. So as we grow there is a slight bit of disintermediation before the permanent drivers are put in. But again, we have the HR programs in place for recruiting and we feel very good about resolving that as we go into '05.

On the insurance side for -- for the fourth quarter 2004 compared to the prior year, that was really an issue of some very favorable actuarial results that we had in the fourth quarter of last year for a true up of '03 in calendar '04. We were much more even steady as we charged the self -insurances to our program through '04. But on a full year basis. year-over-year for '04 to '03, the insurance were largely in line with the same portion of operating revenues had been. In 0 -- in '05 you'll continue to see that same steady state as well. So the programs are in place to stabilize that insurance reserving program and the programs are in place to recruit the drivers that we need to get that back into line with our business model.

Okay. Tracy, two very quick ones. Number one, Sags -- or Sarbanes costs in the quarter, you said were a little bit higher, can you give us the cost for your Sar -- Sarbanes efforts in 2004 and then what do you believe the costs are on a recurring basis going forward?

Sure, for the full year we estimate those cost to be $4 million. Half of that is what we'd call out of pocket expenditures and the other half is where we've had to dedicate significant numbers of Ryder employees on a extended basis to work on that. So, we think those are -- are really very hard costs. I -- I don't know what the number's going to be ongoing.

We certainly are working to sort through what we've learned through the first year and find areas where we can be more efficient. Obviously, there's not going to be a lot of the catch up work that we had to around documentation and -- and some of the other aspects of Sarb-Ox. But we don't have a -- a hard number on that but we would expect to be able to drive that number down.

Okay. And then lastly on the tax issue.

Mm hmm.

It sounds like we now have, kind of a -- a -- of a better idea of what the definitive numbers are, the 200 million of -- of penalties and related interest, I think is -- is kind of a new quantification, am I correct? And -- and if so, then, you know, what are we looking at at the potential, you know, what's the high-end of the range in terms of the potential tax liability as you negotiate with the IRS?

Okay. Well, the -- you know, what -- what we disclosed in -- in December was that we were approaching what we felt we were approaching the end of the field audit process around our 1998 to 2000 tax year. That's been in process now almost two years. And -- and what is typical with that process, we received notice from the IRS in November that they planned to challenge some of our positions. In December we disclosed that if the IRS were to prevail, so this -- this gets to your question of -- of what the maximum would be, we would owe $190 million of tax. I think at that time the interest number was $50 million. And at that time they had not made their penalty assessment.

We've now moved forward a couple of months, and as probably normal in the process, they have now added a penalty assessment of $100 million. Now that is if the IRS prevails. We feel very strongly about our position. We -- we intend to descends our defend our position in this process, and we have put what we think are appropriate accruals around our tax position. And that's -- that's where we are today.

Okay, so -- your. Okay, so your prior number was 190 million in tax, 50 million in interest, and the penalties had not been quantified yet so we were looking at a 240 number plus penalties. Now I'm looking at 190 million tax, and then is the combined interest and penalties 100 million, so my total number is 290,

No.

or is it 100 million over the 240?

It's 100 million over the 240. And then -- and then the interest numb --

We are looking at a total liability of 340 million?

That is the IRS position.

Okay. That's what I needed. Okay. Nice quarter, thanks for your time.

Thanks.

Sure.

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

Legg Mason. A -- just a couple quick questions. First on, going back to dedicated. Your know, revenues down, you know, margins are down, you explained that, with drivers and insurance. Where do you see, you know, margins trending over time in that business?

Hi, this is Tony Tegnelia, David. We -- we see the margins in that business increasing for a number of reasons. First of all, we are going to lever a lot of the capabilities that we have in our Supply Chain Solutions operation from an engineering point of view, a marketing point of view and from an IT point of view into that operation. So we see the quality of those earnings improving over time for that leverage. We also sea opportunities to improve there because of our execution and our new operating chain of command, which is how supply chain is structured and now DCC is structured in that same vein. So, as we lever the capabilities on Supply Chain from a staff support point of view, in engineering and IT and also operations excellence in that perspective, we see opportunities to improve the quality of the earnings.

Also, as we gain further momentum on the sales and marketing side, and in '04 compared to '03 there was some degradation in margin because of increased investment in engineering and also in sales and marketing. As the momentum gains on those pipelines we think the incremental profitability from those opportunities will also improve the quality of earnings as well. So, momentum on the sales and marketing side, leverage on the engineering and also the IT side from Supply Chain, and improved operation excellence. We think there is excellent opportunity to improve the quality of earnings in DCC. And as we continue to work with our sister division, FMS, on the equipment side the combined profitability is the great opportunity for Ryder overall.

Tony, that's helpful. Also on the driver side. You -- you said that driver costs went up, I guess you had wage increases last year. Do you have any wage increases planned for 2005?

We see the driver shortage continuing on into '05 and, of course, we need to meet the market on new accounts. We're able to price the current driver wage into new opportunities and into our new projects and that's working really quite well. And, on existing ones, we continue to work the costs down to try to offset some of the increased driver costs as a result of turnover. But, as I mentioned in the past, our DCC solutions are very attractive to drivers with regard to recruiting. 95 percent of them are home every evening. We have the new FMS vehicles in there which they finds very attractive. We have very attractive safety programs and benefit programs such as 401 K, with them.

So our recruiting is very competitive and actually far more attractive than some of the LTL and truckload carriers and their being home every night really helps us quite a bit as well. And -- and also our turnover is a third of the industry rate. We are at about the 30 percent range. The industry in general approaches 100. So we are not really suffering from that as much as the industry is. But relative to our historic profitability we need to make that up. But we will see those costs continues to improve over '05 as we stabilize the recruiting process.

And did you say earlier that, you know, when you get a new dedicated contracts you hire part-time drivers at a 25 to 30 percent premium until you find full try -- time drivers for those routes? If so, you know, how -- how does that work and where do you fine the part-time drivers?

The -- the -- typically what we do is when we win a new piece of business and -- and when we feel that we're very confident that we will, we go out and recruit as quickly as we can so that the full-time Ryder drivers are there, selected, trained and in place when we begin the operation. It doesn't always quite work that way and sometimes you may have to start a few routes with outside temporary drivers, which does have about the 30 percent premium above the driver total package. That will not last for a long period of time.

That typically is a short period of time. And we'll go to driver leasing companies where we have a long-term relationships with them and preferential pricing with some of those companies for that disintermediation period of time until we do get the Ryder full-time drivers in there. But, we are seeing a lot of new business come on that we're selling and a -- and a lot of our new open positions do relate to that growth. But we try to mitigate that disintermediation time, of course.

All right and then one quick question for Tracy. The tax benefit in the quarter, $0.14 a share, just to get a little more specific was that, you know, 9.0 million, 9.2 million in terms of, you know, gross cost.

Yes, it was 9.2 -- 2 million.

Okay. Thank you.

Mm hmm.

Okay, our next question comes from Mark Rosa. Please state your company name.

Thompson Davis.

Hi Mark

Good morning.

Hi, Mark.

You mentioned your pension expenses were lower in 2004 compared to 2003. Do you anticipate that these expenses should increase in 2005 and 2006?

Well -- well, Mark, when we put together our 2005 plan we -- we were looking at being able to keep our pension expenses flat with 2004. Now we're -- we're in the process of -- of doing all the work to finalize the 2005 number. We'll be updating our white paper on our website around pensions before the ends of the first quarter but we -- we don't have that completed yet. But our -- our plan was for it to be flat.

Okay. And as far as the international business, that has grown sequentially the past few quarters. Is there anything unusual there that -- or non-recurring that would make that happen or is it just business increasing?

In -- in general the trend has been that we've had additional sales and additional revenue in all international segments. The only thing that is unusual is the way we accounted for one contract in Asia that we talked about last year. So the revenue difference doesn't show up as much but the tail on that is in the first quarter of this year and I think you'll see -- you'll continue to see what we forecasted, positive revenue growth in the inter -- international segment.

Okay. Thank you very much.

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

Thompson Davis. I wanted to ask you about the options expense that you mentioned would be beginning in the second half of the year. Is that included in your 3.20, 3.30 plan for this year?

No, it is not, David.

Okay.

You see, when we went out for our forecast for 2005, that excluded the impact of stock option expensing and we'll update that later in the year as we get closer to our implementation plan.

Okay. Thanks. And the fourth quarter included restructuring, the $0.03 restructuring charge after tax. What -- what about, oh, in 2005. Are those restructuring charges likely to continue especially in the first quarter?

No, they are not. The restructuring in the fourth quarter was related to some in-sourcing of some information technology operations. I think we announced that in the third -- third quarter and that should end in the fourth quarter.

And if we did we wouldn't ask for any forgiveness for those. We've -- we've said that those occur during the normal course of business and we absorb those into our earnings forecast.

Okay. And what about a tax rate for this year, Tracy? What would you expect?

Our plan rate was 38.5 percent for 2005.

Okay. And lastly, I just was interested in the fact that your -- there's so much of your revenues in the fourth quarter in the commercial rentals business created by customers waiting for vehicles in the full-service leasing contracts. Does that -- that mean that -- that during the course of '05 the revenues from those customers in the commercial rentals goes down and -- and transfers up into the full-service lease area revenues?

Yeah, David, on -- on a specific customer basis that would happen when their lease truck would come in, it would happen, but we would expect to see continued good demand around rental for a wait new -- new lease type of applications as well as for just general rental demand.

Okay. Thank you very much.

You're welcome.

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

Bear Stearns. Good morning, everybody.

Morning.

Morning, Ed.

Do you know what the commercial rental fleet utilization for the quarter, if not for the quarter for the months were within the quarter, versus a year ago?

I know that we -- we said that it was up 2.5 percent compared to last year and I think it was --

Ed, it was 77.9 percent for the fourth quarter. That's up 2.5 percentage points over the fourth quarter of the prior year.

Okay. And do you have a -- a reading for that in January as well year-over-year?

We don't, Ed, we don't have a -- a utilization rate for January.

Okay. And I -- I think you said it, Tracy, but I missed it, what -- what's the intension for glo -- growing the rental fleet in '05?

Our rental growth for '05 was about 5 percent on fleet size. And then we expect continued improvement in utilization and pricing.

Okay. And what did you grow the fleet in '04?

8 percent globally and that included some units that came over with our acquisitions.

Okay. Just kind of bigger picture as it feels like the -- the leasing is starting to come back now. It -- certainly -- we're getting that sense for you on the call more so than on the last several calls. Would you think that it's possible that both the rental and leasing could accelerate for several quarters? Or is it kind of natural, historically more that, as the leasing starts to kick in the rental decelerates a bit because it's -- it's the leasing turning to rental?

Ed, as -- as we've looked, kind of over the -- the past several cycles and -- and just looking at our cus -- customer base and rental demand, we would expect rental to continue to remain strong even as we see the leasing cycle kick in. Clearly it is the transactional part of the business, so, you know, we -- we will watch it very closely. But we -- we have good confidence level that 2005 will be another strong year for rental and that's why we are confident to add to the fleet while we continue to -- to look for improvements in -- in utilization and pricing. So, we -- we think rental continues to have good legs in terms of improvement.

Can -- can you get -- I mean -- the -- the commercial rental is up 20 percent now on 8 percent fleet, so you're getting a lot of pricing and utilization obviously. If you're taking the -- the fleet up 5, can you get that -- is there -- is there that much utilization in pricing to -- to -- to continue to get out there?

Well, we -- we said in our 2005 plan that we are not planning on the same levels of increase that we've seen over the last two years but, you know, the increase we think there still is significant increase there. I'd -- I'd also point out that as we look at our commercial rental fleet compared to our last peak say in 199, our fleet at the end of -- of 2004 is down about 13 percent from where we were in 1999. So we've, you know, we've really wanted to drive returns here. We have good visibility into the product line. We think it's appropriate to -- to continue to add to the fleet in 2005 and we will be able to do that without compromising the returns.

Sure, that makes sense. Do you -- do you have the utilization, what the fleet utilization was in 1999, when it was higher?

We are -- we do have that. That was I think peaked up out at about 76 percent was the peak in 1999.

Okay.

And -- and -- and I would say there's -- there's a good amount of [INAUDIBLE-- talking at same time] pricing.

Somebody asked before, I think it was John Barnes, about the IRS and -- and, I think that you had said kind of the worse case scenario, the best that you're defining it now is about 340 million or so plus whatever interest rate -- interest, you know, accrues from here. Are you accruing for that going forward in any way on an ongoing basis, and if so, is that in your earnings estimates go -- your guidance going forward?

Well, the -- the $340 million number represents the IRS's position. We have read the details of their position. We disagree with it. But, we -- we believe, you know, we will defend our position. At the same time, we believe we have appropriate cr -- accruals around the tax positions we've taken. So, at this point we believe we're where we need to be. The only -- only additional thing we'd accrue would be interest, but that's a relatively modest number.

Or how about legal fees, are there anything like that?

That -- we're absorbing as -- as -- that's in our normal legal overhead. There's nothing to report.

Okay, and then one last question. It's -- it looks like if you look at the number, the unallocated central support expense is up, I know you talked about extra incentive bonus at the end of the year, but really throughout the year we've seen it -- it up year-over-year. Can you talk to directionally how that should look going forward next year and -- and maybe some of the reasons for why that's increased recently?

Yes, the -- the plan as I recall it, I'm doing this from memory, the 2005 plan over 4 was flat. So there were not -- there were not any increases in the essential support costs. And you have identified those that came up this year. But, you know, they were somewhat exceptional. And Sarbanes-Oxley, as we've said before, we don't expect them to maybe be quite as high as they were going into 2005.

Right. And we did take those Sarbanes-Oxley costs at the top level. We did not allocate those out to the businesses.

Well, you certainly earned your bonuses, thanks a lot, guys.

Okay, thank you.

Thank you.

Okay, our next question comes from Greg Burns. Please state your company name.

Greg Burns. Sorry, JP Morgan. Thank you.

Sure.

Greg, I don't want to take anything away from Fleet Management, cause you clearly had a terrific quarter there. But, I'm really confused on the Dedicated side, so -- so help me out with this. I mean we're in probably one of the strongest trucking environments that we've seen with -- with company's hitting record ORs,

price increases on your old employer, the railroad doing quite well, and basically everyone seems like a name your price fourth quarter environment out there, and yet, not only did you guys lose share, but apparently you weren't able to get the pricing cost to offset your price increases. You're probably one of the few companies we follow that wasn't able to pass on higher costs. So, what am I missing here?

This is Tony Tegnelia , Greg. A couple of points. First of all, we do see a lot new momentum on the sales side on DCC. As a matter of fact, we are beginning to see some customers who have left DCC in the past several years and go to carriers, return back to the DCC market with much greater interest than they've had in the past. And that's because they cannot get the reliability of service as a result of the driver shortage from the carrier environment. So, in the second half of the year, and the momentum that we see going into 2005, we see a much stronger sales year for DCC.

On -- on the cost side, where there are new opportunities, please recall we're a contract business. So when we write new contracts we are getting current pricing on fuel and, of course, we are getting current pricing on driver costs as well. But in some of the historic contracts the prices are set for some window of time with the exception of some CPI clauses and reopeners. So as driver wages increase you may have to absorb some of those in the shorter time until a reopener presents itself or until you have the CPI clause really kick in. Now as we've stated, our -- our fuel is always passed on, any amount above our peg rates. So, we always recapture our fuel prices.

In an LTL or carrier type environment, it's not contract and so their ability to recapture in the very short term, any cost increases, is a bit easier for them to do in contrast to our contract business. But we are seeing good revenue opportunities. We are seeing people return to the DCC product line for more reliability of service coming away from the carriers. And as we have opportunities to take advantage to increase our costs -- our -- our pricing to recapture some cost increases from the drivers we really take that as we can. Again, we have no issue on fuel. We collect everything on fuel.

Right, right. And -- and just -- that helps a little bit. Just what -- what would you say the spot rate, I mean, there is a, you know, a -- a contract renewal rate, I guess. What is the pricing behavior in the market? I mean, is it up, you know 2 to 3 percent versus if you signed a deal last year? And then maybe what is, refresh my memory, what the average contract length is and would you say, in hindsight, those contracts perhaps were mispriced or is there anything you can do in the future to put a stronger escalator, because that certainly wages another costs seems to be a moving target?

Well, our -- our arv -- our average contract length is about 3 years. And -- and what we do in our pricing is take an estimated average cost of those driver wage, for example, over the life of the agreement and we will charge that. So at any point in time in -- in the early earlier part of the contract agreement you're probably ahead of the market, on the pricing to your driver wage, and you've -- you've -- it's a bit of a bell shape curve. You peak about out in the middle and towards the end you may be a little bit underwater depending on what's happened to driver wage. But typically, what we do is, we will price an average over the three-year agreement. We also have reopeners in a number of instances, and CPI clauses as well, so you start out a little bit ahead of the market and end a little bit behind the market. But -- but our average length of agreement is about 3 years overall.

We-- we find the margin that you can receive on new business is about the same. So the rate of margin is about the same. Of course the price level is higher. Cause you're recapturing today's fuel prices and you're recapturing today's driver wage cost, which is up.

Right. Okay. Maybe I'll -- I'll just -- that's helpful. Maybe I'l off-line just try and clarify some of that. But, moving to Supply Chain, Greg, it sounds like you're winning some auto business, but obviously auto, the outlook for auto overall is probably somewhat weak next year.

I guess, what is the percent, refresh my memory, what -- what the percent is, is it like a third or is it -- is it even larger, and sort of what are you assuming net/net for auto, in other words, do the new business wins offset perhaps a little slower overall utilization there? And then also on Supply Chain, are you going to anniversary sometime next year the -- the non-renewal contracts or is that a consistent pruning process?

Greg, this is Tony again. The automotive in-bound assembly business is about a third of our business overall. And basically what we're seeing in the first quarter or so, first 3 or 4 months of the year, we are seeing some of the production schedules lower than they were last year. On the other hand we feel overall that -- that the production volume for '05 is going to be about 16.9 million, up slightly over '04, depending on the OEM that you're serving. But towards the end of the year we see a lot of new introductions from those -- those assemblers that we serve. So we think the year will be a -- a bit different as we go out into the year for the second half in contrast to where we are for the first half. But, overall our automotive inbounds business is about 30 percent.

In -- in the fourth quarter, the automotive improvement in revenue was largely driven by our in-bound business and what was particularly satisfying in the fourth quarter was that that increase came across a number of our assemblers, not any particular one. So we balance that revenue growth in the fourth quarter over several rather than one. On the anniversary dates, of course our objective is always to renew, and we try to extend for 3 to 5 years if we can, typically that gets competitive on pricing. But we work through it and get a renewal, typically in most cases. There are no accounts within the supply chain business that we have a desire to exit. In the Dedicated Contract Carriage business, there is 1 or 2 accounts that we would prefer not be a part of the portfolio and we'll manage through that in the earlier part of '05.

So -- so, Tony, it sounds like the -- the revenue line at Supply Chain is set to accelerate. I mean, it sounds like, notwithstanding the auto macro picture, you've got enough new wins under your belt and you're well-positioned, it sounds like you're assuming some growth there, and if I heard you right' you're not actively looking to prune business so as you lap those periods when you let go, I guess some contracts that you wanted to let go, is it reasonable to think that the revenue line and Supply Chain should accelerate as the year progresses?

Well, we think the projections that we had made for '05 will be steady state where we are. There is always some business where you're denied an opportunity to renew. Again we've always felt that it's our choice. At a certain price, we may be willing to renew. At another price, we may not be willing to renew.

So there is some business in 0 -- in '04 that will not be renewed because of our lack of willingness to go along with some of the requirements on the part of the customers. But overall we think the growth will be there. It is a strong pipeline. We had excellent sales in '04. They will carry on into '05. As Greg had said earlier, towards the second half, more so, as we go through extended launches, and you'll also see some early launch cost that don't particularly match revenue, so we'll work through that and build the business. But towards the second half of the year we think we'll do fine.

Great.

I was going to try to say --

Tracy, just one question on the IRS situation. What is the -- how do these things typically play out in timing-wise and does this potential liability change how you think about buybacks, et cetera? I mean, it -- it, you know, ob -- obviously we all hope it doesn't, they get the full dollar but, I mean it's -- it's about $5 per share. How do you -- how do you think about that in terms of use of capital, you know, if a worse case and you had to -- had to pay some real cash here?

Well, I don't think it changes any of our plans. We have -- even if -- even if the worst happened, even if the IRS prevailed on every count, we lost everything, you know, that's what we've -- that's what we've disclosed and we think that that, you know, we're better served to disclose what's the worst case. But, even if that happened, that wouldn't change our plans. And we have a significant credit line and availability. And no matter what happens in -- in the circumstances, and in the negotiations, and these are complex, you know, circumstances with interpretations with smart people on both sides of the table. However it turns out does not change our plans for the business.

Right. And -- and I would just reiterate the -- we've got plenty of liquidity to handle even the worst case situation. It won't interfere with our ability to support growth in the business. If you look at our balance sheet going back 4 years ago we, paid down $1 billion of debt. So we're in a very strong position. And this does -- this would not change our plans at all. On the timing, that's just very difficult to predict on the timing.

Okay. Thanks a lot, guys, and great quarter on the leasing side.

Thank you.

Okay.

Our -- okay, our next question comes from John Mirshekari, your line is open.

Hi. Good morning.

Hi, John.

Can you please tell us what your revenue growth expectations are for Q1 that go along with your guidance?

We haven't broken it by quarter, and -- and as I said, if you'd -- if you'd heard the earlier statement, I'd said that even though we had a higher fourth quarter and higher year-end by about $100 million, we weren't going to change the -- the -- the official forecast. Although we anticipate that, on a net operating revenue level, we can still get to the targets that we've set for ourselves. We haven't broken those by quarter yet either.

Yes.

Okay. Thank you.

Okay. I would now like to turn the call back over to Greg Swienton.

All right. I think -- I don't know if there's -- is much in queue, but we're a little after 12 and, I know, you all usually have other plans so we will end the call there. I thank you for all your time and attention. I appreciate it and have a safe day.

Thank you, that concludes today's call. You may disconnect at this time.