萊德系統 (R) 2005 Q1 法說會逐字稿

Good morning and welcome to Ryder System, Incorporated first quarter 2005 earnings 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. Good morning and welcome to Ryder’s first quarter 2005 earnings conference call. We’d like to begin with a reminder that in this presentation, you’ll 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 the 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 & 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 Hyland, Executive Vice President of Fleet Management Solutions and Tony Tegnelia, Executive Vide President of U.S. Supply Chain Solutions 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, Bob, and good morning, everyone. I certainly want to welcome each of you to today’s call. And today, we’ll review our first-quarter results, update you on a number of other items, including our asset management area, review our outlook for 2005, and then we’ll open up the call for questions.

So let me begin with an overview of the first quarter and give you some of the highlights.

On page 4, earnings per diluted share were $0.64 for the first quarter 2005, as compared to $0.53 in the prior year period. The $0.64 of earnings this quarter included a $0.02 recovery of costs that were incurred in prior years from a customer that elected not to ultimately outsource an operation. Last year’s $0.53 of earnings included a $0.01 gain related to the sale of a portion of our former headquarters complex.

Fleet Management Solutions posted total revenue growth of 10%. Operating revenue, which excludes fuel revenue, was up 5% versus the prior year.

U.S. lease revenue increased for the quarter, primarily due to the acquisition we completed on March 1 of last year.

On a net basis, our organic lease sales results for the quarter improved over the prior year, due to improved retention of existing business, but were below our internal planned levels.

Our sales of new lease contracts were below our plan, particularly in January and February, while we saw stronger new sales results in March. We’re looking for improved organic lease revenue growth rates in the second half of the year, due to our strong focus on both new sales and customer retention initiatives.

In commercial rental, we continue to see strong revenue trends with 12% growth over the prior year. The growth in rental revenues for the quarter resulted from both increases in activity levels and higher pricing, which was up approximately 6% on average.

Net before tax earnings in Fleet Management were up 28%. Fleet Management earnings as a percent of operating revenue, which, by our definition, excludes fuel revenue, were up 180 basis points over last year, to 10.2%.

Continuing on page 5, from an earnings standpoint, Fleet Management’s results benefited from stronger vehicle gains, improved commercial rental performance, and leverage from the acquisition we made in the first quarter of last year.

Turning to the Supply Chain Solutions segment, revenue was up 8% for the quarter, reflecting the impact of new contract sales and expansions with existing customers. First quarter earnings in Supply Chain Solutions were down versus the prior year, as the positive impact of new sales growth was more than offset by lower margins from certain automotive accounts. The impact from these automotive accounts included both the impact of plant shutdowns and launch costs related to new business.

In Dedicated Contract Carriage, operating revenue was flat for the quarter. The increased cost of fuel, passed through to customers, offset the non-renewal of certain contracts in the segment. Earnings in DCC were down for the quarter, due to these non-renewed contracts, as well as due to higher overhead spending in expanding our logistics engineering capabilities needed for supporting future sales growth in this segment.

On earnings per share on page 6, you’ll see our earnings per share for the quarter. Our reported earnings per share increased by $0.11, to $0.64 per share, as compared to $0.53 per share last year. As I mentioned earlier, first-quarter results last year were $0.52, excluding the $0.01 benefit from the sale of a portion of our former headquarters complex.

The average number of diluted shares outstanding decreased by approximately 1 million shares versus the prior year, due to our share repurchase program. As a reminder, in July 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 first quarter, we repurchased approximately 500,000 shares at an average price of 44.82 per share. And this brings the total number of shares repurchased under this program to 1.8 million shares, at an average price of $45.75 per share.

Our first-quarter tax rate was 38.3%, which we now expect to be our full-year 2005 tax rate.

And finally, on a rolling 12-month basis, our return on capital improved from 6.8% last year to 7.8% this year.

I’ll turn now to page 7 to discuss first-quarter results for the business segments.

Total revenues for the quarter were up 9%, while pre-tax earnings increased by $11.2 million, or 20%.

In Fleet Management Solutions, revenue was up from the prior year by 10%, or 5% excluding fuel. Fleet Management Solutions’ earnings improved $15.5 million, or 28%. The increase was largely driven by the impact of improved vehicle gains, strong commercial rental performance, and the first quarter 2004 acquisition.

U.S. commercial rental utilization in the quarter was 69.2%, down from 71.9% in the first quarter 2004, due to the timing issues that impacted our rental fleet size. We took delivery of new commercial rental vehicles earlier this year and also delayed outsourcing -- outservicing, rather, some vehicles due to the strong demand we’ve had from customers. As a result, our average commercial rental fleet in the U.S. was up by 14% over the first quarter last year and was above our planned level.

I do want to emphasize that the decrease in our rental utilization was due to decisions regarding the fleet that we made and not to a slow-down in activity levels. Activity levels remained robust during the quarter.

Furthermore, early indications regarding April’s rental activity continue to show strong demand. We expect that commercial rental utilization levels will improve as we go through the year.

In Supply Chain Solutions, total revenue was up 8% in the quarter and operating revenue, which excludes freight under management, was up 3%, due to improved sales activity.

Net before tax earnings were down from 7.2 million in the first quarter last year to 6.5 million this quarter, due to the impact of certain automotive accounts, including plant shutdowns and launch costs associated with new business.

In Dedicated Contract Carriage, total revenue was up 1%, largely reflecting the impact of higher fuel costs that were passed through to customers, partially offset by non-renewals of customer contracts. Net before tax earnings declined from 6.8 million to 5.9 million, due to these non-renewals, as well as to increased overhead spending with expansion of logistics engineering capabilities.

On allocated Central Support Service costs were up largely to a couple of items. One was related to our move to our move to our new and smaller headquarters facility. And second, due to Sarbanes-Oxley compliance costs that we do not allocate to the business segments.

Earnings after all Central Support Service costs improved by 22% before restructuring and other charges, or by 20% including these items. Our quarterly net after tax earnings were 41.5 million for the quarter, up 18% from $35 million in the previous year, or up 20% when excluding the gain on the portion of the headquarters complex sale in the first quarter last year.

On page 8, and in fact, the next couple of pages, we’ll provide some additional detail that we’ve previously provided in our appendix, but now we’ve brought forward into the presentation. We’ve also made a few revisions to the way we present fleet management revenue on this page that I think better provides clarity into our operations.

First, we’ve separated contract maintenance revenue apart from full-service lease revenue. These items were previously combined in our reporting. And as a reminder, contract maintenance revenue represents long-term contractual maintenance and related services that we provide to customers where Ryder does not own or finance the vehicle. At the end of the quarter, we provided contract maintenance services on nearly 29,000 customer vehicles that we do not own.

Second, we’ve reclassified a portion of what used to be called other revenue into lease and rental. The reclassified amounts represent full service lease or commercial rental revenues on trailers that we operate under a pooled concept. The services provided to customers are substantially the same as those under the lease and rental classifications and therefore, we believe this is a more appropriate presentation of these revenues.

Third, we’re separately reporting contract-related maintenance revenue, which was previously included in the other product line. This category represents ancillary maintenance services, supporting core product lines that are billable, due to the fact that we have these contracts and are billed when services are required and performed.

So what is now in the other category is revenue that primarily represents smaller, miscellaneous product lines in the fleet management segment. We believe these revenue classifications provide increased visibility into the nature of our customer relationships and therefore, into our results. Reporting changes, however, do not affect the general year-over-year trends that would have been shown under the prior revenue categorization. A restatement of 2003 and 2004 for quarterly revenues under the new classifications is provided in the appendix for your reference.

Now to the numbers. Full-service lease revenue was up 3% for the quarter, due to our acquisition in March last year. Contract maintenance revenue was flat, while 12% percent, due to both higher activity and pricing levels. Other revenue was down 16%, due to loss of 1 ancillary, non-U.S. account.

In total, operating revenue, which we’d previously referred to as dry revenue since it excludes fuel, was up 5%. Fuel revenue was up 30%, primarily reflecting the impact of higher fuel costs passed through to customers.

Net before tax earnings, as a percent of operating revenue were up from 8.4% last year to 10.2% this year.

On page 9, you’ll see the Supply Chain Solutions revenue and earnings results for the quarter. U.S. operating revenues were up 5% with increases in all categories, including in our automotive, aerospace, and industrial businesses.

For those who have followed our calls in the past, you’ll note that we’ve identified transportation management revenue as a separate line item. This revenue was previously called other revenue in the SCS reporting. This change in terminology does not affect any of the numbers as reported historically.

While still relatively modest in size, transportation management revenue was up by 46%, reflecting our focus on selling these services more broadly to customers. Growth in transportation management revenues positively contributed earnings leverage in the quarter, due to the use of a shared infrastructure for providing these services.

International revenues were down 2%, reflecting the impact of an inventory procurement contract whose terms were favorably renegotiated late in the first quarter 2004. And as we talked about last year, the change in contract terms resulted in a change from gross revenue reporting in last year’s first quarter to net revenue reporting this quarter.

Overall, operating revenue for Supply Chain was up 3% for the quarter. A 22% increase in freight under management reflects increased volumes of freight activity and higher pricing on subcontracted freight, due to fuel cost increases. Total revenues for Supply Chain were up 8%, due to both the increases in operating revenue and freight under management.

As I mentioned earlier, segment net before tax earnings were down 7.2 million to 6.5 million, due to certain automotive account issues with plant shutdowns, as well as launch costs on new business. Net before tax earnings, as a percent of operating revenues, were down 3.1% in the first quarter to 2.7% this year, this quarter.

Page 10, on Dedicated Contract Carriage, revenues were essentially flat, as a result of higher fuel costs passed through to customers, offsetting some non-renewed contracts. Segment net before tax earnings were down approximately $1 million, while the percent of operating revenue was down from 5.4% to 4.7%.

Earnings were impacted by contract non-renewals and investments in expanding the Company’s logistics engineering capabilities.

At this point, I’ll turn the call over to Tracy Leinbach, our CFO, who will cover a number of items, beginning with capital expenditures.

Thanks, Greg. Turning to page 11, capital expenditures before acquisitions totaled just over $500 million for the quarter, up approximately $230 million from the prior year. Higher capital spending was driven by increases in both full-service lease and commercial rental. In the lease, the higher spending primarily reflects increased replacement spending and our lease fleet was essentially flat with year-end 2004.

In rental, higher spending primarily reflects a timing impact that Greg talked about. We took delivery of rental vehicles earlier this year than we did last year. For the full year, we expect to be at our planned commercial rental spending level of $258 million, which represents a full-year increase of only $16 million.

During the first quarter, we sold used assets for total proceeds of $79 million, an increase of $14 million over last year’s sales proceeds. Last year’s first-quarter proceeds did include $4 million from the sale of a portion of our headquarters complex. So the quarterly increase in proceeds generated from vehicle sales is actually somewhat larger.

Deducting these sales from our gross capital expenditures, we had net capital spending during the quarter of $427 million, up 220 million from the first quarter last year.

The $15 million in acquisition spending shown in the memo line relates to the purchase of 4 G’s Truck Leasing, as well to payments under holdback provisions for the acquisitions we made last year. The remaining unpaid holdback on previous acquisitions is approximately $4 million and is expected to be paid later this year.

On page 12, you can see both total debt and equity levels have increased, compared to prior year-end. The increased debt is due to our capital spending, as well as to the impact of the settlement of the 1998 and 2000 tax matter. I’ll talk about this in a bit more detail in the cash flow discussion.

Balance sheet debt is up $382 million for the year and is up as a percent of equity at 142% at the end of the quarter. Ryder’s total obligations of $2.3 billion are also up 382 million, as compared to the prior year-end. Total obligations as a percent of equity at the end of the quarter was 152%, up from 129% at the end of 2004.

We continue to have significant balance sheet capacity and, over time, as we grow the business, we would expect leverage to increase to the 250 to 300% range, supported by the strength of our contractual lease business, along with strong profit margins and return.

Our equity balance at the end of the quarter was approximately $1.5 billion, up $16 million versus year-end 2004. And the increase represents improved earnings, net of our share repurchases and dividends.

As those of you who have followed us know, from a funding standpoint, we match 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% variable-rate debt.

At the end of the quarter, our variable-rate portion of debt represented 39% of total obligations. Since the quarter end, we have issued an additional 175 million of fixed-rate financing and correspondingly brought down our floating-rate debt, which puts us at a current variable debt rate at around 33% of total obligations.

Finally, we’re pleased that Standard & Poors recently upgraded our long-term debt from BBB to BBB+ with a stable outlook. We believe that this upgrade is a reflection of the strong balance sheet we have available to support future growth in the Company.

Turning to the next page, you’ll see that we used $383 million of free cash flow for the year, as compared to break-even in the prior year. In the first quarter, the reduction in our acquisition spending, improved earnings, and the increase in the depreciation add-back contributed positively to free cash flow results for the quarter. The quarter-over-quarter reduction in free cash flow was really driven by higher levels of capital spending on lease and rental vehicles, as well as the impact of the IRS tax settlement.

The tax settlement, which we announced in February, included the payment of $176 million in cash, as well as the utilization of our available federal net operating losses and alternative minimum tax carry-forwards. As a result of the use of these NOLs and the AMT credit, we also made a $51 million cash tax payment in the quarter relating to the 2004 tax year.

We’ve updated our full year free cash flow forecast in the appendix to the presentation. The 2005 forecast now anticipates usage of $345 million of free cash flow for the full year. This reflects our initial business plan, free cash flow projection, which was approximately break-even, less the tax cash payments for the IRS settlement, as well as for the 2004 and 2005 tax years.

The appendix also includes our revised leverage projection. We now estimate total obligations to equity of 143% at year-end. That’s up from the 129% at the end of 2004, but slightly below where we are today.

From a return-on-capital standpoint, due to the additional cash tax payments, our current return-on-capital target for the year is 7.9%, versus the 8.1% in the initial business plan call.

Turning to page 15, I’d like to update you on our asset management area. Coming into 2005, we did expect higher levels of lease replacement activity and correspondingly, more used vehicles to sell. In anticipation of this, we increased our used vehicle sales capabilities through adding new retail sales centers and expanding third-party financing options for customers, among other initiatives. As a result, we sold almost 5,000 used vehicles during the quarter, up over 20% from last year. The higher number of units sold, combined with modestly-firming prices contributed to higher vehicle proceeds and stronger vehicle gains in the quarter. We expect used-vehicle pricing to remain strong, but we are not forecasting market pricing to increase from the Q1 level.

The number of vehicles that are going into service, but are not yet earning revenue, increased by over 900 units during the quarter, reflecting higher levels of replacement activity in lease. We would expect this number to remain at these levels or grow modestly, as the volume of both new and replacement lease activity increases.

The number of no-longer-earning vehicles, which we define as vehicles that have not earned revenue in the past 30 days, was up by approximately 650 units versus the prior year first quarter, due primarily to higher inventory levels of used vehicles available for sale. As we’ve stated in the past, we target used vehicle inventory levels at 3 months of vehicle sales, which is where we are at quarter-end. With an increased number of retail sales centers and an increase in the number of vehicles sold, you should see us stay at this higher inventory level throughout the year.

Before I turn the call over to Greg, I’d like to mention a couple of additional items related to our disclosure process.

First, later today, we will be posting on our website a pension whitepaper that details our final 2005 pension calculations. We expect our full-year 2005 pension expense to be $58 million, down $5 million from 2004. As you may recall, our original business plan assumed the pension expense in 2005 would be flat with the ’04 expense and therefore, there is a bit of a pick-up in earnings from pension as compared to our original plan assumptions. This improvement in earnings due to lower pension expense, however, is being fully offset by higher interest expense as we will incur this year due to the higher debt levels as a result of the tax payment from the settlement that we’ve previously discussed.

Second, we’re accelerating the timing of our 10-Q. Starting this quarter, we’ll be filing the Q on the same day as our earnings release so that will be going out later today. We believe this timing will facilitate analysis of our results by providing some additional detail available in the Q, concurrent with the release and today’s call.

Finally, in the last few years, in addition to holding 4 quarterly earnings calls, we’ve held a fifth call in December to review our business plan projections. This year, we do not plan to hold a separate business plan call. Instead, we’ll review our business plan projections during our fourth-quarter earnings call, which is scheduled for early 2006. This timing will provide us with the ability to have a full year of results available for the current year when communicating our plans for the following year.

With that, let me turn the call back over to Greg to review our earnings outlook.

Thank you, Tracy. And we’ll move on to page 17 on the earnings outlook. In December of last year, when we did present our 2005 business plan, we provided a 2005 EPS forecast range of 3.20 to 3.30 for the full year. At this time, we’re increasing this forecast by $0.10, to a range of 3.30 to 3.40 per share.

We’re also establishing, for the first time, our second-quarter forecast of $0.83 to $0.86 per share.

Please note that our EPS forecasts do not include any impact from the expensing of stock options. We currently expect to adopt option expensing in January 2006.

Before we go on to question and answers, let me make a few other general comments. Our focus continues to be on profitable growth in all of our business segments. In commercial rental, our plan called for increases in both activity levels and pricing this year, although at a more modest rate of increase than in the prior 2 years. Based on our year-to-date results, we continue to believe our expectations for rental are solidly on track with our business plan.

In full-service lease and maintenance, we’re encouraged by the improvements we’ve made in customer retention levels during the quarter. While we were disappointed with new sales in January and February, we are encouraged by stronger results in March. Our focus clearly remains on executing our action plans around sales and marketing initiatives.

In Dedicated Contract Carriage, with 1 or 2 exceptions, we believe that we’re largely through the process of pruning undesirable accounts. We are refocused on selling to prospects that value the high level of customer service and consistency we can clearly deliver in this product line.

We are making investments and expanding our engineering capabilities in the segment and are continuing to align this business more closely with our Supply Chain operations. While we are not looking for DCC to be a strong earnings contributor this year, I believe that over time, we’ll see much stronger results from the Dedicated Contract segment.

In Supply Chain Solutions, we’re working to address issues with a couple of individual accounts that impacted our bottom-line earnings during the first quarter. We are pleased, however, that we’ve begun to see results in our reported revenues from new contract sales and expansions with existing accounts and intend to keep a strong focus on profitable growth in this segment going forward.

That concludes our remarks so at this time, I’ll turn this over to the operator who will open up the call for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Jon Langenfeld, Robert Baird.

Good morning.

Good morning, Jon.

Greg, on the organic sales side with full-service lease, if I remember correctly, you finished the year strong in ’04, November, December, I think you had mentioned was strong, and then January and February off to a little bit weaker start. Sounds like March and April came around. How much of that do you contribute to the economy versus just maybe a typical calendar with decisions not being made in January and February?

I think probably there’s a couple of mixed portions to that answer. I think that some of it is sort of in customer cycles and I think part of it may also be in the way that we sell relative to that cycle. So I think you do have those ups and downs.

What we’re trying to do more so internally -- and I think you and others are aware that we’re also trying to continue to improve our performance in everything we’re doing in sales and marketing. What we’d like to ensure that we have, from an internal view, is a stronger continuous pipeline that tries to take out the ebbs and flows of customer decisions. So if we have a stronger continuous pipeline -- and that’s something we work on with our sales organization -- then we’d like to mitigate that.

But I think at this point, we’re still sort of influenced by the customer purchasing cycles and we kind of go along with that, at least we have up to this point.

And do you get the sense, talking to the customers, that they were hesitant in the first quarter, given some of the uncertainty, given the outlook on fuel, uncertainty to make these commitments? We’ve certainly seen it with the private leasing companies we’ve talked to and we’ve seen it on the truckload side as well.

I think that you can never underestimate the shadow of increasing fuel prices to the economy in generally and certainly, to the transportation segment. I think whenever you have rapidly-escalating fuel costs, that is always on the minds and it’s impacting the cost lines of all customers and that certainly causes, I think, everyone to pause a bit and determine how strong are their demands for products, as well as the cost of moving those products.

Okay. That’s fair. And then I guess going along with that, the retention side of the full-service lease. I know we can see the early terminations are lower and that’s a positive. But what about straight-out non-renewals? How have those trended relative to your expectations and then how they trended relative to last year?

Right. I’m going to -- with Greg Hyland in the room from that segment, maybe I’ll ask Greg Hyland to comment on that specifically.

Good morning, Jon. Actually, we’re very encouraged by our first-quarter results on the retention side. And if we look year-over-year, we’re up about 8% in our retention. So in other words, those contracts that were up for renewal, that we retained a greater percentage of those in the first quarter of this year than we did last year. So again, we’re encouraged about the results we’ve seen in the first quarter and our preliminary view of the second quarter.

And I guess, not looking for specifics here, but maybe just in terms of generalities, we’ve looked at the organic growth on the leasing side and it’s been relatively flat for the last several years. Do you think we’re past that point? Are we past the trough and Q2 looks to start the build into the second half of the year?

Jon, I can answer that best by reflecting on what Greg said, is that we’re seeing an increased robustness in our pipeline, which would lead us to believe that we do have those opportunities. The only thing is, I think we’re also seeing a better pipeline because I think we’re just better at recording it now too. So it might not necessarily reflect true year-over-year opportunity, but in all, we see, year-over-year, we see a much better pipeline, which we would expect then would convert down the road to stronger lease sales.

Okay. And finally, just along those same lines, Greg, the penetration of the C-level and the executive-level suite, to try to really get the market that’s not necessarily outsourcing today, any progress there that you can update us on?

For both Gregs. Jon, I would say that we’re pleased with the foundation we’re putting in place. I would not say yet that we’re turning that into results yet.

Okay. Thank you.

John Larkin, Legg Mason.

Just a couple questions on the Dedicated division. You indicated that a couple of accounts did not renew contracts. Any particular reasons for that? Was there increased competitive pressure there, perhaps?

I’m going to let Tony Tegnelia answer because he’s covering both Supply Chain and Dedicated.

John, there are a number of accounts that we still have within our portfolio that we would prefer to work off. But with regard to the loss business and those accounts that have not renewed, our loss business reported in the first quarter is down dramatically from where it was in the first quarter of last year.

So we are working very, very hard to be more competitive on the pricing side of DCC. And relating back to Greg’s previous comments, the increase in our overhead costs for the engineering side is helping us develop a much more competitive, much more efficient operating systems in those DCC operations, which really help us for renewal when we go in to re-price during renewal environment.

So the engineering support is improving the operations performance, helping us be more competitive and that’s why our loss business is down dramatically in the first quarter. And we’re actually pleased with how our retention rate in DCC will be looking for the balance of the year.

But within the portfolio, there still are 1 or 2 accounts that are not performing well and we would prefer, for the most part, that they not be in the portfolio. We’re going to work through those.

Can you give us a little more color on the logistics systems that you all are developing there in DCC that ought to help you develop additional business in the future?

Well, our pipeline right now in the DCC area is up dramatically from where it was last year. So is our number of proposal in the hands of consumers is up dramatically as well.

Some of the solutions that play very well to the DCC product line are those where there is time-sensitive freight, high-value freight, and particularly where the equipment is very special-purpose to what the provider really needs.

We have one new account where the trailer requirements are very, very unique for that operation. The inventory being carried is very, very expensive and it is time sensitive to get it to the customers. The freight is also, as I said, very expensive.

So that plays right into Ryder’s sweet spot. We have the FMS equipment on the trailer and tractor side that supports that business. It’s a very unique design, because of the freight, from an engineering point of view, and that plays right into our sweet spot for high-value, time-sensitive, special-purpose equipment, which our more traditional competitors in truckload really can’t satisfy.

Another question on the commercial rental business, which just continues to knock the cover off the ball, even though you’re taking prices up very nicely there, it sounds. Has the lease commercial rental spread continued to expand? Is it the biggest spread you’ve ever seen and what do you read into that?

I’ll take that, John. This is Tracy. The spread -- pricing did improve in rental for the quarter so the spread did continue to expand.

I think as we said earlier, we read a couple things into that spread. First, the internal read on it is we don’t feel as though we were really aggressive enough in previous cycles around rental pricing. We used to be very decentralized. We let those pricing decisions be made locally. And through our centralized asset management, we’ve really pushed pricing now for a number of years. And, as we reported earlier, we think the competition has followed us. So part of this, we think is us, that we just didn’t push that in previous cycles.

Now, the other part is that customers are willing to pay that extra premium for the flexibility if they’re not ready to commit to expanding their fleet. But some customers are committing to expanding their fleet so they don’t have to pay that premium and so they’re ensured having availability because they can’t necessarily be ensured of that if they’re just relying on a commercial rental application.

So I hope that answered your question.

Yeah, that’s very helpful, Tracy. Thank you.

Then just one final question. On Supply Chain Solutions, it looks like a lot of the growth there really came from transportation management, which is relatively small, but growing very nicely. And then also the freight under management category, which according to the footnote, looks like it’s more of a pass-through.

So if you were to strip those 2 away, is it fair to say that Supply Chain Solutions really isn’t generating that much organic growth?

Well, I think you do have to include the TM really with our total revenue. In some instances, those solutions actually blend into some of the other product lines that we have as well. But we continue to have a very strong pipeline with our supply chain business in general. We have some major new launches, particularly on the ACI side, that will be coming in for the balance of the year and some major large launches coming in on the automotive side as well for the balance of the year.

So we see the revenue growth there relative to our existing pipeline and also relative to contracts signed and executed last year that will be launched this year, adding to the revenue growth within that service offering.

Plus, we did suffer, as Greg had mentioned, some revenue declines as a result of volumes with a number of the OEMs that we service in the automotive sector. Our forecast for the balance of the year, for the most part, does not anticipate dramatic improvement in that automotive environment, but perhaps there is some hope that it would and you would see revenue growth come from those customers as well.

But the loss business is down dramatically on that side. We have major new launches coming in this year, which we think will help. And the TM is a very attractive product line for us. We have a great team managing that service offering. And it is also used as a blend to be part of our total solutions with some of the other accounts as well so it’s hard to actually really separate that out.

I had something else on transportation management, John, that I think is important and why we wanted to make sure it was specified, rather just in another category.

It is a part of our organic growth plan. And we established that service a number of years ago. We worked on ramping it up. It is often an entry-level product line for customers, new customers in supply chain, who become acquainted with what our capabilities are compared to other competitors. So we consider that to be a fundamental part of organic growth.

Additionally, as it grows, it also helps to offset some of the other downturns that may occur in other industries, in other volume reductions. And I think even in this quarter, it helped to cushion some of the impacts, as Tony said, of volume decreases or plant shutdowns. So we expect it to become a significant larger portion of the business. It is low asset-based. There’s a lot of software activity. Good margin, good returns, and we think an important and growing part of that portfolio of the business.

Is it safe to say that freight under management does not display those characteristics though? It’s less profitable than your straightforward TM business?

Yeah, freight under management is different. And Tony can specify the distinction, but, yeah, that’s a different category. ’Cause that is more activity-based, freight-based and what’s going on in the marketplace for a subcontracted service.

Right. The freight under management, as you had mentioned earlier, predominantly is a pass-through. And those are really the services that are purchased with outside carriers, through some of the TM operations that we have when we provide that service to them.

In a number of instances, as I said, our solutions will include dedicated activity, including the Ryder fleet, and also a portion going on outside carriers, which is what the freight under management largely is. So we do get an attractive margin on the procurement and orchestration and execution fee relative to TM and the freight under management really represents the outside carrier costs that we incur when that freight is moved on non-Ryder equipment.

I understand. Thank you very much.

[OPERATOR INSTRUCTIONS]

Ed Wolfe, Bear Stearns.

Good morning.

Good morning.

Can you take us through a little bit on the commercial rental side? The revenue’s up 12%. Can you just take through how much of that’s pricing, how much the fleet’s up at the end of the first quarter?

Yeah. The pricing is up 6%. And I’ll let Greg Hyland cover the other portion of your question.

Yes. We’re up, as Greg said, about half the growth is related to pricing, the other half related to real demand.

And in terms of the size of the fleet, what are you building for, what’s the projected growth for the rest of the year?

We still expect to see it in that 12% to -- I’m sorry, did you say lease or rental?

I’m talking about rental and the fleet size. If you have a projection on revenue, that’s great too.

Yeah, on the rental fleet, we -- Greg mentioned that the average fleet was up 14% in the first quarter. Now, that had a lot of trucks coming in and out in that average.

As of the end of the first quarter, our rental fleet globally is up about 6%. It’s a little bit higher in the U.S. We would expect that fleet to remain at about that level certainly through the busy season and then we would be bringing that fleet back down in the fourth quarter.

So I think our plan -- on the plan call, we said, on average for the full year, the fleet would be up about 5%. Given our first quarter, we were over plan. We’re going to be a little bit higher than that on a full-year average with maintaining this higher fleet through the rest of the second quarter and into the third quarter and then bringing it down.

So average for the full year, a little bit higher than 5% because of first-quarter fleeting and then we would stay at this higher level through the peak season.

I’m not sure I quite understood everything you said, Tracy.

Okay.

The average fleet you said was up 14%, but it ended at the quarter up 6%? Is that what you said?

Yes. The average fleet--now, we give you more statistics on what’s going on in the U.S. fleet, but the average was about 14%. But that has already come down as of the first quarter. Greg mentioned that we had held some units longer. We’ve since disposed of those. We had new units coming in. So there was a lot of activity in the first quarter that drove that average number up 14%.

What am I missing then? If average fleet was up 14 and pricing was up 5, why was revenue up 12? What am I missing there?

The utilization was down year-over-year.

Okay. Can you give me--

So pricing was about--

The utilization rates now versus a year ago?

Yeah, the volume was days rented. Days rented was up about 6%, was on those days rented was up about 6%.

So there’s fewer days in the quarter is what you’re saying?

No, no. Quarter-over-quarter, we had more demand. We had more days rented. That’s how we count our demand. We had more transactions out there for rental, about 6%. Pricing is up 6%. That gives you the revenue growth. Our fleet was up, on average, 14% and that’s why the utilization declined. But we’re getting the fleet -- the fleet now is at the level we want for it to be the peak season.

Okay. And when you talk about utilization, you usually talk about percentage. What was the percentage throughout the quarter? If you could talk about that, utilizing the fleet.

It was, for the first quarter, it was 69.2% for 2005. And that compares to 71.9% last year in the first quarter.

Okay. And can you kind of take me through the quarter in that 69 to year-over-year, how did it look January, February, March, if you have that?

We don’t break it out by month.

Okay. Just directionally, in April, is it still a little down year-over-year or is that improving?

Well, it was improving towards the end of the quarter. And we don’t have it yet for April. As Greg said, we would expect utilization will improve and we’ll get you that year-over-year improvement as we go throughout the year. I certainly wouldn’t commit that April or -- that we would be quite there.

But we have -- what was important for us was to get the fleet right for the peak. And we wanted to make sure we had the fleet right before the peak season and that’s why we made the decision to pull forward some of the fleeting. So we’re very comfortable with the fleet we have. And utilization and the year-over-year comps will continue to improve as we go through the year.

Okay. Last quarter, you talked about some of the short-term rental starting to convert towards longer-term leasing and we see that this quarter, the leasing rates up, the rental down a little bit. Is that trend accelerating, kind of flattening? What do you see with that going forward?

We see that, going forward, we see that’s perhaps up just slightly, but our short-term expectations remain pretty flat.

In other words, both of them grow at similar rates in the near term?

Could you repeat that, please?

I’m trying to understand whether you’re converting a faster number or slower number or kind of a flat pace of short-term to long-term lease. And was your answer -- just trying to make sure I understand -- that it’s kind of a flat level in the near term, but should increase a little bit throughout the year?

That’s our expectation.

Okay. Switching gears, on the gains on the sales, the 12.8 million, what should we look at that going forward? Is that sustainable as we go out?

We think that -- we don’t think that number is sustainable. We do expect the same volume of trucks being sold the rest of the year, but we’re forecasting kind of the gains per unit to come down some from the first-quarter level.

But we’re pleased with what we see in the used-truck market. Selling used trucks is very much part of our business and our business model. We’ve always said though we don’t want to build a model that relies just on the end sale of the vehicle, but we’re pleased with what we’re seeing. We’re going to be selling trucks probably at the rate you saw in the first quarter, but we’re forecasting the gains per unit to come down somewhat from the first quarter.

Just along those lines, in the 3.30 to 3.40 guidance, is there a range on the gains on sales that you’re assuming in there?

We didn’t break that out, but certainly not at the same level in the first quarter.

Okay. And then in the 3.30 to 3.40 guidance, just to be clear, you’re including in that the first quarter reported at 64? You’re not taking that $0.02 out or are you taking the $0.02 out from the--?

No, it’s the 64.

Okay. And the $0.05 pension cost advantage year-over-year is in that too, is that right?

As well as the additional interest costs related to the higher debt levels on the tax payments, yes.

Okay. Were those in the -- were either of those 2 in the original guidance last quarter?

No, they were not. And they pretty much, on a P&L standpoint, offset one another. They were not in our original business plan or in the guidance last year or on the last quarter. But we have adjusted our ROC target because the denominator’s impacted.

Okay. And then one just general question. Greg, what are you seeing out there from Penske and some of your other competitors? Anything that concerns you? It feels like there’s been some inconsistency in the economy just recently. Any change out there in the competitive environment at all?

Well, since we’re the only public company in this segment, I usually don’t comment about what we see from other competitors on the marketplace who are not public companies.

I understand why. Thank you very much for the time.

Thanks very much.

At this time, I show no further questions. I would now like to turn the call back over to Greg Swienton.

Well, I thank you all for participating and thank you for your questions. I think we have no other calls in queue so thanks again for your participation. Have a good, safe day.

Thank you. That concludes today’s call. You may disconnect at this time.