萊德系統 (R) 2005 Q2 法說會逐字稿

Good morning and welcome to Ryder Systems Incorporated second quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS]

I would like to introduce Mr. Bob Brunn, corporate - - Group Director of Investor Relations for Ryder. Mr. Brunn, you may begin.

Thank you. Good morning and welcome to Ryder's second quarter 2005 earnings conference call. We would 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 economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release, and in Ryder's filings with the Securities and Exchange Commission. Presenting on the call today are Greg Swienton, Chairman and Chief Executive Officer, and Tracy Leinbach, Executive Vice President and Chief Financial Officer. Additionally, Greg Hyland, President of Fleet Management Solutions, Tony Tegnelia, President of the U.S. Supply Solutions and Bobby Griffin, President of International Operations are available to answer any questions you may have at the conclusion of our presentation. With that, I'll turn the call over to Greg.

Thank you and good morning, everyone. This morning we'll review our second quarter results, update you on a number of other items, including our asset management area. We'll review our outlook for the remainder of the year and then as always, open up the call for questions. So, let me begin with an overview of our second quarter results. And for those of you who are following on the web, we'll begin on page four . Our comparable earnings per diluted share were $0.86 for the second quarter 2005, which is a 13% increase as compared to $0.76 in the prior year period.

Each period has one adjustment that I'm making to determine those comparable earnings. In the second quarter this year, we realized a $0.12 tax benefit due to a change in the income tax law in the State of Ohio. In the second quarter last year, we realized a $0.21 gain from the sale of a part of our headquarters complex. So I'm excluding both of these in determining comparable earnings. On a reported basis, therefore, including these one-time items, EPS was $0.98 this year versus $0.97 last year. Fleet management solutions posted total revenue growth of 9%. Operating revenue, which excludes fuel revenue, was up 2% versus the prior year.

Within FMS, full service lease revenue remained unchanged while maintenance revenue was up by 6%. In commercial rental, we continued to see good revenue trends with 8% growth over the prior year. The growth in rental revenues for the quarter resulted from an increase in pricing, as well as higher activity levels. Net before tax earnings in fleet management were up 8%. Fleet management earnings as a percent of operating revenue, which does exclude the fuel revenue, were up 80 basis points to 12.4%. On page five, from an earnings standpoint, fleet management's results benefited from improved commercial rental performance and strong performance in our used vehicle sales area.

Turning to the supply chain solutions segment, revenue was up 15%, or 9% in operating revenue for the quarter, reflecting the impact of new contract sales and expansions with existing customers. Second quarter earnings in supply chain solutions were slightly down versus the prior year. As the positive impact of new sales growth was more than offset by lower margins from certain automotive accounts, including plant slowdowns and shutdowns and lower margins in our operations in Brazil. In dedicated contract carriage, revenue was up by 7% and operating revenue up by 5% for the quarter. Due to the impact of new contract sales and customer expansions as well as higher fuel costs, passed-through to customers. Earnings in DCC improved for the quarter, due to these new and expanded customer contracts, as well as due to improved cost performance in our safety and other operating areas.

If you turn to page six, we cover our earnings per share for the second quarter. And reported earnings per share increased by $0.01 to $0.98 as compared to $0.97 per share last year. And as I mentioned in my opening remarks, second quarter results this year included a $0.12 benefit from the change in Ohio's income tax law on June 30. And second quarter results last year included a $0.21 benefit from the sale of a portion of our headquarters complex. So again, excluding these one time items, comparable earnings per share were $0.86 this year versus $0.76 last year.

The average number of diluted shares outstanding decreased by 900,000 shares versus the prior year due to our share repurchase program. And you'll recall in July of 2004 we announced the two-year 3.5 million share purchase program designed to mitigate the impact of employee stock purchase and option plans. During the second quarter, we repurchased approximately 272,000 shares at an average price of $40.20 per share. This brings the total number of shares repurchased under this program to 2.1 million shares at an average price of 45.03 per share. Our second quarter tax rate was 30.1%. Excluding the Ohio tax benefit, the tax rate would have been 38.5%, which we would expect to be our 2005 tax rate for the remainder of the year. Finally, on a rolling 12-month basis our return on capital improved from 7.2% last year to 7.7% this year.

On page seven, we list our earnings per share on a year-to-date basis. Reported EPS increased by $0.11 to $1.61 as compared to $1.50 per share last year. Excluding the impact of the Ohio tax change this year and our headquarters sales gains last year, comparable earnings per share increased by $0.22 to $1.50 this year versus $1.28 last year. Our year-to-date tax rate was 33.6%, but would have been 38.4% excluding the Ohio tax benefit this year.

We'll turn to page eight and I'll discuss our second quarter results for the business segments. Total revenues for the quarter were up 10% from the prior year. In fleet management solutions, revenue was up by 9%, or up 2%, excluding fuel. Fleet management solutions earnings were up $6.9 million, or 8%. And this increase was largely driven by the impact of strong performance in our commercial rental and used vehicle sales areas. U.S. commercial rental utilization in the quarter was 73.4% down from 77.9% in the second quarter 2004. We have taken steps to adjust and improve our plan accordingly in light of this somewhat lower utilization level. And expect that commercial rental utilization will improve as we continue throughout the year.

In supply chain solutions, total revenue was up 15% in the quarter and operating revenue, which excludes freight under management was up 9% due to improved sales results. Net before-tax earnings were down from 8.7 million in the first quarter last year to 8.3 million this quarter, due to the impact of certain automotive accounts and lower volume, and significantly lower margins on our Brazil operations. In dedicated contract carriage, total revenue was up 7%, reflecting the impact of new and expanded customer contracts, as well as higher fuel costs passed through to customers. Net before-tax earnings improved from 8.3 million to 9.7 million, due to these new customer contracts and lower safety and other operating costs. The unallocated portion of central support services costs were up largely due to moving expenses related to our now completed move, to our new and smaller headquarters facility.

Earnings after all central support service costs improved by 8% before restructuring and other recoveries. Our reported quarterly net after-tax earnings were 63.3 million for the quarter, approximately flat with the prior year. Excluding the Ohio tax impact this year and the headquarters gain last year, comparable earnings were 55.7 million this year, up 12% from $49.6 million last year. In our year-to-date results on page 9, total revenues for the year to date were up 9%. Fleet management solutions revenue was up 9%, or up 3% excluding fuel, due primarily to growth in commercial rental and maintenance revenues. Fleet management solutions earnings were up 22.4 million, or 16%. And this increase was largely driven by the impact of improved commercial rental performance and strong results in used vehicle sales.

In supply chain solutions, total revenue was up 11% year to date and operating revenue, which excludes freight under management, was up 6%, due to improved sales activity. Net before-tax earnings were down by approximately $1 million due to the impact of certain automotive accounts, including plant slowdowns and shutdowns, launch costs associated with new business, in our Brazil operations. In dedicated contract carriage, total revenue was up 4%, largely reflecting the impact of new and expanded customer contracts and higher fuel costs that were passed through to customers. Net before-tax earnings increased from 15.1 million to $15.5 million due to the new contract growth and improved cost performance.

Earnings before restructuring and taxes improved by 14% to 157.6 million. Reported net earnings were 104.8 million, up 6% from the prior year. And, again, excluding the impacts of the Ohio tax change and the headquarters complex sale, comparable earnings increased by over $13 million, or 16% to 97.2 million for the current year-to-date number. And at this point, I'll turn the call over to our Chief Financial Officer, Tracy Leinbach, who will cover a number of items, beginning with capital expenditures.

Thanks, Greg. If you turn to page ten, you'll see that year-to-date capital expenditures before acquisitions totaled $820 million, up approximately $250 million from the prior year. Higher capital spending was driven primarily by an increase in full service lease spending on replacement vehicles. As we have said previously, and as was planned for this year, we're currently in a heavier than normal cycle of replacing vehicles for expiring lease contracts. Customer confidence remains high to commit to re-signing long-term lease contracts. This spending is good for our business, as we are lengthening the average remaining life of the lease contracts in our lease portfolio.

Capital spending was also up somewhat in commercial rentals at $243 million for the first half of the year. The bulk of our commercial rental spending is now complete for the year, and at this point we do not expect any significant spending in quarter 3 or quarter 4. During the first half, we sold used vehicle - - revenue earning equipment for total cash proceeds of $172 million, an increase of $34 million over last year's sales proceeds.

Sales of operating property declined by $43 million, largely due to the sale of our headquarters facility last year. Deducting all sales proceeds from our gross capital expenditures, we had net capital expenditures during the first half of $648 million, up by approximately $260 million from last year. Finally, the $15 million in acquisition expenditures shown in the memo line relates to the purchase of 4G's truck leasing in the first quarter, as well as to the payments under holdback provisions for the acquisitions we made last year.

On page 11, you can see both total debt and equity levels have increased as compared to prior year end. The increased debt level is due to higher capital spending, as well as to the impact of the previously announced settlement of the 1998 to 2000 tax matter that occurred during the first quarter. Balance sheet debt is up 440 million for the year and is up as a percent of equity at 143%. Ryder's total obligations of approximately $2.4 billion are up 425 million as compared to the prior year end. Total obligations as a percent to equity at the end of the quarter were 152%, up from 129% at the end of 2004. We are very comfortable with this increase in leverage and as we grow the business, we expect leverage to continue to increase, supported by the strength of our long-term contractual lease business.

Our equity balance at the end of the quarter was approximately $1.6 billion, up $47 million versus the end of 2004. The increase represents our year-to-date earnings, net of share repurchases and dividends. As those of you who have followed 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% variable rate debt.

At the end of the quarter, the Company's variable rate portion of debt represented 30% of our total obligations. Over the last several years, we have taken steps to strengthen the balance sheet and position the Company to capitalize on strong growth opportunities in each of our business segments going forward. We're pleased that the credit rating agencies continue to recognize the improvements we've made in the Company. With Fitch upgrading our long-term debt rating from BBB+ to A- earlier this month.

Turning to the next page, you'll see that the Company used $422 million of free cash flow year to date as compared to the use of $38 million in the prior year. In the first half, the reduction in our acquisition spending, higher proceeds from the sale of used vehicles, and an increase in the depreciation add-back contributed positively to free cash flow results. The year-over-year reduction in free cash flow was driven by higher levels of capital spending on vehicles, lower sales of operating property due to the sale of our headquarters facility last year. As well as the impact of the IRS tax settlement in the first quarter of this year. As a reminder, the tax settlement did include a payment of $176 million in cash and approximately $51 million of cash tax payments related to our 2004 tax year. Those were both made in the first quarter of 2005.

Turning to page 14, I'd like to update you on our asset management area. We're pleased with the results of our used vehicle sales operations. We sold over 5,700 used vehicles during the quarter, up 22% from last year. We planned for higher used vehicle throughput this year in connection with the increase in lease replacement activity I mentioned earlier. And in anticipation of this throughput, we did expand the number of used vehicle outlets, as well as enhance many of our sales tools. To date, our teams have executed very well in this area. The higher number of units sold combined with good pricing contributed to strong vehicle proceeds and gains performance in the quarter. Gains per unit were down slightly from the first quarter as anticipated, and going forward, we expect some slight moderation in gains per unit, but with overall total gains remaining strong.

Moving to vehicles not yet earning revenue, these are new vehicles that will be going into service with customers, but have not yet started to earn revenue. And you can see the number is fairly consist with last year's level. 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 1400 units, due primarily to high inventory levels of used vehicles available for sale. As we've stated in the past, we target used vehicle inventory levels at three months of sales volume, which is approximately where we are at quarter end. You should see us state this higher inventory level throughout the year. At this point, I'll turn the call back over to Greg and he can review our earnings outlook.

Thank you. If you would turn to page 16, in December of last year, you may remember that we presented our 2005 business plan and provided a 2005 EPS forecast range of $3.20 to $3.30 per share for the full year. During the first quarter call, we increased this forecast by $0.10 to a range of 3.30 to 3.40 per share. And at this time, we are reaffirming our forecast for the operations of our business, which with the addition of the $0.12 Ohio tax benefit, brings our current forecast to a range of 3.42 to 3.52 per share. We're also establishing for the first time our third quarter forecast of $0.90 to $0.95 per share.

Please note that our EPS forecasts do not include any impact from the expensing of stock options. We currently expect to adopt the option expensing in January of 2006. Our focus continues to be on profitable growth in all of our business segments. In commercial rental, our plan called for increases in both pricing and activity levels this year, although at more modest rates of increase than in the prior two years. Based on our year-to-date results, we continue to believe we will realize this type of growth in commercial rental this year. In full service lease and maintenance, we are executing our action plans in the areas of sales and marketing.

We're pleased with the confidence we're seeing for our customers, from our customers, in replacing expiring lease contracts. And we remain firmly committed to increasing organic sales of new full service lease contracts this year for revenue in future periods. In supply chain solutions, we're working to address issues with a couple of individual accounts in one geography. We named that in Brazil, that impacted our bottom line earnings during the quarter. We are, however, pleased that we've now delivered the second quarter of revenue growth coming from new contract sales and expansions with existing accounts, and intend to keep a strong focus on profitable growth in this segment going forward.

And finally, in dedicated contract carriage, we're pleased that we've started to see the results of our efforts over the past 12 to 18 months in refocusing this segment on the right kinds of targeted customers. We're happy to have shown the first quarter of revenue growth stemming from new contract sales and have delivered margin improvement through our focus on cost management in this segment. We will continue to execute on our initiatives in DCC and expect that these will continue to improve our operating results over time. That concludes our remarks. So at this time, I would like to turn it over to the operator, who will open it up for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question today is coming from John Langenfeld. Your line is open, sir.

Questions for you on the leasing side, just in terms of sales. Greg, you kind of talked about a little bit in terms of the renewals. Sounds like those are tracking in line with your expectations. What do renewals typically track?

I think the first part of the statement is right and that is that they are tracking with what we had hoped to have in the way of renewals. I think usually, historically for competitive purposes, we haven't disclosed what those trends and levels tend to be. So I think have I to leave it at that. And as you know, we're the only public Company reporting in this sector. So there are some areas that we can give you broad information, but others we can't get down to that granularity.

I certainly appreciate that. On the new sales side, so not the extension of existing contracts or expansion within existing customers, but actual new customers coming into the fold. How has that been trending both relative to expectations and - -?

I think that - - I'll make a comment and then I'll ask Greg Hyland, who is obviously with that segment, to also perhaps make a comment. I think that we have seen a better pipeline and better activity and it isn't where we want it to be yet. I think frankly that's an area that we're still working on and we give a lot of attention to. But I think that, we have some evidence that that is improving in a number of areas. And I'll turn it over to Greg Hyland if you would like to comment further on that segment.

Thanks, Greg. Thin that the key factor there is that, and John, we are not where we expected to be on the new customer sales, but we do have confidence that the foundation is in place, as Greg mentioned, that we're seeing a much stronger pipeline and our number of quotations in that pipeline is growing. So it gives us I think a pretty - - as I said, a confidence that the foundation is placed where we'll start seeing the - - us achieving our expectation on the new growth opportunities.

Okay. So the leading indicators are there. There is nothing that makes either of you think that the value proposition you're bringing to the table has somehow changed, given the environment we're in?

No, I don't think there's any evidence that the value proposition changes. I think sometimes in terms of sales execution, you just have to kind of grind things out. And I think that's what we're doing with our sales contact force in working closely with our customers. But nothing fundamentally has changed in the attractiveness or the value proposition.

Okay, and then flipping over to the supply chain side, how much of that - - I know you highlighted the issues with automotive and Brazil, but how big of an issue or drag are the startup expenses with the impressive new revenue growth that you've brought into the fold?

It's one of the factors that I mentioned on the year-to-date results. I would say that it's a factor, but not a major factor. And I think it probably even shows up a little bit more on our year to year comparisons because we've had fewer of them in the past. I think as we intend, if you've got a more constant flow of new business, you absorb those things and it doesn't show up so much on a year to year basis. But I think as you've seen, we've recently had some rampups in sales. We've announced press releases on new business or renewed business, and I think that has an impact. But of the three that we mentioned, I would say that's the smaller of the three impacts compared to the automotive slowdowns and the particular attention that we have in Brazil.

Would that lead to the expectation that as you cycle through these startups and you start to anniversary some of the weaker auto volumes by the end of this year, you could turn positive on the profit line year-over-year?

Yes, all other things being equal, we would hope that to be the case.

Okay, thanks.

Sure.

Thank you, sir. Our next question is coming from John Larkin. Please state your company, sir.

Yes, I'm with Legg Mason. Just wanted to get a sense for whether you're providing any guidance for the impact of the expensing of options starting in 2006?

I think the question's come up and I don't think we have thus far. So I'll look to our CFO to see if we've said anything externally or publicly or if we'll be waiting until we do the business plan for 2006.

No, John, we've not shared anything publicly and we will be waiting. Of course, our pro form make number for the quarter was $0.04.

Okay.

That we have detailed in our K.

Okay. Well, that gives us an order of magnitude at least. Thank you. And then just maybe just more into the sales effort in the full service lease arena. For the last, I don't know, maybe 18 months or, so you all have been talking about a concerted effort there. And you would think by now that there would be some victories either with taking some share from some of the smaller regional players or perhaps some expansions with some existing accounts that would maybe drive a little more growth there. Certainly the growth in all the other areas looks quite good. Any thoughts as to why that's such a - - as you characterize it, Greg, a grinded out type of sales effort?

I'll turn over to Greg Hyland who is obviously in that segment and closer to it and I'll let him make a few comments.

Yes, John, we've been seeing some wins but I agree, we have not been seeing the wins certainly as we planned. It's - - I think, again, to reiterate what Greg said, it is a grinded out and to move - - the shift moves slowly. And again, I can just reiterate the growth that we're seeing I think in our quotation pipeline gives us the confidence that it's going in the right direction. And that we are confidence that we'll start seeing those wins in the future.

Will that result in revenue out in 2006, or is it possible you may see some of that as early as 2005?

I think our expectations, given the timing on delivery from units from the OEM's, that more than likely we would see that in 2006.

I see. And then on commercial rental, which has been rather strong for quite a long time, even though I think the spreads between rental and leasing are probably close to all-time record highs. Why is it, do you think that, people are so willing to pay that premium just to have the flexibility to turn the equipment back? Doesn't it make more sense for them to lock in the longer-term leases?

Well, when you look at rental results, there is a lot of pieces to it. And we don't always distinguish but there are some components. There's pure rental. There is equipment that is additional lease equipment - - additional rental equipment for customers who already lease. And customers who rent as they are awaiting new leases. So you have some different parts and components. On the general subject I think that every customer in every industry is a little bit different. And their confidence levels will depend on what industry they are in, where their business is and even what part of the country we're in. We're seeing even some differences between regional parts of the country. That wouldn't indicate that there is something that we're concerned about in terms of rental overall or the economy. But that there are different pockets of industries and locales that are just in a different place. So I, I guess part of the answer is customers' confidence levels and how much they want to commit to something longer term and be fixed about it versus still to have the availability of flexibility on a shorter-term basis.

Okay. That's very helpful. And then just one final question on the competitive landscape. Have you seen any change in the behavior of your one large competitor or of your many smaller competitors?

If I did, I wouldn't comment.

There you go. Thank you very much.

Thank you, sir. Our next question is coming from Ed Wolfe. Please state your company, sir.

Thanks, good morning. Ed Wolfe, Bear Stearns.

Good morning, Ed.

Tracy, you said that the CapEx wasn't going - - you weren't going to be spending CapEx in the second half of the year. Did I hear that right?

For commercial rental.

Okay. What's the guidance now? I think through half a year gross is 780 and net is 650 or something like that. What's the full year guidance?

Our full year guidance we haven't changed at roughly $1.4 billion. That's for everything on a global basis.

Okay, and the commercial rental fleet is now where versus a year ago?

Well, we share statistics typically just around our U.S. fleet. That, for the quarter, in terms of size, was up an average of 5% year-on-year. On a global basis, you'll see in our Q, on a global basis, the increase was slightly less than that, probably in the 2% to 3% range.

Okay. So should we assume that if CapEx for that division is flat that it should stay about 5% for the rest of the year up?

Well, I would look to our operating teams and as they continue to work the rental market, and Greg even mentioned some different regional differences; one of the things, tools they use is positioning and repositioning the fleet. So they always have the ability, certainly, to move the fleet around, to downsize it if they think appropriate, or to upsize it with used equipment. But we don't anticipate bringing any new equipment into the rental fleet. But the actual size, I think, will depend on how the teams work the marketplace and their response in the marketplace.

Okay, and in terms of utilization, can you give some numbers now versus a year ago?

Yes, I think we - - Greg shared those and I have those here. Again, this is the U.S. fleet that we highlight relative to utilization. For the second quarter, it was 73.4%. Now, last year that was 77.9%.

And can you kind of take us through the months in the quarter? Did it change much?

Well, seasonally through - - the second quarter was stronger than the first. And as we went through the quart, utilization does improve, mainly because of the seasonality and the rampup and demand on a seasonal basis. So we continued to see it trend up during the second quarter.

That makes sense. Do you have, by any chance, the information July versus July a year ago?

No, we don't have that to disclose at this point.

Or June versus June a year ago?

I think June was, in terms of utilization, it was slightly better on a year-over-year comparison. It was 76.8 in June versus 80.7 last year.

Okay. And you talked a little bit about lengthening contracts as something that's happening. Can you talk a little bit on the leasing side what the average contract is and what it might have looked like a year ago?

Yes, well, just to clarify, the actual single contract is still, when we sign it, new. It usually ranges between five and six years, depending on the vehicle type and how many miles the lessee will run. What I referenced was that the remaining lease term in our total lease portfolio is lengthening as we have all this replacement activity. So you're taking vehicles that were at the end of that lease, that might have only had a month or two remaining and replacing it with a contract that now locks in the revenue streams for five to six years.

So would you say the average length then, is growing though, at this point?

Yes it, is. We don't -- again, for competitive reasons, we don't that. It is lengthening. Obviously that's good for our perspective because we've locked in those cash flow streams for the next five or six years.

Sure, and the - - your slide shows as good as it gets. Appreciate that. Thank you for it. But had you a slide somewhere that talked about the gains on sales and that there were 22% I think more units sold year-over-year and the tractors were up 13% or something like that.

Yes.

Can you talk about - - you said that might moderate a little bit what you think for the rest of the year in terms of' are you thinking the number of volumes is going moderate, but the pricing is going to stay flat or go up? Or what are you thinking in terms of those two things?

We expect volumes to stay at these high levels. That's what we've planned for essentially and our teams have been executing. So we're confident that we can keep those volumes at these high levels. On the pricing, on proceeds, which were up for tractors 13% this quarter, in the first quarter I think that year-over-year increase was 16%. And at that time, we said we don't expect in the rest of the year to see that same level of year-over-year improvement. We do expect pricing to hold at these strong levels. But you're not going to continue to see that year-over-year improvement at quite those high levels. And we saw a little bit of moderation here in the second quarter. And I would say that same level of kind of slight moderation as we go out throughout the year.

Is that because the comps are more difficult or because the fleet that you're selling is getting older?

No, generally it's because the comps become more difficult. And we've seen, particularly in the tractor market, we've seen now a couple of years of good improvement on proceeds. So we're not forecasting that for our purposes to continue at that pace of increase.

Okay, and then just one general question. Ryder has changed so many times over the years in terms of different divisions and different things. Can you talk a little bit how you see seasonality first quarter, second quarter, third quarter, fourth quarter, kind of bigger picture? Which of the quarters should be - - I'm guessing other than first quarter, which is weaker, the other quarters are fairly similar, or should they pick up each quarter? How should we look at that?

The way when you look at the historical quarters, clearly there's a significant pickup from second quarter over the first. Third quarter picks up from there, is traditionally the strongest and then the fourth is about there or slightly lower than the third.

And--

That's what I've seen for six years while I've been here.

Sure, but you guys have been improving on the cost side every quarter, so a lot of your fourth quarters have been better than your third quarters, and it's just hard to know seasonally. So you think that's kind of the same seasonal trend?

I think, yes that overall, the big numbers still drive those kinds of trends.

And the only thing I would add, Ed, is I think the fourth quarter rental, we have experienced different fourth quarters around rental performance and the holiday season. So I think that - - how that - - the strength of that in the month of December sometimes makes the difference as to whether it's as strong as the third quarter or maybe just slightly below.

Sure. Does the engine change that's coming in January '07, does that impact your relationship with your customer in any way? Where they want to prebuy and maybe enter into a lease earlier or not, or is that a non-event?

Yes, Ed I don't want to say it's a non-event. We work with our customers around their fleet plan. But we haven't seen it at a high level as a major issue. We have the ability, as we've gone through these before, to fleet plan with customers. They will make decisions about obviously how many trucks they want and the strategy they want to take. We obviously give them options. We can run their trucks longer. We'll certainly be on top of the new technology and we think this changeover should go a lot smoother than the last one. So it's really customer by customer.

Okay. Thanks, Tracy. Thanks, Greg.

Sure.

Thank you, sir. Our next question is coming from David Campbell. Please state your company.

Thompson Davis and Company. Tracy and Greg, I just - - I'm a little confused about the capital expenditures. The best and most growth you're having, and the best success you're having, and it sounds like in new rentals is in commercial rentals, short-term leases. But you're not going to spend anymore money on that, you say, in the last six months. Instead, you're going to spend more money on I guess full service leasing vehicles where you haven't had as much success. So I'm trying to figure out maybe the reason that your full service leasing revenues haven't increased in the second quarter is because you're not spending any money on full service leasing. Have I got this right, or am I all confused ?

Well, David, on commercial rental, we go into each year with a plan relative to how much we want to spend for our commercial rental fleet. Because, again, these aren't customer-driven decisions. These are really our decisions around commercial rental. And we do that based on the fleet aging and what part of the fleet needs to be refreshed and replaced, as well as any growth that we want to add to our commercial rental fleet. This year we actually pulled forward the actual delivery of the vehicles early. So that's, that's part of the reason why we're done in the first half. We did pull that forward. Typically, and as we did last year, you would see some spending spread out over three quarters. This year we did it in Q1 and Q2.

On rental, we are seeing good growth in rental and our teams continue to go after that market aggressively. We think, though that, we have opportunities with the fleet we have to drive better utilization, so we haven't given up on growth in rental at all. But we think we have the right fleet to go do that. Now, if we drive up that utilization and there's still demand that we want to go after, our teams have the flexibility certainly to run some trucks longer, that might have been scheduled to come out of the fleet or to bring in used equipment to meet unmet demand. So that's not a concern we have in rental. We think we have an appropriate fleet and we want to first drive up the utilization with incremental demand. And then if we need to, we can certainly supplement with used equipment.

And then the lease capital is really driven by the contract signings. We don't place the order until we have that contract signed from customers. So that's really what drives the timing of that. And as we've said, the majority of that spending has been around the replacement activity. Not necessarily driving top line growth in lease but that's very important to us because we are locking up these contracts for a five-to-six-year period.

So is it safe to say that you see the increasing orders for full service leasing coming in the second half of the year and therefore you planned the deliveries of the new vehicles in the second half of the year?

Well, the capital - - we expect to have a healthy level of capital spending for lease in the second half of the year. In the first half, we have spent over $537 million on full service leasing, which is a very healthy number as well. That spending relates to contracts that we signed all the way back to the end of 2004 and early in 2005. So those were contracts that we signed several months ago and we're just now taking the delivery of the trucks. So, there's that delay between contract signing and actually spending the capital. So, the teems will continue to get contract signings for both replacement. And certainly our goal is to get for new business as well. And then we'll take delivery of those trucks later into 2005 and in some cases maybe not even until 2006. And that's why you may not see the - - if we get those contract signings around new customers as we plan, it's really not going to have a revenue impact until next year. Because of the timing between signing the contract and getting the truck delivered. And that's when we record the capital.

So your guidance - - or your estimates of earnings for the year, 2005, I take it, then, assume you didn't give us any revenue forecasts for the year, assume very little full service leasing revenues, organic revenue growth this year.

Yes, I think that's consistent with what Greg Hyland said earlier. Now, certainly our plans are to get those contract signings and even if we get some growth capital in this year, it's not going to have a significant revenue impact this year. The revenue impact really comes over the next five or six years of that contract term. But it's important obviously to get the contract signed as soon as we can.

Okay, and the supply chain solutions division, can you give us the breakout between U.S. and international in terms of revenues?

And the revenue breakout is in our pack. It's in the appendix on page 21 for the second quarter and 22. Operating revenues for the second quarter of '05 in the U.S. were 180 million.

Okay.

And international operating revenues were 68 million.

Okay. Thanks, and what is the $2.1 million miscellaneous income credit in the second quarter?

I think that's year - - is that year-to-date?

It was year-to-date.

And that would have related to - - it's the first quarter, we had talked about we were reimbursed for - - it was a one-time reimbursement for some sales and contracting costs from a prior year. But that was actually recorded in the first quarter.

Okay. And can you give us any estimate of depreciation or interest expense for the year?

Well, I think the best estimate is probably just to look at our year-to-date numbers on depreciation on the cash flow. And through the first six months, depreciation was $368 million.

It's been going up a quarterly basis, as you get - - because of CapEx, I guess.

Yes, it has. I mean you could look at maybe some modest increase similar to what, what we've seen in the quarters.

And the same goes for interest expense?

Interest, year to date for the first six months, interest is about $58 million. As our debt levels move, which we don't expect a big move in the second half, so we probably see - - if you take the third quarter - - or the second quarter number, I'm sorry, which was 31 million, that's for the second quarter, if you look at that same level for Q3 and Q4.

Okay. Thank you very much.

Okay, David.

Thank you. And now our next question is coming from Arthur Winston. Please state your company.

Pilot Advisors. If the commercial and rental results are higher and the gains on sale of trucks look like they are higher too, it would appear that the return on investment of the rental, of the leasing business is probably going down. And I'm curious if the contracts written this year and last year somehow just don't provide the same return on investment as the ones that are rolling off from 4.5, 3.2 years ago?

Well, we don't break out individual return on investments by-product line. A couple of comments. We - -

I don't want you to break it down. I just want to understand why this is happening.

Well, the pricing on our lease contracts and the returns is, has actually improved the last couple of years versus prior years. The gains operation, the used truck operation is part of our leasing operation. Most of those trucks that we sell are out of our leasing operation. So that's when we look at the leasing business, we certainly look at those cash proceeds we generate in our used vehicle operation. And of course there are carrying costs and selling costs to support that operation. Now, we just highlight the gains part as a good indicator of what's going on in the marketplace. But they are very much connected. And we don't, certainly don't separate out the proceeds on the generation of used vehicle sales from our view of our leasing business.

Would it be fair to say that the contracts written now are favorable to our shareholders in our Company as the contracts written 18 months ago?

Yes, and that was a big focus area for us certainly four and five years ago when we started making the turn on that.

So, if I could go forward, basically we're reporting whatever we're supposed to earn this year without much growth, or much kick-in from the contracts written now and next year we could look forward to what we've done this year plus the kick-in of the leasing revenues at a higher level from what we've done now?

Yes.

Okay, and just one last question. On the cost of the debt, the equivalent of the yield, the cost of the debt is going up because of the rising short-term rates and the fact that they are coming on as a higher rate than the debt coming off?

Well, actually we've been able to hold our cost of debt relatively level with last year's. Now, obviously we've seen that increase in the floating rate debt. But as we have been replacing our medium-term debt, our five and six-year notes that have matured this year, we're actually able to refinance at lower rates. So the portfolio for managing - - from a portfolio level, our rate has held steady with last year. We do have increasing debt levels related to our CapEx spending.

Sure.

But we've not seen a rate increase - - overall cost of debt increase this year.

Did I hear right that you said that by the end of the year, the debt wouldn't be appreciably higher than it is right now?

No, it should be relatively flat.

Excellent. Thank you very much.

Thank you. Our next question is coming from John Langenfeld. Please state your company.

Robert W. Baird. Tracy, when you talk about the lengthening contract cycles, how long has that been occurring?

John, I - - it probably - - I think it probably wasn't really till we got into this year that you really saw the volume of replacements start to kind of come in. But it's directly tied to the replacement spending. So it started to pick up last year. But with last year under our belt and now a strong year this year, we're starting to see good movement on that. Which, obviously is something we watch and we constantly look at the value of that lease portfolio.

And was it more or less stable in '04, or was it still declining?

John, I can't,- - I don't have that number in front of me.

Okay.

But we really started to see the movement, I think, with, as we started into this year.

And then as far as the pension goes, what was the year-over-year delta in the pension expense for the quarter?

5 million? 5 million reductions.

On a quarterly basis?

Oh, I'm sorry. That was a full-year number. Let me get it for the quarter. It's - - for year to date, it's about $2 million in the first six months.

Okay.

And I think we were projecting close to 5 million for the full year. So 4 to 5 million for the full year, reduction versus '04.

So did the - - because I think - - I may have my numbers wrong here, but I think in the first quarter you had about a little less than a $2 million impact. Was that - - is that disproportional on the benefit in the second quarter, or are my numbers off?

No, we did our - - we annually do our actuarial review and have what we would call a true-up. We do that every year. And that re-flowed through in the second quarter, so that's probably why you don't see the numbers being even.

I see. Okay. Good enough. Thank you.

Okay.

Thank you, and our next one is coming from David Campbell. Please state your company, sir.

Thompson Davis and company. Tracy, I asked you about that miscellaneous income in the second quarter. It's on the - - I don't know what page it, is but it's on your Ryder System consolidated statements of earnings where it shows $2.1 million. I think that's a credit versus 2.8 last year.

David, that in the seconds is an accumulation of just a lot of smaller things. The only large item that we had going through the miscellaneous income line occurred in the first quarter. It was a $2 million credit that we took as a result of the reimbursement and that's what I was referring to. But otherwise it's just a number of smaller items that rolls up to that. So there's not one thing I could point to in the seconds that's causing that delta.

Okay, and the other question, I didn't ask it the first time around was salaries and related costs being down 4 million roughly from a year ago, and down a little bit from the first quarter. What's - - is that sustainable? What's - - I mean obviously you're getting revenue growth year to year and you're getting revenue growth sequentially. But those costs are down, which is very good, but I just wondered how sustainable that is?

Well, the reduction is driven by a number of things. Clearly in addition to the base pay that's in there, the pension costs are in there and we did note earlier that those are down year-over-year and we also have incentives. Our incentive comps are in there as well. And I think those are the major drivers of change versus the - - any head count reduction changes that are driving that.

So incentive costs are being - - whatever they are, are being amortized across the year, is that correct? So we won't see any big increase in last quarter or something.

Only, if performance were to outpace the expectations. So, we would expect to see that year-over-year reduction consistent with the first half.

Okay. And I guess that's about it for me. Thank you very much for your help.

Thank you, David.

Thank you, sir and now I'd like to turn the call over to Mr. Greg Swienton. You may begin, sir.

All right. I think we're about five minutes short of high noon Eastern Time and I think we've taken all the questions. So I thank you all for participating. Have a good rest of the summer and as always, please be safe. Bye, now.