萊德系統 (R) 2005 Q4 法說會逐字稿

Good morning and welcome to Ryder System, Inc.'s fourth-quarter 2005 earnings release conference call. All lines are 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.

Good morning and welcome to Ryder's fourth-quarter 2005 earnings and 2006 forecast 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 economics, 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, Bobby Griffin, President of International Operations; Vicki O'Meara, President of U.S. Supply Chain Solutions; and Tony Tegnelia, President of U.S. Fleet Management 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.

Thanks, Bob, and good morning to all of you. This morning we will review our fourth-quarter 2005 results, provide you with our forecast for 2006 and also update you on our longer-term objectives for the business. We do have a lot of material to cover today, so I'm going to move fairly quickly through some of these pages in the presentation in order to leave time for questions at the end of the call. So let me begin with an overview of our fourth-quarter 2005 results and, for those of you who are following on the Web, it begins on page 4.

Reported net earnings per diluted share were $0.92 for the fourth quarter 2005 as compared to $0.96 in the prior year period. Reported earnings in 2005 included a $0.03 benefit from discontinued operations and a $0.04 charge from the cumulative effect of an accounting change related to future asset retirement obligations.

Earnings per diluted share from continuing operations in the fourth quarter 2005 were $0.93, up 13% from a comparable $0.82 in the prior year. Comparable earnings in 2004 exclude a $0.14 net tax benefit associated with the resolution of various tax matters. Comparable earnings for the quarter include restructuring costs of $0.4 in 2005 and $0.03 in 2004.

Restructuring costs in 2005 include severance expenses in our UK operations and severance expenses related to offshoring of some administrative, finance and other support functions in our U.S. operations that will allow for cost savings in future periods. The fourth-quarter 2005 actual restructuring costs of $0.04 were above the $0.02 that we estimated on the third-quarter earnings call.

Fleet Management Solutions posted total revenue growth of 7%; operating revenue, which excludes the fuel revenue, was up 1% versus the prior year. Within FMS full-service lease revenue was up 1% and this growth was driven primarily by a 2% increase in the U.S. lease revenue. In commercial rental total revenue was flat with the prior year and we continue to realize higher pricing in rental. However, we reduced the fleet size to more appropriately position the rental fleet as we go into 2006.

Net before tax earnings in Fleet Management were up 3%. Fleet Management earnings as a percentage of operating revenue were up 30 basis points to 12.7%. From an earnings standpoint Fleet Management's results benefited from improved commercial rental and lease performance in the U.S. as well as lower overheads. These earnings improvements were partially offset by lower margins in our UK operations.

On page 5, turning to the Supply Chain Solutions segment, total revenue was up 31% for the quarter while operating revenue was up 12% reflecting the impact of increased managed sub contracted transportation as well as new and expanded business. Fourth-quarter earnings in Supply Chain were up 22% versus the prior year. Net before tax earnings as a percent of operating revenue were up 50 basis points to 5.1%. These earnings improvements stemmed primarily from new and expanded customer contracts as well as lower overhead spending.

And Dedicated Contract Carriage revenue was up by approximately 10% for the quarter on both a total revenue and operating revenue basis due to the impact of new contract sales and customer expansions as well as higher fuel cost pass-through to customers. Net before tax earnings in DCC were up by 52% and as a percent to operating revenue were up 200 basis points to 7.5%. Earnings improved in the quarter due to new and expanded customer contracts as well as due to improved cost performance in our safety area.

If you turn to page 6 you'll see our earnings per share for the fourth quarter. Earnings per share from continuing operations were $0.93 as compared to $0.96 last year. With the $0.03 benefit from discontinued operations and the $0.04 cumulative effect charge, reported earnings per share were $0.92 this year. Excluding last year's $0.14 net tax benefit earnings per share from containing operation of $0.93 in fourth '05 are up by $0.11 or 13% from last year's comparable earnings. Again, as I mentioned earlier, these results include $0.04 of restructuring costs this year and $0.03 last year.

The average number of diluted shares outstanding decreased by 1.6 million shares versus the prior year due to our share repurchase activity. At the beginning of the fourth quarter 2005 we repurchased approximately 69,000 shares at an average price of $33.85 under the previous 3.5 million share repurchase program that was announced in July 2004. The 3.5 million share program has been replaced with a $175 million program that was announced in October 2005.

During the fourth quarter we repurchased approximately 2.6 million shares at an average price of $41.61 under the $175 million program. And during the first quarter of 2006 we have purchased an additional 1.2 million shares at an average price of $42.09 under the current repurchase program. As such, approximately $50 million remains available under the $175 million program. Our fourth-quarter tax rate was 36.6%; in the prior year our tax rate was 27% due to the net tax benefit I mentioned earlier.

If you turn to page 7 you'll see our earnings per share for the full year. Reported EPS from continuing operations were $3.53 versus $3.28 in 2004. Excluding our headquarter sales gained last year and net tax benefits in each year, comparable earnings per share were $3.41 for the year 2005, up $0.50, or 17% from $2.91 in 2004. Our return on capital was 7.8%, up from 7.7% in the prior year.

I'll now turn to page 8 to discuss our fourth-quarter results for the business segments. Total revenue for the quarter was up 13% from the prior year; in Fleet Management Solutions revenue was up by 7% or up 1% excluding fuel. The FMS earnings were up $2.5 million or 3%. The increase was due to improvements in our U.S. rental and lease results as well as the lower overheads. These improvements were partially offset by lower margins in our UK operations.

U.S. commercial rental utilization in the quarter was 77.3% versus 77.9% in the fourth quarter 2004. The difference between our utilization performance this year versus last year improved again in the fourth quarter as we continued to write size our rental fleet. In Supply Chain Solutions total revenue was up 31% in the quarter and operating revenue, which excludes subcontracted transportation, was up 12% due to improved sales results. SCS net before tax earnings were up 22% from 11.4 million in the fourth quarter last year to $14 million this past quarter due to higher operating revenues and lower overhead spending.

In Dedicated Contract Carriage revenue was up 11% reflecting the impact of new and expanded customer contracts as well as higher fuel cost pass-through to customers. Please note that in the segment reporting included in the appendix we've noted the fuel costs for DCC as well as for SCS. Fuel costs in these segments are generally a pass-through to our customers and are impacted by both pricing and volume changes.

The revenue growth in DCC excluding these fuel costs was approximately 6% in the quarter. DCC's net before tax earnings improved by $3.6 million or 52% to $10.4 million due to our new customer contracts and lower safety costs. Unallocated Central Support Services costs were lower by 7% or $700,000 in the quarter. Earnings after all Central Support Services costs improved by 10% before restructuring and any other charges. Reported quarterly net after-tax earnings were $58.8 million as compared to 62.6 million in the prior year. On a comparable basis earnings from continuing operations were $59.5 million, up over $6 million or 11% for the quarter.

In the interest of time I won't review our full-year business segment results on page 9 in detail, but I would like to highlight, however, that 2005 was the first year in quite some time that the Company showed both simultaneous organic revenue growth and improvement in net before tax earnings in each of our three business segments. Total company earnings from continuing operations on a comparable basis were up $29 million or 15% for the full year. At this point I'll turn the call over to Tracy who will cover a number of items beginning with capital expenditures.

Thanks, Greg. Turning to page 10, full year gross capital expenditures totaled $1.4 billion, 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've said previously and as we planned for in 2005, we're currently in a heavier than normal cycle for replacing vehicles from expiring lease contracts. Customer confidence remains high to commit to re-signing long-term lease contracts and this spending is good for our business as we are lengthening the average remaining life of the lease contract in our portfolio.

During the year we sold used vehicles for total proceeds of $327 million, an increase of $38 million over last year's sales proceeds. Sales of operating property declined by $36 million due to the sale of our headquarter's facility in 2004. Deducting all sales proceeds from our gross capital expenditures, we had net capital expenditures of close to $1.1 billion, up by $244 million from 2004.

Turning to page 11, I'd like to update you on our asset management area. We continue to be pleased with the results of our used vehicles sales operation. We sold over 5,600 used vehicles during the quarter, up 32% from last year. Typically we sell most of our used vehicles in the retail market through our own sales centers. This quarter we also sold some older vehicles in the wholesale market in order to better position our inventories going into 2006.

As a result of this activity, while gains were slightly up over the prior year, we didn't experience the same level of increase in gains that we had earlier this year. We do not expect to continue to wholesale significant numbers of vehicles going forward.

Retail sales prices for both used trucks and tractors remain at good levels and we expect that to continue in 2006. Retail tractor proceeds were up 8% from the prior year and up 4% from the third quarter. Retail truck prices were down 5% from the prior year but up 2% from the third quarter.

The number of no longer earning vehicles was up by approximately 550 units versus the prior year's fourth quarter due primarily to higher inventory levels of used vehicles available for sale. While the number of no longer earning vehicles is up over the prior year, we've continued to make progress in reducing this number from it peak of about 8,000 units earlier this year to just over 6,900 units currently.

We believe that our commercial rental fleet is much better positioned going into 2006 than it was coming into 2005. We've taken action to reduce our fleet size by approximately 1,900 units or 5% from the prior year. You may recall that our fleet size coming into 2005 created challenges in the first and second quarters with rental utilization and used vehicle inventory levels. We've taken steps to right size this fleet and, along with the used vehicle sales actions in the fourth quarter, believe that it is currently at an appropriate level.

Turning to the next page, you'll see that we generated cash flow from operating activities of approximately $780 million this year. Our increased earnings and depreciation at that was offset by tax payments related to the IRS settlement which is reflected in the change in working capital line. The Company used $210 million of free cash flow this year as compared to generating $147 million in 2004.

The reduction in our acquisition spending and higher proceeds from used vehicle sales contributed positively to free cash flow results; however, higher capital spending on leased vehicles and the impact of the IRS tax settlement earlier in 2005 moved our free cash flow numbers into negative territory for the year. As a reminder, the tax settlement included the payment of $176 million in cash and approximately $51 million of cash tax payments for the 2004 tax year that were made in the first quarter of 2005. Excluding these tax payments we would have been free cash flow positive this year.

On page 13 you can see both total debt and equity levels have increased as compared to the prior year end. The increased debt level is due to higher capital spending and the impact of the tax settlement I just mentioned, and our share repurchase activity. Balance sheet debt is up approximately 400 million for the year and is up as a percent of equity at 143%.

Ryder's total obligations of $2.3 billion are up approximately $360 million as compared to the prior year-end. Total obligations as a percent of equity at the end of the quarter were 151%, that's up from 129% at the end of 2004. Our equity balance at the end of the quarter was just over $1.5 billion, that's up $17 million versus the end of 2004. The increase was driven by our strong full-year earnings net of the share repurchase and dividend activity. At this point I'll hand the call back over to Greg to outline our 2006 forecast.

As I turn to page 16, let me start by outlining some of the key assumptions and drivers in our 2006 forecast. Our forecast is based on moderate economic growth conditions for the year. The forecast assumes a 10% decline in diesel fuel prices. This decrease impacts our total revenue growth rate, but does not significantly impact our fuel margins as generally fuel cost changes are passed through to customers.

In Fleet Management we plan to continue the positive trends we've seen over the recent months both in improving customer retention rates and growing new sales. We expect to continue significant replacement activity with existing lease customers due to the maturity profile of our lease contracts as well as due to the new 2007 tractor engine.

We expect demand conditions in commercial rental to remain stable. We look to increase the number of rental transactions we capture in the market while increasing returns through our asset management initiatives. We plan to hold our rental fleet size flat in 2006 while continuing to focus on capturing higher prices and improving utilization rates.

Due to the heavy vehicle replacement activity forecast for 2006, we expect to sell a significant number of used vehicles. As such we expect to realize continued strong gains on used vehicle sales in a stable pricing environment. Finally, we will continue to identify and execute cost containment and process initiatives -- process improvement initiatives in Fleet Management in areas such as business process offshoring for administrative, finance and other functions; maintenance standardization and strategic sourcing.

On page 16 in Supply Chain and Dedicated, our focus is on conversion of a strong sales pipeline as well as solid customer retention. We'll continue a multiyear effort to further diversify our customer base within existing industry segments as well as in a segment such as consumer goods in industrial companies which are smaller segments for us today. It will also be important for us to continue managing volume related impacts from some of our automotive customers.

In 2006 we'll look to expand our capabilities in transportation management and capture higher levels of activity in this area. While we plan to continue focusing on cost reduction opportunities, we expect to make some investments in Supply Chain to support future growth opportunities. These investments are anticipated to include building a stronger presence in Asia including in China. For the Company overall we anticipate some contribution to earnings from cost reductions and process improvements. However, the majority of the improvement in earnings will stem from delivering solid leverage on revenue growth.

On page 17, from a financial standpoint we expect operating revenue growth of 4 to 5% for 2006. Total revenue growth will be slightly lower at 3 to 4% due to the forecasted fuel price decline I mentioned earlier. Comparable earnings from continuing operations are forecast to grow by 5 to 9% to a range of $231 to $240 million in 2006. Comparable earnings per share from continuing operations are expected to increase by 10 to 14% to a range of $3.75 to $3.90 in 2006 as compared to $3.41 in the prior year.

The $0.15 we've established largely reflects some uncertainty around the level of automotive volumes we'll see in our Supply Chain business as well as the pace of improvements in our UK operating results. Our average share count is expected to decline by 3 million shares to 61.6 million diluted shares outstanding largely due to the execution of our existing share repurchase plan. We project a tax rate of 38.8% for 2006 and expect that our return on capital will be in a range of 7.8 to 8%. I'll now turn over to Tracy to cover the next few pages.

Page 18 provides a chart outlining the key changes in our EPS forecast from 2005 to 2006. As we previously announced, we've started to expense stock options as of the first of this year and this change will result in $0.10 of incremental expense year-over-year. Additionally, we will incur an incremental $0.09 of pension expense in 2006 due to a decline in the discount rate and actual plan returns in 2005. The decline in our projected share count is expected to add $0.08 to earnings this year. We'll also benefit by $0.13 due to changes in depreciation.

These changes stem from our asset management process which have resulted in us holding vehicles longer and improved market pricing over the past several years. On an annual run rate basis, the impact of these changes is less than 1% of our total depreciation expense. However, because these changes are applied prospectively to vehicles in mid-life, the first-year impact is more significant which is why we're highlighting it here on the schedule.

Moving on across the page, we expect to incur approximately $0.11 in investment costs in areas including our FMS sales organization and in supply chain business development in China. We anticipate cost related actions to result in $0.09 of EPS savings through initiatives in our business operations as well as business process offshoring, which Greg mentioned earlier.

The majority of our earnings improvements are planned to come from growth in revenue across all business segments, revenue and other improvements are forecast to increase EPS by a range of $0.34 to $0.49 for the year. Taken together the combination of planned investments, cost saving initiatives and revenue and other improvements is forecast to result in EPS growth of $0.32 to $0.47 or a range of 9 to 14% improvement.

The next page outlines our growth expectations by business segment. In Fleet Management operating revenue is forecast to grow by 4 to 5%. Gross revenue, which includes fuel, is forecast to grow at a slower rate due to the forecasted decline in fuel costs that are passed through to our customers. Supply Chain operating revenue is expected to grow by 6 to 7% while total revenue is projected to grow by 8 to 10%. While we expect strong new sales activity in this segment, we're mindful of potential volume related impacts from some of our automotive customers in projecting growth rates for Supply Chain.

Finally, in Dedicated Contract Carriage we anticipate operating revenue to grow at 4 to 5% and gross revenue to grow at 3 to 4%. Dedicated has now had three consecutive quarters of improved growth due to our refocused sales and marketing efforts and we'll look for this to continue in 2006.

The next page outlines margin targets for each of our business segments. I'll comment here on our forecast for segment net before tax earnings as a percent of operating revenue. In Fleet Management and Dedicated we're forecasting continued improvement in margins. In FMS a 40 basis point improvement to 12.8% stems largely from revenue growth and leveraging our existing infrastructure as well as from business process improvements. We're also forecasting a 10 basis point improvement to 6.8% in our Dedicated Contract Carriage margins. In Supply Chain we're forecasting a 10 basis point decrease in margin to 3.8% largely due to our planned investment in China and potential volume impacts in the automotive sector.

Turning to page 21, as Greg previously outlined, our full-year 2006 EPS forecast is for a range of $3.75 to $3.90. We're also providing a forecast for the first-quarter EPS of $0.65 to $0.70. This compares to reported first-quarter 2005 earnings per share from continuing operations of $0.64. As you may recall from our first-quarter 2005 call, the $0.64 included a $0.02 recovery of prior year costs. Without this recovery first-quarter 2005 earnings per share would have been $0.62.

Turning now to page 22, you can see we're forecasting total growth capital spending in a range of roughly $1.5 to $1.6 billion. That's up approximately $150 to $200 million over 2005. The increase in total capital is being driven by higher spending in the lease product line with total lease capital projected at $1.2 to $1.3 billion. As has been our practice for several years now, this capital will only be spent once we have signed the lease contracts with our customers.

Commercial rental spending is forecast to decline to $220 million from just over $250 million in 2005. And in addition to the vehicle spending, our forecast calls for $100 million of capital for operating property and equipment. This would include spending to support anticipated new contracts in our supply chain business.

Because we expect to replace significant numbers of older lease vehicles this year, we also expect to sell large numbers of used vehicles. The higher volume of unit sales is forecast to increase our proceeds from sales to $380 million. That's up from $330 million in 2005. As a result net capital expenditures are forecast in the area of $1.2 billion as compared to $1.1 billion in 2005. The higher level of capital spending on lease vehicles this year drives our free cash flow forecast to a range of negative $90 million to a negative $170 million. That compares to the negative $210 million I covered earlier for 2005. Total obligations to equity is projected to be near 140%, that will be down from the 151% at the end of 2005.

The next page provides some additional details regarding our capital spending plan. Our capital forecast is comprised of two pieces. Capital that is spent to replace vehicles which will result in no net increase in revenue, and capital spent on growth that will increase the revenue base of the Company. In 2006 replacement capital for full-service lease is expected to be $1.1 billion while gross capital is forecast in a range of $120 million to $205 million. The growth portion of our capital is projected to result in $25 to $45 million of higher reported lease revenue in the calendar year 2006.

Because these contracts are signed during the course of the year and because of the timing lag between when contracts are signed with customers and when vehicles are received from our OEMs this growth capital will result in annualized revenue of $40 to $70 million. That represents the annual revenue that will be realized and earned over the contract period which in our case averages between five and six years.

Looking forward to 2007, we expect that our replacement capital requirement will decline significantly as the number of leases due to expire in 2007 will be approximately 30% below the 2006 level. This decline is a reflection of past sales activity, contract renewal dates and term extensions made in prior years. It also reflects the fact that we will have been through two years of heavy lease vehicle replacement activity during 2005 and 2006 and therefore a sizable portion of our lease fleet is expected to be under newer contracts by the time we enter 2007. We do expect to have growth capital in 2007, but we're not providing a forecast around that at this time.

In commercial rental, our $220 million capital forecast is entirely related to replacing existing vehicles as we are not projecting a net increase in our total rental fleet count. At this point let me turn the call back over to Greg.

Thanks, Tracy. Let me briefly summarize the key points of our 2006 plan, and they're summarized on page 24. We are strongly focused on continuing the growth we realized in 2005 in all business segments. And while cost controls and business process improvements remain important to our results, earnings growth is expected to come primarily through leveraging higher revenue levels. As such there's no more important activity under way in our Company today than improving our customer retention levels and in winning new business.

We expect to deliver accelerated growth rates in our core full-service lease and maintenance product lines while continuing the positive growth trends we've shown in commercial rental, Supply Chain and Dedicated Contract Carriage. We will continue to emphasize and improve returns on capital while managing the timing of our capital requirements for leased vehicles over the replacement cycle. And finally, we have a strong balance sheet and expect to use our balance sheet capacity to replenish our fleet and support our growth objectives.

Now that we've covered our 2006 forecast, I'd like to take just a moment to outline some longer-term financial objectives for the Company that are outlined on page 26. We have significantly transformed our Company's business over the past five or six years. However, there is still a lot of work that needs to be done in several areas to fully realize Ryder's potential. We believe with these additional actions Ryder can deliver return on equity of 16 to 18% and return on capital in excess of 8%.

Given the strength of our brand name and market reputation, the size of the markets in which we compete, the trends toward outsourcing in the transportation arena and the transformations we're making in our sales and marketing area, we also believe our Company can deliver 6 to 8% growth in operating revenue in the future. We also anticipate that Ryder can realize annual compounded earnings per share growth of 10 to 15%.

These are important longer-term objectives for our organization and we will continue to work towards them with the same level of intensity and focus that has allowed us to be successful in realizing the many other objectives we established and met during the past five years.

That does conclude our prepared remarks this morning; but, before I turn the call over for live questions, let me address one question that we received regarding the status of our CFO search. As we've previously announced, Tracy Leinbach will be retiring from the Company after over 20 years of very dedicated service. And while Tracy will still be with us for a while longer, I'd like to take this opportunity to publicly thank her for her many strong and important contributions to be the business.

We have all greatly enjoyed working with Tracy and she will be missed by all of us, including our employees, our shareholders, our customers and others that she has worked with during her time at Ryder. In terms of our new CFO search, we have been undertaking a diligent and focused process and I am pleased with the progress in this effort. I also expect that we'll announce an our new CFO during the first quarter this. So at this time I'd like to turn it over to the operator who will open up the call for additional questions.

(OPERATOR INSTRUCTIONS). John Larkin.

Stifel Nicolaus. Good morning, everyone. I had a question on the Fleet Management Solutions' net margin before tax. It looked line there were some items working against you in the fourth quarter including fuel; the accelerated sale of used equipment, which I think you referred to as a whole sale type of operation; and then also margins in the UK operation that were a little less than you would have liked to have seen. What do you think the combined impact of all of those items might have been on the margin?

John, we're not breaking the detail out on those particular items. I think you picked up a number of the items. The only additional thing I'd add in terms of looking at year-over-year comparisons has been our decision to bring the rental fleet down here in the fourth quarter of '05 so that we had the fleet in good shape going into what's our seasonally slowest quarter, the first quarter.

That compares to the fourth quarter of '04 where we made a decision to run the trucks through the full quarter. That certainly give us more revenue and margin in the quarter, but really created challenges for us in the first half of the year. So I would add that to your list of items that I think had a negative impact in this quarter, but we're not breaking out and quantifying those separately.

Nonetheless you had a nice expansion on the margin anyway. Second question related to the investments that you're going to be making in Supply Chain Solutions in China. I don't think we've heard too much about that in the past. Could you give us a little color on the extent of those investments and whether ultimately you may actually have some rolling stock in China to support the Supply Chain Solutions effort over there?

I could answer the second part first. If by rolling stock you mean doing things that are FMS related or DCC related, no, those are not our intentions. Our activities would be in supply chain, so we'd be engaged in many of the activities that we currently deploy successfully for customers in other parts of the world. So in transportation management and warehouse management, in global supply chain planning, execution, consulting and so forth and perhaps some on the ground investment in order to accommodate that. Those are the types of things we'd be doing in supply chain.

That's helpful. Then just one final note and I'll turn it over to somebody else. I believe you indicated that the objective for Fleet Management Solutions is to grow the revenue between 4 and 5% in 2006. Would you share with us how much of that you think will be price and how much will be volume?

Let me turn that over to Tony Tegnelia. I'll ask him to turn his microphone on and he's in the room here representing FMS and he might comment a little on that.

John, the way we see the business going into '06, that would all be volume really. We plan to get aggressive on pricing to increase our position in the marketplace and also to be certain that we retain significant portions of the business to a much greater extent than we've retained business in the past. So with very aggressive programs on new sales and also aggressive programs on retention, what you see there really is volume, not necessarily opportunities for up pricing at this point. If there are opportunities for up pricing, naturally we'll never past them up. But our objective is to dramatically increase our retention on existing business and grow new business as well.

Best of luck with that. And I also wanted just to add a thank you to Tracy for doing such a tremendous job on the Investor Relations front.

Thank you, John.

Jon Langenfield.

Robert Baird. First off, Tracy, congratulations for all your work and then also thanks for all the great detail, it was always much appreciated here. Greg, can I get your reflection on the FMS sales environment, what the market looks like to you currently? If you can share with us any of your thoughts on what your net growth rate looks like -- net sales growth rate looks like as well as any changes you have upcoming here and your sales strategy as you look at '06?

I would say in terms of the environment we believe that, because of increasing complexity with increasing desire of customers of many sizes or all sizes looking to focus on their core and improve their competitiveness and improve their bottom-line performance, that outsourcing, which is really what we provide in that segment and all segments, is very healthy and I think very dynamic. And as you go into 2007 and you go into future periods, going toward 2010 you've got another compelling factor that I think further complicates the lives of private fleet owners in the technology changes.

So the ability to keep up with that, the ability to assess risks on residual values of equipment, training, inventory and all of the other things that go into the provision of maintenance in a fleet itself. We think all of those are in our interests and serve us well in terms of a market environment and a growth environment.

In terms of net sales, we don't disclose net sales for competitive purposes, as I think you may be aware, and ultimately we do report our revenue, but we've chosen not to be specific on net sales because of the fact that we are the only public trading company in that sector and that wouldn't serve us well.

In terms of strategy in sales, I think we're going to keep doing what we have been doing. We have I think a very compelling value proposition to our customers. We obviously want to expand the customer base that we are approaching both in geography and in size, and we have been taking steps, as we've also mentioned before, on improving the quality of our industrial contact sales organization. So all of that continues, but really no change.

Good detail. And I'm assuming from some of the comments you made about the U.S. environment you're starting to see the benefits of those changes that really you started to put in place 12 to 18 months ago?

Yes, and the fact that we said this quarter that we had leased growth of 2% in the U.S. Although that's not a number we're jumping up and down and excited about, the fact is we haven't seen that number for quite some time. So we take some comfort and confidence in our belief that the things we've put into place and the trends that we're beginning to see we feel confident in that. So yes, that was a good sign.

Okay. And then one last thing I guess on the supply chain side. One of your competitors commented on pricing pressure relative to the warehousing side of their logistics business, that being Menlo. Have you noticed any similar trends that have been more aggressive than in previous years?

I'm going to let Vicki O'Meara comment on that. I'm not sure that I personally have seen anything more aggressive than any other period, but I'll let Vicki comment on that as she's been closer to it.

Thanks, Greg. It remains a highly competitive environment, though I have to reflect what Greg just said. We haven't noted what -- apparently you found some memo -- that there's been any heightened level of competition or aggressiveness around price. So it certainly remains a very aggressive and highly competitive environment. Nothing new in terms of the trends.

Great, thank you.

Edward Wolfe.

Bear Stearns. A couple different things. First, on the CapEx side have you thought longer term in terms of where the cycle should look? So it looks like it's going to ramp up some more in '06; would you expect at this time, given the economy stays fairly similar to where it is, that CapEx in '07 directionally should start to come down at some point?

Ed, certainly when we look at what we call the replacement spend and we correlate that to the number of units we know that are going to -- whose leases are going to expire in 2007, we expect a roughly 30% decline in the number of units that are going to expire in 2007 versus 2006. So as we've been saying, '05 and '06 were very heavy years peaking in '06 and then we're really going to see a drop-off in terms of what has to be replenished in our fleet.

Now on the growth side, our teams are focused on growing full-service fleets with real focus and penetrating ownership. We don't feel that follows necessarily a particular cycle and our ability to penetrate ownership, whether we take over their fleet or whether we go out and order new trucks, is really largely going to be driven by our team's success and not particularly by a cycle that would follow what we see in the replacement side.

And again, how much of the 1.6 billion is for growth?

The 1.6 billion for 2006 in lease growth is a range of 150 to 205 million.

Would you think that's a normal for '07 if you think about it that way going forward or you could see that going even higher?

No, I think we could see that going higher based on the traction we're beginning to get, but still in early phases in terms of our sales efforts and our focused efforts there. So I think we would expect it to go higher for '07 and '08.

When you look at FMS margins, in third quarter you had the big improvement, a couple hundred basis points, and we talked on the call last time about maybe some of that was from fuel. Is there anything else that we'll see or not see? And the feeling I got was that you felt pretty comfortable that you've taken out enough layers of cost over time that this was going to be more of an ongoing event. And then this quarter we're flat year-over-year on the FMS margin.

I'm trying to understand, you talked a little bit in your remarks, Tracy, about gains on sales not being as strong because you did some wholesaling versus retailing. Can you talk to which is more normalized, the third quarter where you had the 200 margin improvement to 14% or the fourth quarter where you had 12.7% contribution margin?

I'll trying to address the second part first and then ask Tony to maybe get into some of the details and elaborate on some of the comments we've already made. I think the best way to look at our margins in FMS and our continued belief that we have good margin expansion opportunities there is to look at what we're forecasting for 2006.

And we are forecasting on a full-year basis when you get the kind of seasonal aspects of the quarter or onetime aspects of what can happen in a quarter out of it that we're going to continue to see that margin expand in 2006. Largely from leverage from revenue growth, but there are activities going on in the business around process and cost reduction that will help that as well. So I think that's probably the best way for us to kind of articulate our ongoing belief that we can expand those margins. But I'll let Tony maybe elaborate a little bit more on some of the fourth-quarter items.

Thank you, Tracy. Ed, I think the most significant area really to reflect on in the fourth quarter really was readiness for '06 and preparedness for '06. We were very diligent from an asset management point of view to really manage down the rental fleet because we're not happy at all with the utilization rates on rental that we experienced earlier in the year and we did see that turnaround in the fourth quarter compared to last year. But we're looking forward to improved utilization rates in the rental fleet going into '06 as a result of that activity in the fourth quarter.

That resulted in, again, using our asset management skills, wholesaling more units than we would have preferred perhaps in the fourth quarter compared to the third quarter or last year's fourth quarter as well so that we began the year with an inventory level for the used vehicle sales that had the right aging and the right balance that we were comfortable with going into '06. So most importantly in the fourth quarter you saw a lot of readiness on the rental side and on the UTC inventory side for us to generate the kind of returns on the rental fleet that we want and we do think we will see much more leverage improvements on the P&L performance going forward.

That's helpful, Tony. Tony, what's the rental fleet on January 1, '06 versus January 1, '05? Do you know that number?

Well, it will be lower at January 1, '06 than it was on January 1, '05. If you recall, we started '05 a little heavy on the rental fleet because we carried more units into the first quarter of '05 from the fourth quarter of '04. And as a result, that gave us some utilization performance in the first several quarters of the year that we were not particularly pleased with. So it will be lower clearly starting '06 than it was in January in '05 (multiple speakers) significantly more units of rental in '05.

Let me give you the exact numbers. For our global rental fleet at the end of '05 were about 40,500 units, that's down from 41,700 units at the end of '04. That's a 3% decline. What we highlight in the pack is the U.S. fleet and that's actually down 5% year-over-year.

How should we think of those two fleets, the overall and the U.S. fleet, throughout '06? Is the plan right now to keep it kind of flat so that for the year it will be down 3% and 5% give or take?

Yes, the plan is flat for the year. Now during the year our operators are going to take advantage of seasonal opportunities and they'll let the fleets flex up a little bit in the second and third quarter and then bring it back down again in the fourth quarter. So there will be some flexing up and down during the year, but on an average probably flat.

(multiple speakers) the comment you made about you're projecting a 40 basis point margin improvement. Combined with what Tony said that probably pricing is going to be a little bit down year-over-year. So you're seeing with more volume in the leasing business, more tractors out there and the chance for a little bit of cost and a little bit of operating leverage you can overcome the pricing? Or have you assumed pricing is flat? How are you looking at that?

The two segments of the business are very different. We see the revenue growth on the rental side clearly coming from up pricing and also improvements in utilization because the fleet, as we had mentioned, will be flat. On the lease side, we think it will moderate a bit, be flat, steady-state to really aggressively grow the revenue as we plan.

So steady-state pricing and lease to grow the revenue, is that right?

Yes.

Yes, I think that's fair.

That's in the assumption of the 40 basis points or so of margin improvement year-over-year?

Yes, that's right. Along with productivity improvement work and overhead containment as well to drive the bottom line also.

Vicki O’Meara: And I would add, Ed, on the used vehicle sales proceeds, that increase year-over-year is really driven by volume as well. So we really haven't baked in much in terms of price improvement even though we've experienced it in the prior years, our focus is much more on the volume going into '06.

Okay. And on the dedicated margin there was such a big uptick, over 300 basis points in the quarter year-over-year. Is there anything unusual or something we should look at in that for this quarter?

Vicki O’Meara: That reflects the improvement in the focus of the marketing efforts in the dedicated portfolio and also a significant improvement in safety performance which we will continue to replicate and enhance. So those levels of safety have -- we've reached unprecedented levels of performance and safety which go right to the bottom line.

I would emphasize the teams there are doing a great job on safety and driving down frequency and severity. We do have a self-insured level that goes up to $3 million per claim and we've managed the insurance operations for years. But it can cause some quarter-to-quarter fluctuations particularly in this business. And so we certainly had a good result on some of our bigger claims in the quarter as well. But that all starts with the good safety performance Vicki mentioned which is lower in frequency and we're very pleased by those trends in our operations.

All right. But it looks like you're projecting 20 basis points or 10 basis points of year-over-year improvement in margin in '06 versus the 300 this quarter. So we shouldn't interpret the 300 going forward, we should look for some and better revenue growth it looks like?

Yes, that's fair. We had a real focus over the last year on our customer base in Dedicated which had a real impact on margin. We'll continue that effort, so we don't expect to see the same level of accelerated change like you saw last year.

Okay. And just two quick questions on the cash flow and balance sheet. Tracy, what did you buy back share wise in the quarter? And how should we look at the CapEx rise and the aggressiveness of how we should expect the rest of the authorization to go over?

I think Greg covered those numbers earlier in his comments on trying to get to the numbers, so I can give them to you. In the fourth quarter we actually had our old program in place where we purchased 69,000 shares. And then on the new program, the $175 million program we actually purchased 2.6 million shares during the quarter. So just under 2.7 million shares for the quarter. Under our existing program we have only $15 million remaining. I think it's fair to say and from our plan perspective we expect to complete the $175 million program in the first quarter of this year.

And is it fair to say that even with the use of cash this year, given the under leverage of the balance sheet that another share repurchase isn't out of the question, or are you thinking differently right now?

I'll probably answer that the way I've answered before we did this recent program. We're not indicating how we might go in that direction. I think your points are right about being underleveraged and that's why we said that our target in total -- in terms of leverage was 2.5 to 3 times. We think that's appropriate for our business. Obviously this buyback made some mall moves in heading us in the right direction toward our leverage target, but it wasn't designed to get to the full target.

So We will continue to evaluate that relative to all of the other needs for cash as well as the other objectives that we have for growth capacity, maintaining our margins and maintaining a strong investment-grade credit rating. So all of that we'll always take into consideration but at this point I'm not making any forecast or commitment as to what we would or would not do.

Okay. Then last question, on the balance sheet, can you just give direction on fixed versus variable debt at the end of the year.

I think at the end of the year we were at about 34 to 35% variable and we would expect to stay -- going into 2006 and to stay within our stated range certainly of 25 to 45%, but as we have the last year, we've stayed around that 30 to 35% range. I don't anticipate anything more significant.

Okay. Thanks, everyone, for the time and all the best of luck, Tracy.

Thank you.

Brannon Cook.

JPMorgan. I had a question on the rental business. Clearly it sounds like you're focusing on price there and not as much on growing the business and number trucks. And I know you've been trying to improve the utilization rate there. Has there been any change in the marketplace that you see that make you more or less ambitious about growing that business looking out over the next couple years?

Brannon, this is Tony Tegnelia. We don't see necessarily dramatic changes in the marketplace as it relates to rental. But we are very cognizant of our investment level in that fleet. It does have a different risk posture than lease. So we are going after revenue growth. We're going after margin and return improvement with up pricing and higher utilization compared to '05 and also '04.

So we don't see the market dramatically different. We want to continue to progress as we have, but we're looking for returns on that investment level and we want to get it through up pricing and also through utilization. It's easy just to grow the fleet and also grow revenue and put capital to it, but we don't like the returns that we get on the capital from that. So we're going for utilization and return on capital.

Okay. And then a question on the leasing business. I know you've been making an effort to extend the length of contract terms you've had with your customers. I guess that's around five or six years now. Could you give us a sense of maybe where that number was two or three years ago and where you see that going over the next couple years?

I think in terms of the actual stated contract terms, it has lengthened a little bit, but I wouldn't call it significantly. I think where we've really had success has been in two areas in terms of lengthening what I'd call the effective term of the lease. Years ago we had some very bad practices about breaking leases early and we'd actually go into customers -- we had our sales teams go into customers and, in the fourth year of a five- or six-year lease, actually renew that lease early. So we never really kind of fulfilled the economic promise of the first lease from our perspective. So we addressed that issue years ago and we have the disciplines in place to make sure that doesn't happen on a widespread basis as it did years ago.

The other area where we've been effective is where we actually let a customer run the full stated lease and then we'll go in and talk to that customer and talk about extending the lease six months, a year, 18 months -- really depending on the condition of the vehicle, the application of the customer or the application of that vehicle and, frankly, the conditions around used vehicle pricing and what's going on in the customer's business.

So I think it's really been in those two areas that have lengthened out the actual holding period of trucks, not so much the stated contract term, although that may have changed modestly. It's really been how we've managed around it that has been very effective for us. And you see that in our earnings, in our cash flows and in a lot of other areas.

So looking forward we shouldn't expect that holding period to increase much from where we are today?

I don't think so. It really depends on the type of vehicle and the mileage applications. If we think trucks' quality is better or if we find other ways to maintain it to extend the life, you could extend that out. But I don't expect that as a business strategy. That would really be driven by truck quality and maintenance practices over a longer period of time.

Okay. And then finally a question on Supply Chain. I know you mentioned that -- you included in your guidance in '06 potentially some automotive weakness and volumes, etc. And obviously Ford and GM have come out and announced some of their plant reductions in plants over the next several years. Have you had a chance to really go through and look through those plans and try to delve into your exposure the specific areas?

Yes, we absolutely do and maybe I'll ask Vicki to comment on both of those because she is responsible for that segment and we do pay a lot of attention and do advance planning.

With respect to Ford, Ford is a valued and long-standing customer of our Supply Chain Segment; however, they are not one of our largest Supply Chain accounts in terms of revenue and we would expect no material impact in 2006 from their recent announcements. In terms of General Motors, we are a long-standing and very valued supplier of General Motors. We're positioned in very important places in their manufacturing processes around the world. We have assessed the impacts of their recent announcement as well and do not expect any material impacts in 2006 from those announcements.

Okay, thanks for the time.

David Campbell.

Thompson, Davis & Company. Good morning, everybody. I wanted to just get a feeling for the revenue growth in '06. It sounds like you will be getting commercial revenue growth from your policies of utilization and pricing, but there wasn't any net revenue growth in the fourth quarter. Can you kind of explain why you're seemingly more optimistic about '06?

In the fourth quarter our vehicle count on the rental fleet was really lower than it was in the fourth quarter of last year and also lower than it was in the third quarter of this year. So we have made changes on the sales and marketing side relating to rental. The comments that Tracy had mentioned earlier relative to investments in the sales and marketing group are relevant to that. We will have more marketing and sales coverage in the field, and we think that will drive the up-pricing opportunities and also the utilization as well, along with very strict asset management activities at the same time.

We also plan to do better sequencing of the rental fleet throughout the peak season of 2006, having the right vehicles in the right place at the right time with the right pricing, which will help us optimize utilization and also get that price increase uptick that we had discussed. So we are optimistic about rental for '06.

But the fleet count in commercial rentals will be down again in the first quarter; is that not right?

Yes, it will. But as I said, we really feel strongly that up-pricing and better utilization and management of the fleet will drive the revenue growth that we anticipate throughout the year. Remember, the revenue growth rates that Tracy had discussed, and Greg, are annualized growth rates. And we are relying heavily on the season to really drive those for the full year as well.

I would just add, rental is seasonal in terms of the quarters. And I would remind everyone that in the fourth-quarter growth rate, the 0% that you highlighted, that was somewhat self-induced because we in the fourth quarter of '04, we made the decision to hold trucks and to generate more revenues and margins in that fourth quarter. We were really challenged with that decision because then we were overfleeted for the first quarter.

So end of '05, we made a different decision and we decided to forego some of the incremental revenue and margin. So we were really working against ourselves in terms of fourth-quarter growth rates. In terms of the fleet going into the first quarter, the first quarter is seasonally our lowest in terms of revenue. But if you go back to our first call, first-quarter call of 2005, our fleet was up 14% year-over-year, which was just way too high. And that is where we paid the penalty, for holding those trucks in the fourth quarter.

So I think what is most important in terms of revenue growth for the beginning of the year is that we have the right fleet in the right place, and clearly we had way too many trucks last year. I would expect our teams to show much better utilization on the fleet they have this year versus last year. I don't think we are as concerned about year-over-year revenue growth as you might just get looking at fleet levels.

In full-service lease revenues, you had 1% growth in the fourth quarter on a net basis. Do you expect better than that in '06?

Yes, there are two pieces in that, because a lot of our focus and the biggest part of our market is in the U.S. We did 2% this past quarter, and we expect to do better than that in 2006. And that is reflected in the overall growth in FMS that includes all of our global operations, but largely influenced by the U.S. at a 4 to 5% growth level.

So the UK had an impact, obviously, on that revenue growth?

Yes, it did, and that is why even in the earnings in the fourth quarter were affected by some of the restructuring work that we needed to do to get some changes made in that part of the world.

Okay. Tracy, do you have any estimates you can give us for depreciation and net interest costs for '06?

We do. We have -- in fact, it is in the pack. I think our depreciation expense for 2006 is going to be $790 million; that is our point estimate. What was the other number?

The interest expense.

We aren't breaking out interest expense, although I did say I think on the third-quarter call, we don't expect our effective interest rate to increase significantly over the 2005 level. And I think for 2005, that is roughly 5.6%. So you can look at that versus our debt levels, which obviously are going up.

In China, you mentioned the expenses in the Supply Chain Solutions division. Could you do those nonrecurring? They are obviously not generating any revenues in '06; is it fair to say?

Well, it would be modest in '06. We have done some work already for customers in China, so it is not that this is a brand-new never-before explored area for us. What we wanted to do was to have a significant more staff, as well as facility operations, because we have more and more customers who have so much relied on our expertise and our performance in a number of these solutions areas that they've wanted us to be on the ground. So clearly, there is an imbalance when you start up between the costs and the revenue, but it is not like it is all cost and no revenue. But there will be more cost and some revenue.

And that is built into your profit estimates for Supply Chain Solutions?

That is built into the 2006 estimates, yes.

You'll see it mostly in the P&L through the salaries and related costs?

You'll see it in the P&L and supply chain. In fact, if you look to the page that we described the year-over-year performance on the net before tax as a percent of operating revenue, it declines by 10 basis points. Part of that reason for the declination is the investment in China.

Okay. But the bottom line is, as far as '06 is concerned, you seem to be talking about a 4 to 5% net revenue growth number for the Company excluding the fuel costs. Is that roughly correct?

That is absolutely correct.

Is there any upside to that? If there is any upside, where would it be and how would it be?

I would love to say that there is upside. We think we have tried to bracket the growth in where we think is pretty reasonable. I think if there is upside, it could be in various segments. It could be just in better performance, better selling. You could have customers who haven't cut back on volume. The domestic automotive manufacturers could be doing better in selling their cars and keeping their lines open, as opposed to having been shut down this year. Lease sales activity or rental could be stronger.

I mean those are the core things that we would love to be able to take advantage of if they are there, but we think it would be inappropriate to guarantee that. We think we have got the overall growth rate bracketed to improve, but not to take it to a level that we think is unreasonable.

And on the expense side, you really haven't got -- there is not a lot of flexibility there. You are pretty much targeting what the expenses are going to be.

Well, we continue this year as we have in former years to always identify specific cost initiatives that should help the margins. And I think on an EPS basis, our waterfall chart said $0.09 in initiatives. So, obviously, some of our -- a good portion of our networks are fixed, but at the same time by process change, process improvement, even doing some administrative offshoring, we think that there are opportunities for bottom-line improvement.

Okay, thank you very much. Good luck to you, Tracy. I thank you very much for your help.

Thank you, David.

Operator, I think we are over time, but why don't we take one more call.

[Lee Markowitz].

Pilot Advisors. I have a couple questions for you regarding rising truck prices in 2007 with the engine change. As they are going up, prices of new trucks, does that affect any of your businesses, and if so, what way? Then just secondly, what does that do to the overall value of your existing fleet compared to book value and gain on sales going forward?

Lee, this is Tony Tegnelia. We are in the process of working with the OEMs to determine exactly to what extent those investment costs will rise as a result of the '07 engines. And we are not entirely sure at this point in time where that will come out. But we do think that a number of individual customers may prefer the '06 engines over the '07 engines. So we may see some accelerated uptick of early replacements and people making some decisions earlier in '06 to have those engines rather than having the first fleet of vehicles for the '07 engine.

So we see that there may be some market activity into the year as a result of that coming onboard. We haven't seen it in any meaningful way yet, and we don't know exactly where we will come out on the increased level of investment on the vehicles yet as well.

I would just add for our lease product line, which is obviously where we spend most of our capital, we will take whatever that price is for the truck and price that in or rate it into the customer. So that inflationary cost is passed through in our lease pricing to customers, as well as any impact on fuel efficiency.

Okay, great. Then just as far as the value of that fleet on your books versus compared to book value, do those go up as the value of new trucks are rising?

Lee, historically, we have seen as Tony said, there tends to be some uptick in terms of higher demand for grandfathered-in vehicles. We certainly don't make a bet on that. When we set our residuals and depreciation policy, we are pretty rigorous about that. We look at it over the long-term. It could happen, but we're certainly not counting on that in our plan or how we set our residual policies.

Okay, thanks.

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

I thank you all for taking the extra time. We had a lot of extra things to cover today, not only the results but also the '06 plan. So thank you for your time and attention, and have a safe day and weekend. Bye now.

That concludes today's call. You may disconnect at this time.