萊德系統 (R) 2006 Q1 法說會逐字稿

Welcome to the Ryder System Inc. Third Quarter Release Conference Call. [OPERATOR INSTRUCTIONS] I'd like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

Thank you. Good morning, and welcome to Ryder's First Quarter 2006 Earnings Conference Call. We'd's 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 Mark Jamieson, 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 able 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, everyone. Today we'll review our First Quarter 2006 results, update you on a number of other items, including our asset management area, review our outlook for 2006 and then, of course, open up the call for questions. Let me begin with an overview of our first quarter results, which are on page four of the PowerPoint presentation. Reported net earnings per diluted share were $0.77 for the first quarter 2006, up 20% as compared to $0.64 in the prior year period. Earnings in the first quarter this year included a $0.02 benefit from the receipt of stock in prior years from Mutual Insurance Companies. Earnings in the first quarter of 2005 also included a $0.02 benefit due to the recovery of prior year's project costs from a customer. Without these benefits in each year, comparable earnings would be $0.75 this year versus $0.62 last year, up $0.13 or 21%. Total revenue for the Company was up 14% in the quarter. Operating revenue, which excludes fuel and subcontracted transportation revenue, was up 5% with all business segments contributing to operating revenue growth in the quarter.

Fleet Management Solutions posted total revenue growth of 6%, while operating revenue was up 1% versus the prior year. Within FMS, full service lease revenue was up 2%, driven by higher growth rates in North American operations. The growth rate of lease in the first quarter of 2% is up from growth rate of 1% we saw in the fourth quarter last year, and up from no growth in the third quarter 2005, excluding any impact of foreign exchange. In commercial rental, total revenue was down 2% with the prior year. We continued to drive higher pricing and returns in rental, and this helped to offset our planned reduction of 8% in the average size of the global rental fleet. Net before tax earnings in Fleet Management were up 6%. Fleet Management earnings, as a percent of operating revenue, were up 50 basis points to 10.7%. As a reminder, FMS margins in the first quarter are typically lower than in subsequently quarters due to seasonality impacts. From an earnings standpoint, Fleet Management's results benefited from improved performance in both commercial rental and full service lease in North America. These operations improvements were partially offset by higher overhead for the segment and lower margins in our U.K. operations.

Turning to page five and the Supply Chain Solutions segment. Total revenue was up 35% for the quarter, which includes the impact of increased managed subcontracted transportation. Operating revenue was up 14%, reflecting the impact of higher volumes with existing accounts as well as new and expanded business. First quarter earnings in Supply Chain were up 64% versus the prior year. Net before tax earnings, as a percent of operating revenue, were up 120 basis points to 3.9%. These earnings improvements stem from higher volume levels, as well as new and expanded customer contracts. In Dedicated Contract Carriage, total revenue was up by 8% for the quarter and operating revenue was up by 7% due to the impact of new contract sales and customer expansions, as well as higher fuel costs passed through to customers. Net before tax earnings in DCC were up by 44% and, as a percent to operating revenue, were up by 160 basis points to 6.3%. Earnings improvement in the quarter were due to new and expanded customer contracts, as well as due to improved cost performance in the safety area.

On page six we'll highlight some financial statistics for the quarter. As I mentioned earlier, operating revenue was up 5% for the quarter as compared to last year with growth coming in all business segments. On 5% operating revenue growth earnings per share were up 20%, reflecting good earnings leverage on operating revenue growth. Reported earnings per share were $0.77 as compared to $0.64 last year. As a reminder, on January 1 of this year in 2006, we implemented stock option expensing. So without this impact, diluted earnings per share would have been $0.03 higher, or to $0.80 in the first quarter this year. The average number of diluted shares outstanding decreased by 3.7 million shares to 61.4 million versus the prior year due to our share repurchase activity. During the first quarter 2006 we purchased 1.6 million shares at an average price of $42.18 under the previously announced $175 million repurchase program. The repurchase program was completed during the first quarter, bringing the total shares purchased under the program to 4.2 million shares at an average price of $41.81 per share.

Our first quarter tax rate was 39.9%, reflecting a true up for non-deductible items from the prior year. For the remainder of 2006 we are expecting a rate of 39.1%, somehow higher than the 38.8% we previously forecasted for full-year 2006 due to a higher amount of non-deductible items than assumed in the plan. Our adjusted return on capital improved from 7.7% in the first quarter last year to 7.9% first quarter this year. Now we'll look to page seven to discuss our first quarter results for the business segments. Total revenue for the quarter was up 14% from the prior year. In Fleet Management Solutions revenue was up 6%, or by 1% excluding fuel which is passed through to customers. Fleet Management Solutions' earnings were up $4 million or 6%. The increase was due primarily to improvements in our North American results for both the full-service lease and commercial rental product lines. These improvements were partially offset by higher segment overheads and lower margins in our U.K. operations.

As I mentioned earlier, in 2005 FMS benefited by a one-time $2 million reimbursement of cost from a prior year. Excluding this benefit in the prior year, FMS earnings were up by 9%. U.S. commercial rental utilization in the quarter was 69.1%, roughly flat with the 69.2% in the first quarter of 2005. Rental utilization rates were somewhat below prior year comparisons in January and February, but they improved in March and in April versus our prior year comparables. While we are not changing our overall rental fleet count plan for the year, we are making some geographic and other adjustments to drive higher utilization rates going forward. In Supply Chain Solutions total revenue was up 35% in the quarter and operating revenue, which excludes subcontracted transportation, was up 14% due to improved customer volume levels and new sales activity. SCS net before tax earnings were up 4.2% or 64% for the quarter due largely to these higher revenue levels. In Dedicated Contract Carriage revenue was up 8% due to the impact of new and expanded customer contracts, as well as higher fuel costs passed through to customers. Excluding subcontracted transportation and fuel, revenue growth was over 4% in this segment, reflecting stronger sales activity.

DCC's net before tax earnings improved by $2.6 million, or 44%, to $8.5 million due to our new customer contracts and lower safety related costs in the quarter. Unallocated central support services costs were down by 16%, or $1.4 million in the quarter. This improvement reflects the one-time benefit from recognition of stock received from insurance companies I mentioned earlier, and total central support services costs are down by 9%, or $4.4 million, for the quarter which also reflects a reduction in information technology spending due to cost containment initiatives. Earnings before income taxes improved by 18%, or $12 million, to $79.2 million for the quarter. Quarterly net after tax earnings were $47.6 million as compared to $41.5 million in the prior year, up by 15% or $6.1 million. I'm going to turn the call over now to Mark Jamieson, whom has been with us for now just under a couple of months. During the last call, a number of you asked how the process was going for the replacement for Tracy Leinbach, who was retiring. So as you saw from the notices, Mark has joined us. Some of you have actually met him in person or spoke to him by phone, but officially let me welcome Mark to the call and I'll turn it over to him right now.

Thanks, Greg. Turning to page eight. First quarter gross capital expenditures before acquisitions totaled $369 million, down by $137 million from the prior year. Lower capital spending was driven by a decrease in commercial rental spending of about $134 million. This lower rate of spending in the first quarter is a timing difference, as last year we took delivery of most of our rental vehicles in the first quarter. This year we anticipate taking delivery of most of our rental units in the second quarter, which is consistent with a typical vehicle delivery cycle for this product line. On a full-year basis, we continue to expect spending to be somewhat below 2005 levels. Our lease capital spending in the quarter was fairly flat with last year.

As we have discussed for some time now, both 2005 and 2006 are heavier than normal years in terms of replacement spending on vehicles for expiring lease contracts. We continue to see strong levels of customer confidence in renewing long-term lease contracts that are scheduled to expire. Overall, this spending is a positive as we are lengthening the average remaining life of the lease contracts in our portfolio and also are reducing the average age of our fleet. As a reminder, in looking ahead to 2007 we anticipate a 30% reduction in the number of lease units scheduled to expire, and this should reduce our capital requirement next year. We realized proceeds from sales of mostly revenue earning equipment of $89 million, up by $11 million from last year's first quarter. Deducting sales proceeds from gross capital spending, our net capital expenditures were $280 million, down by $148 million from last year. And finally on this page, the $4 million of acquisition spending in the first quarter 2006 represents payment of a hold back on the Ruan Leasing Company acquisition, which was completed in March 2005.

Turning to the next page. You'll see that we generated cash from operating activities of $117 million this quarter, primarily through our earnings and a depreciated add back. The Company used $108 million of free cash flow this quarter, as compared to using $382 million in the prior year. Both cash from operating activities and free cash flow in the prior year included approximately $225 million that was paid to the IRS in the first quarter 2005 related to the resolution of the 1998 to 2000 tax audits, and the payment of 2004 taxes. The reduction in our capital spending and higher proceeds from the used vehicle sales were both positive contributors to the free cash results for the quarter. On page 10, you can see total debt has increased as compared to the prior year-end. The increased debt level is due to our negative free cash flow, as well as our share repurchase activity. Balance sheet debt is up by $113 million over year-end 2005, and is up as a percent to equity from 143% at year-end to 150 percent at the end of the first quarter. Ryder's total obligations of approximately $2.4 billion are up by $114 million as compared to the prior year-end. Total obligations as a percent to equity at the end of the quarter were 159%, up from 151% at the end of 2005. Our equity balance at the end of the quarter was $1.52 billion, down by $4 million versus the end of 2005, reflecting our net earnings offset by first quarter share repurchases.

Turning to page 12. I'd like to update you on our asset management area. We're pleased with the results of our used vehicle sales operation. We sold almost 5,400 used vehicles during the quarter, up 8% from last year. We have taken the appropriate steps to ramp up for higher used vehicle sales this year due to our anticipated heavy vehicle replacement activity. Retail sales prices for both used trucks and tractors are at good levels, and we expect them to remain so this year. Retail tractor prices with a were up 4% from the prior year, while retail truck prices were down 4%.

The number of vehicles no longer earning revenue was down by over 1,000 units, or 13%, versus the prior year's first quarter due to operational improvements as well as a reduction in our used vehicle inventory. Overall, our used vehicle inventory is close to our target of three-months worth of inventory on hand. Our U.S. commercial rental fleet is down by approximately 7% on average over the prior year, as was planned. As a reminder, we elected to wholesale some units in the fourth quarter last year in addition to our regular retail sales activity in order to bring the fleet size down to a more appropriate level. As planned, the rental fleet will increase somewhat during the busy summer season as we take delivery of new rental vehicles. However, we continue to plan to end the year with a flat rental fleet count. At this point, I'll hand the call back over to Greg to outline our 2006 forecast.

Thanks. If we go to the outlook page on page 14, we are increasing our full-year 2006 earnings per share forecast by $0.07 to a range of $3.82 to $3.97 per share. This represents EPS growth of 12 to 16% versus comparable earnings from continuing operations in 2005 of $3.41 per share. We're also establishing a forecast for second quarter EPS in a range of $0.95 to $1.00. This represents EPS growth in the second quarter of 10 to 16% improvement versus comparable earnings in the second quarter 2005 of $0.86 per share. As a reminder, comparable earnings from continuing operations for both the second quarter and full-year last year 2005 exclude a one-time tax benefit in that year of $0.12 per share due to a change in Ohio tax law.

Overall, we're very pleased with the results we delivered in the first quarter this year. But as always, we have much more we expect to accomplish. We continue to expect to realize both organic operating revenue growth and improved earnings in each of our business segments as we go forward this year. We remain strongly focused on profitable sales activity in all business segments, and we are very happy with our progress in this area during the early part of the year. Both Supply Chain and Dedicated showed solid revenue growth in the quarter and, excluding any foreign exchange impact, our revenue growth rate in lease has improved for a second straight quarter. Looking ahead, we remain committed to delivering at least the 4 to 5% operating revenue growth we outlined in our business plan for both Fleet Management and for the overall company. That concludes our presentation and prepared remarks. So at this time we'll turn it over to the operator who will open up the call for additional questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Jon Langenfeld. Please state your company name.

Robert W. Baird. Good morning, all.

Good morning.

First I've got a question on the leasing side. We're seeing the top line accelerate here. Could you talk to us a little bit about the trends underneath that in terms of new sales and retention and how that trended through the quarter and into April?

Yes. I'll give you some broad comments, and then I'll ask Tony Tegnelia who's here from that segment to perhaps comment further. I think, as we've been commenting in the last number of quarters, we've seen some definite improvement in sales activity and improvement in our retention. And we think that that's absolutely fundamental, and due to a lot of specific initiatives we've put in place and, I think, continuing improving performance and service with our customers. I believe we're to the point that we've had very positive sales for the last 10 months. And because there's always a lead time between when the sales are made and when the revenue appears, I think that's why you've seen --

You know several quarters ago it was flat. Last quarter we were up 1% in revenue in lease, and now we're up 2% in revenue and lease. And, in fact, it's a little bit stronger in the U.S. and North America, offset by the U.K. So I think, you know, overall we're now seeing the progress that we had anticipated. Much more to do, but definitely we're seeing continued improvement. And I'll ask if Tony Tegnelia, who's heading up the U.S. Fleet Management group, would like to add anything further.

Thank you, Greg. John, there are really three areas that we are focusing on to get the lease revenue growth where we really need to see it. First of all, we did have a very good end of the year last year. And, of course, those sales toward the end of the fourth quarter last year really help us with the revenue growth this year. And, in many ways, a lot of those sales still haven't seen the vehicles delivered yet. So we'll still see some of that growth as we go on out into the year. But as we look to our sales activity in calendar '06 -- As you know, we have a much more focused approach on those sales. We did make a restructure in the organization which we think is working extremely well for us, and really hitting the mark on what we wanted to do for the growth side. We see a lot of new growth in the operation.

We're please the with the sales quota numbers we've hit in the first quarter. We're very pleased with our retention rate. We're seeing a lot of progress on dramatically improving our retention rate, which was a major objective of the reorganization. And we're also seeing our average EDA and pricing improve as well. In the first quarter, our average EDA pricing was greater than it was in the first quarter of last year and also greater than it was on average for all of '05. So we're seeing new growth. We're seeing very high retention rates, and also improved pricing. And we feel that a lot of this is due to the more focused organization that we put into place last year. So we feel very good about the sales progress in the beginning of the year. And the beginning of the year is important to us because you'll have those vehicles in service for many more months during the year to help propel our revenue growth.

Absolutely. Sounds good. Maybe flipping over a little bit on the FMS side. Within the contract business you do, contract maintenance and related maintenance lines, you know -- What's kind of the outlook there over the longer term? Is that a growth vehicle or is that something that you just kind of offer as an ancillary offering, maybe plus or minus a couple of percent growth every other year?

I think our view is that for contract maintenance, we expect that to be a continuing growth area. We think that in the marketplace, what we have to offer is very valuable as the complexity of engine technology and everything else that's going on for customers -- So we think that that continues to be an area where we should expect growth and that's what we plan for. The contract related area tends to be a little bit more variable based what may be happening in a particular period of time. So if there's equipment that has been damaged or repaired, that's equipment that we call contract-related maintenance because depending on what may have happened to equipment at turn in or damage or accident, you have more variability. But certainly on that contract maintenance area we would expect growth. And, Tony, if you'd like to add anything you can go ahead as well.

I would add that we like that business. We like the margin on that business. And what's very important about that business for us, which is why we're focusing on the growth there -- Ultimately, we want to convert that contract maintenance to full-service lease accounts. So we see in many ways individual companies will try us on the contract maintenance piece. We do a world class job in that area, and our objective is to convert them to full-service lease business when life cycle of those units really term out. So we like it. We like the margins. It is focused. It's good lead into our growth side for lease, and we also get rental business from those customers as well. So we like it, and we're going to continue to focus on it.

Okay. Good. And then lastly on the Supply Chain side. Great quarter in that business. Anything we need to be thinking about there in terms of the one-time events? I think, typically, both the revenue and the earnings grow sequentially in that business as you move through the year. Should we expect anything different on that line?

I'll turn that question over to Vicki O'Meara, who's President and Head of our U.S. Supply Chain group. And, Vicki, if you'd like to comment.

Sure. Hi, Jon. Could I get a clarification to your question? Are you asking was there anything unusual in the first quarter affecting the year over year comparisons on the first quarter? Or are you looking ahead to a special event sometime in the year?

Both. Essentially, I guess when we look back historically, the first quarter is typically the low water mark in terms of both profit as well as revenue -- net revenue. And so should we expect that to grow throughout the year sequentially?

Yes. Thank you. We expect to continue the steady and positive growth that is the Supply Chain group's contribution to the numbers that Greg has disclosed in the forecast for the year. But there are, as you were getting at, some extraordinary factors that affect our year over year comparison of the first quarter. In the first quarter of '05 our automotive business experienced some extraordinarily high shut downs. And conversely in the first quarter of '06 our automotive business experienced less than expect shut downs. So that affects the year over year comparisons in an important way. In addition, last year '05 we had a number of very important and large accounts come on in the second, third and fourth quarters with business ramping up in that time frame. That will affect your year over year comparisons of the quarters going forward. But, again, we expect steady and positive growth. But those are important factors for us to note that do affect the first quarter year over year comparisons.

That's what I was looking for. Thank you.

The other thing I'll add, John,and for others is -- Supply Chain, of course, includes some significant activity in other parts of the world. And Bobby Griffin is here, who heads up International Operations, and you might comment in particular that we've had some improvement in South America both in revenue growth and in earnings for some issues we raised last year. And I think that also helps contributes. So, Bobby, do you want to comment?

Thanks a lot, Greg. As Greg mentioned, we did have -- to answer your question specifically about some changes first quarter over quarter -- some improvement in Brazilian operations. You may recall -- Last year we discussed the fact that we had an issue with a specific customer that entered into the marketplace. We did make those improvements. The results of those improvements are very positive. We expect those positive results will continue throughout the balance of the year. And, in addition to that, we've had some very nice growth in our Canadian operations and we expect those to continue as well.

Thanks.

And our next question comes from Alex Brand. Please state your company name.

Stevens. Good morning.

Good morning.

Let me just follow up on Jon's questions on SCS. The thing that struck me there was that you had such a nice improvement in the margins. And I'm just wondering about sort of the sustainability there. I know that had been your goal, but is that the reflection of start up costs last year on some of this new business so now as you scale up, you get more profitable?

I think in general, that's the right answer. And we've set out what we felt are important targets to be considered best in class, and we've got another one or two hundred basis points that we would like to contribute overall from Supply Chain. But you raise one point about start ups. When you're growing, you're always going to have a start ups. But last year we had a particularly larger one and, Vicki, if you'd like to comment any on that.

That's exactly it on the Supply Chain margins. You do see that factor influencing on a year over year quarterly comparison basis. We had a significant start up, which has been effectively executed. And that is the distinguishing factor. We do see generic improvement, organic improvement in our margins. As you suggested, it's what we're working toward. We're continuing to do so. We're seeing it in all lines of service and Supply Chain, and are continuing to focus on that . And we see opportunity for that continued margin improvement. We're also seeing it on the Dedicated side with the help of improved safety performance, which is always a key concern in that business.

I know that the press release says that this was sort of across the board growth in terms of industry verticles. Can we get any more color on maybe where you've had success or where you're focusing for the future?

It is across the board, growth. Our focus has been on diversifying, as you know, across into -- and just more into high-tech and consumer and other sectors. We're seeing particularly strong growth in those sectors, and expect to continue that on both the domestic and an international basis. We're also seeing healthy growth in automotive. We certainly are proud of our automotive business, and offer quality service there. So we see great diversification within the automotive business to new companies, both domestic and foreign automotive providers and manufacturers -- tier ones as well as primary manufacturers. It really is a consistent, across the board strong growth. As I note, though, it's particularly strong growth on the high-tech and consumer side.

Okay. And Greg, on the Fleet Management business, you talked a little bit about that already in terms of North America was pretty good. But I guess I'm just still wondering. I'm not sure how we can see if you're succeeding in your effort to penetrate the private fleets and really unlock that opportunity. And, you know, is it really more price oriented? Or are you starting to get some volume growth as well?

There will probably never be all the visibility that you ever would like because, for competitive reasons, we don't disclose everything.

There could never be enough.

And it could never be enough. So I'll take that as a given. But I think that we continue to see progress. You know I try to speak to our sales leaders, other than our most senior managers, to try to understand what they're seeing in the field and what kind of reaction they're getting and what our customers are thinking of us. And I would say that we are making some inroads in new areas that we hadn't before. I think we tend to be working with even some larger customers than we had before, and I think we've had more success. But it's really very early. We said that we were at early stages in trying to focus our contact organizations in ways that they had hadn't before. You know our company grew up in a very decentralized way, which tended to have more focus on local customers and we said we'd have to move that up. So we're in the early stages of doing that. And I would say early indicators are that we're starting to see some progress, and that will continue to show up. And,Tony, if there's anything else you'd like to add.

Alex, what we see in the form of our pipeline is much more representation in that pipeline for more privately lease conversion. One of our targets going into 06 was to dramatically improve the penetration of the private fleet operators. And we are doing that. That's where we're focusing the sales effort. Our pipeline and prospecting is reflecting that, and the closes that we have in the first quarter and also in the month of April reflect that as well. So we do see more volume coming from the private fleet group. That was our target. And we are achieving that target. And we also are seeing, as I said earlier, improvement on the pricing side as well. But we do believe that private fleet owners will do much more conversion to leasing as the engines and other issues become more complex as we go on out into the future, and the complexity regarding supporting and maintaining those vehicles becomes much more challenging. So that is our target. We're right on it. The pipeline reflects that. Our closes in the first four months reflect that and we feel very good about our direction in penetrating private fleet, both volume and price improvements.

Okay. Thanks, Tony. And just one more question for me. On -- In terms of cash flow, obviously you're ramping your CapEx guidance a little bit more. But, you know next year's going to be lower. Your balance sheet still can easily handle the leverage. What's the thought in terms of stock buy back? You know, are you willing to use some leverage to continue to do that? What you've talked about willing to leverage up the balance sheet more or does this step up in CapEx sort of preclude that for the time being?

The step up in CapEx really doesn't preclude it because we have a lot of capacity. And as we said, before -- You know our first call on what we'd do with our available capital and cash is to consider growth and investment and any appropriate acquisition activities. So we didn't say anything in this release or in this discussion about share buy back because we didn't have anything to say. We obviously have considered that. It helped us a little bit to move in the direction we wanted to for the right leverage for the organization by the nature of the business. We still have longer term targets, and we can get there in a variety of ways. So, you know, we still have the same priorities. That we want to make sure we've got the capacity to invest in the business, consider proper expansion, investments as necessary, any acquisitions, and then we always have had what we had on the table and what we did recently and that was the repurchase or the share repurchase. We're just not saying anything new or different about that right now.

Okay. Fair enough. Thanks a lot.

Okay.

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

Yes. Stifel Nicolaus. Good morning, gentlemen.

Good morning.

Good morning, Vicki. I have a question, first, on the SCS segment. The growth area you said was high-tech and auto, I guess, more than others. Is that coming more from market growth in those sectors or outsourcing the logistics functions a little more, using more 3POs? Or is that kind of market share growth that you guys are taking in the logistics management of those sectors? Because I know that there's other companies out there that are also focused their logistics efforts around those specific sectors. So I wanted to know exactly what the dynamics were there.

I'll let Vicki start and Bobby may have some comments too from international. So, Vicki, go ahead.

Great. Thanks. Both. First as to the external market. The recent industry data shows that the U.S. and global Supply Chain markets continue to grow at a very high rate. The most recent U.S. data shows that the growth went from $89 billion in the outsourcing market in the United States to $100 billion from '04 to '05, and the projections are that attractive, continued growth in that market will continue. So we are seeing reflections of that growth number in actual customers outsourcing for the first time or exploring the opportunity to take parts of their supply chain outside to vendors for the first time. We are also, though, seeing Ryder very strong in competition in taking market share from our competitors. We are very strongly competing on quality and it's always, as you know, a very aggressive price competition with our customers very strong and focused on bringing -- having their providers bring costs out of their bottom line. So the price is always competitive. Ryder's doing very well in market share competition against our competitors as well .

Consistent with the growth in the market, we are also seeing that customers that we want to do business with come to us in no-bid situations in the international market, which has helped our growth also. That's the result of the solutions that provide, also the reputation in terms of being able to provide a quality product. So in the past 12 to 18 months, we've been able to benefit from that -- from those types of situations and, in fact, helped us increase the revenue line at the top across all of our segments. We have also targeted other markets within those segments that have helped us, and in the last 12 months we have been able to bring on new types of customers. Customers that we have never done business with before in different types of industries. And we expect that to continue also in the future.

And then -- Is the international Supply Chain market growing faster than the domestic? Or are you seeing something where you may have a domestic company whose going global that you handle those operations for as well?

We are taking advantage of the great work that we've done here in the U.S. and, in fact, are really piggy-backing on some of the customer base that the U.S. has to expand our opportunities within the international arena. But in addition to that, we have picked up some customers that are basically in the geographies where we are now operating and we hope that will benefit the whole global process going forward.

If I may. There are some different rates of growth in regions of the world. The highest rate of growth is in Asia right now, largely influenced by freight movements driven by the lengthening of the supply chain into Asia with many U.S. and other national manufacturers moving their manufacturing into Asia. So that's influencing a significant rate of growth in the Supply Chain business in Asia. Europe, the rate of growth in eastern Europe is higher than western. And overall, however, Europe is a lower rate of growth than other parts of the world. United States still experiences a very healthy growth in this market with outsourcing continuing and the numbers I had quoted before. And usually the U.S. is looked at in a North American market and in some cases even a market of the Americas. Because, as Bobby was getting at, many of our customers are demanding global attention to their supply chains and it's a service that Ryder can accommodate very well. We are placed around the world and we can operate very effectively around the world as our customers ask us to move to those regions.

Okay. That's great. And if I could just ask a question on the Fleet Managements Solutions business. You talked about the rental fleet being down roughly 7% year over year, but the utilization of the rental fleet was relatively flat. Is there anything behind that? Is that just a soft demand first quarter? Or is there something else there?

First, the plan was to take the fleet down. We did that aggressively last quarter. And we did that because we thought, you know, from sizing things appropriately and expectations in markets, we wanted to always make sure that we're focused not just on revenue and revenue growth but earnings and returns on the capital. And I think that's, you know, that's been done appropriately and I think reflective of what we really are trying to accomplish in that area. I'll let Tony comment further on commercial rental, but I think that there is no single answer. The answer, to a degree, is it's different in various regions of the country. Where it's soft, not where you might expect it to be. So somewhat in the upper midwest or some of the older manufacturing areas. And as I said in my comments, part of our effort in improving utilization and performance is to make sure we've got equipment moved to the hottest markets. And because of our asset management capability that we've established, we're able to do that. Tony, if you'd like to add any further?

Yes. David, if you recall in our conversations in January, we talked about a lot of preparedness and readiness in the rental fleet as we go into '06. We executed that strategy right on the mark, beginning at the end of the fourth quarter and all through the first quarter. And I'm very proud of the rental group and the work that they did in the first quarter. We had a dramatically less reduction in dollar revenue than compared to the reduction in the size of the rental fleet in the quarter, which was exactly our plan. Our margin dollars and margin percents were up year over year and we were several hundred basis points higher on a return for the rental fleet than we were year over year. And as we all know, we need to be careful playing a revenue game on the rental fleet. So we're playing a return game on the rental fleet and we executed that strategy right according to plan in the first quarter, and I'm very proud proud of those results.

There was a number of very selected markets which did start the year out a little slower than we would have liked to see, but those strengthened as we went through the third -- the first quarter, the third month in the first quarter. And they also are strengthening, as we see in April, where we are right now. But we're pleased with flat utilization year over year, because you may recall in each of our quarters during '05 versus '04, utilization was really lower in '04 -- in '05 than it was in '04. So that flattening and stabilization, we thought, was an important plateau for us to reach and now we are on track going into the season. We like where the vehicles are. We like the freshness of the fleet. We like where it is. We've matched the resources, both the human resources and the units, with where we believe the market is. We're working our sequencing plan for the rental fleet exactly as we had strategically planned as we went into the year, and we're confident that we'll have a very good season in rental. And I'm proud of the rental results for the first quarter.

Great. One last question on Dedicated, in regard to the seasonality of the business. Looking back over past years. Some years the fourth quarter has been the strongest on the margin and income side. Other years it's trailed off after the third quarter. What kind of seasonal pattern should we expected from the Dedicated group as we go through the second, third and fourth quarters this year?

I've got Vicki taking a look at numbers. I think normally the DCC is very similar to what we see in FMS, generally that you get a pick up in the second quarter compared to the first. The third quarter is always the strongest, and depending on the demand at the end of the year and the holiday season, it flattens or diminishes a bit. I think that's a general pattern, but Vicki you have some numbers there that you can share.

It's roughly that same pattern with an emphasis on a third, though we hope not to make the differences that great. We do expect that pattern roughly to continue through this year with some strengthening in the third. Other than that, there's nothing that makes this year different than what you've seen in the past.

Okay. Thank you very much.

You're welcome.

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

Hi, guys. Good morning. It's Ed Wolfe, Bear Sterns.

Good morning, Ed.

I think Tony was talking about the commercial rental fleet and you're kind of on track. Just as a refresher, what is the guidance going forward? How should we think of revenue and the fleet size, both of those two things, as we go forward? Are we going to continue to see kind of down revenue but improved operating results? Or is the revenue going to actually start growing in the fleet size as well?

Go ahead, Tony.

Well, our plan is to sequence units into the fleet with our CapEx program for '06. So we will be at the top of the fleet level during the high season. The fleet will be greater, several hundred basis points year over year, during the high season. And then we will reduce it toward the end of the year as well -- October, November, December -- as we go into the weaker period for the first quarter of '07. So we do anticipate revenue growth in dollars during the season year over year because we will have higher fleet levels during the high season. And we also anticipate higher utilization rates into the high season as well. So we're looking for pricing opportunities which we did experience in the first quarter very well. We believe those pricing opportunities will be there for us as well during the season. Higher utilization year over year as well during the season. Higher fleet levels year over year. So we're looking forward to organic revenue growth in the rental fleet during the high season. But the fleet will grow and so will revenue.

During second quarter before you get to the peak, should we expect some transition between here and there? Kind of flattish revenue? Is that as good as any of the models?

I'm sorry. Could you repeat the question?

In second quarter -- It sounds like you're going to ramp up into the third and fourth into the peak. I was trying to get a sense for second quarter. If revenue is down a couple percentage in commercial rental right now, should we think of it in terms of flattish in second quarter? Is that as good as any for modeling purpose for revenue at this point?

For the most part, that's correct. As the season begins to peak up, and as we also sequence the units in, this quarter will be a little bit more flattish. The higher season later on will see the growth. Yes.

Okay. Can you talk a little bit more big picture? The impact of the January 1, '07 engines and the prebuying that's going on versus some of the trucking companies it's fairly easy decision because they're buying for their own fleets of buying in advance. Can you talk -- On the commercial rental side, you have a standing fleet, what your decisions are around that? And then on the leasing side where your customers make the decisions, how you see that playing out for the timing of vehicles? Is that going to impact the way you want to or need to take on trucks this year and next year as you look out?

Well, from the lease side, we are seeing some improvement in sales as a result of individuals trying to avoid the '07 engines as the technology will be new. And there's also some anticipation that there'll be poor fuel yield on those vehicles as well. So we are experiencing some attractive excitement on the revenue side as a result of the '07 engines. And it's clearly our goal to take absolute full advantage of that transition activity relative to those vehicles. And we will see that as we go throughout the year. On the rental side, for the most part, we will not be doing any prebuy for rental relative to the '07 engines. When we go into '07, with our requirements to refresh the rental fleet, it will be with the '07's that are out there. We have a number of '07 engines that we have in service right now. Our technicians are becoming very familiar with them. We're working with them from more than one OEM source. We're comfortable with the engines. We've had them in service for a while. So, on the rental side, we will have our normal timing, our normal sequencing of capital expenditures to refresh the rental fleet as we go into the April-May period of '07. So we're going to stay on our sequencing plan for rental, and we are seeing some uplift on the sales side for the lease piece relative to the '07 engine.

That's very helpful. Two lines on the operating expenses. The gains on sales and the miscellaneous net. I would say the gains on sales probably weren't as strong as we thought. Maybe, you know, more vehicles would be sold than year over year. That number would be even higher. How should we look at that going forward? And then the second line, I'm not even so sure what's in that miscellaneous net, but it worked in your favor up at $5.4 million. Can we talk a little bit about what that is?

I'll ask Tony to take that first part of the question, and then I'll see Mark is around here long enough after two months to find that other answer for you.

On the gain side we work very hard, as we also spoke in January, for readiness for the used vehicle inventories that we had. We had up pricing on the tractors that we sold and we had a little bit of reduction in the price on the trucks, but that's because the trucks that we had sold year over year for that, the 4% reduction, was because the vehicles were older and had a bit more mileage on them. But for the most part, we see the gains holding steady.

We have a very fresh fleet in our 52-location network of used vehicle sales. And they're in our right vintage to hit the sweet spot of the marketplace. We think the pricing will stay strong throughout the balance of the year for both tractors and for trucks. And we think our gains, for the most, will stay steady state. And we're pleased with the gains that we had. Our objective is to do dramatically less wholesaling in '06 than we did that in '07. And we saw that in the first quarter compared to the fourth quarter of last year. So with more retailing and with a fresher fleet and strong pricing, we think that we'll enjoy the gains on the used vehicles side that we've anticipated for this year.

Tony, if I look at '05 you did $47 million. If I look at first quarter '06 you're flat with 12.8. Should I think in terms of '06 being up over '05, when all is said and done, a little bit?

When all is said and done, yes, it will be up because we'll be selling more vehicles. If you'll recall, we are in heavy replacement cycle and those vehicles will go to our UTC operations, and there'll be more gains just by virtue of more units being sold.

Okay. And then other question was on the miscellaneous and that. I don't know if anyone's figured that out.

Those continue to be non-recurring items. '05 was driven by an item we've talked about, the Logicare gain. In '06 we've got several items. The biggest one is the gain on the Mutual Insurance Company stock, which Greg mentioned. We also had a gain on the sale of land, and we have some gains in there for investments we do for our 401-K we call the rabbi trust. Those items -- the three items I mentioned add up to $4 million of the $5.4 million, and the rest is a lot -- dozens of minor items.

How do we look at that going forward? Should it be flat year over year? Or up a little bit year over year? Is there more land stuff in the hopper their could drive that a little --

No. These tend to be, you know -- it's -- They're just one-off items. They're not part of the business. They're ancillary to the business. We don't plan them. So it's unknown.

Okay. One other longer term question. Greg, the way I used to think about your leverage was that you could get up pretty close to three to one debt to equity before the ratings agencies would have an issue and it would change the impact on your borrowing costs. Is that still a fair kind of range? You can get that far without changing your borrowing costs?

Since we've both publicly said two and a half to three,and you've just mentioned the high end of that, and we've also discussed that with the rating agencies. The answer is yes. They are comfortable with that. They tend to like to see that phased in over time, feathered in over time, as opposed to one fell swoop. But, importantly, as long as we continue to improvement earnings performance and operations leverage, they are comfortable with an improvement in our leverage because we've been there before. It's appropriate for our business, especially with the nature of our leasing part of the company, and the certainty of those long-term contracts. So all of their discussions with us are that that is acceptable.

That makes sense. Thanks a lot for the time.

All right.

Our next question comes from Adam Thalhimer. Please state your company name.

Hi. Good morning, guys. Adam Thalhimer at BB&T. Most of my questions have been answered. I just had one kind of mundane questions question here. The gains on vehicle sales as we look out to 2007, how does the engine change over effect of that? I mean, are their fewer trade ins, so that should come down significantly?

I'll turn that over to Tony because he's got that in his segment. So I'll get Tony to turn on his mic, and he can comment.

Adam, about 85% or even greater, roughly, for the vehicles in service are really the older technology. So we don't see a dramatic change in the average gains for Ryder going into calendar '07. Now we are going to be, as we had stated in January, have about a third fewer vehicles that will be trimming off and coming in for replacement. So there will be fewer vehicles sold for us in '07 versus '06. So the total dollar figure of gains will be down in '07. The averages per vehicle we see holding pretty much steady state going into '07. So average, steady state for trucks and tractors, each, going into '07. Total probably down because we'll be off a very heavy replacement cycle compared to '06.

Okay. That's helpful. Thanks, guys. Congratulations on a good quarter.

Thank you.

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

Thompson, Davis & Company.

Hello.

Hi. I missed it I think, but you said you paid $42.18 in the first quarter for how many shares?

Let me turn back to the right page and I'll give you that answer.

It was in the --

1.6 million.

Mark had it.

Second question is, the U.K. impact on the first quarter. You mentioned that profit margins were down. First of all, I assume this is Fleet Management Solutions profits.

Yes.

What was that cost? Or if you don't want to say that, will it continue? What's the solution there?

I'll make a couple comments about the U.K. The U.K. lease market is considerably different from North American and U.S. and Canada. The OEMs tend to have a different posture. They're stronger in that area. So you've got dynamics that are a bit different. We have been working on a number of improvements and Bobby Griffin, of course, is very active with that in International Operations. We've been working on being more cost competitive. We've had reorgs, some facility reorganization, margin improvement programs. We've done some of the things operationally that we've done in the U.S. in U.K.

We're targeting some different kinds of fleets. We've got, we think, a broader array of services and a better technology platform to differentiate ourselves from some of the other manufacturing providers. So we're reviewing this on a very detailed basis. We've taken some actions, and where we're underperforming, we have some very specific initiatives. Bobby, if there's anything else that I've missed or something else you want to add on Fleet Management in the U.K., because we don't break it down that finitely by geography.

I think you've hit most of the highlights, Greg. The only other thing I'll add is we did a [inaudible] margin improvement program which is definitely underway now, and we expect to see more stable performance going forward.

So it sounds like there's at least some relief ahead in the short term.

Well we like to not have any surprises or things take us by surprise. And when you see certain trends in certain geographies and certain activities, whether they're competitive or macro economic because conditions are different in parts of the world -- that's what we've done in the U.K. So we certainly have taken action to mitigate those impacts, and we'll continue working on them.

Okay. Thanks. In the Supply Chain Solutions division, I had expected some impact from the China expansion this year, in terms of expenses. Is that -- That impact was in the first quarter or is it still to come?

The answer is both. And we're obviously in investment phase. We're doing this logically and progressively and rationally. So, Bobby, if you want to comment. That's your area of the world.

We do have expenses that were in the first quarter. Actually we do have a team on the ground with the -- we put into place in China in the fourth quarter. They will continue for the balance of the year. We are evaluating the types of services that we want to implement in China. Of course, working with our other global Supply Chain customers which will be our focus, by the way, with trying to determine what the best route will be. Fairly soon we will have a legal entity set up, sometime between now and the beginning of the third quarter. You may know that at the end of the last year, we did get the opportunity to go in as a wholly owned self-sufficient entity versus going in with a JV partner. And those steps are now underway. But expenses, as you requested, will continue for the balance of the year. They have been incorporated within our plan, and we did assume some of those expenses in the first quarter.

Okay. Thanks. Now I assume those expenses are part of the reason for the salary increase -- salaries and related costs increase, excluding FAS 123, exceeded the growth and net revenues. I guess I'm a little surprised to see that. Is there no leverage there? Or was there some extraordinary other cost increases besides China in there?

Well since we've had growth in a number of areas, and when you are operating warehouses or you're doing other activities you tend to add employees and, therefore, salaries to be related to that revenue. A lot of those increases come from Supply Chain, in general, so that's the total that you're seeing for salaries. But clearly we've been able to get it right and get the profitability right to see the margin improvement in Supply Chain.

There's problem with the margin improvement. It just seems a little weird to see the growth exceeding the net revenue growth of the company. I understand there's leverage in other areas which is certainly recording, so I can't really campaign. But I say -- I take it as long as your SCS growth is sustainable, that cost is going to continue to go up.

That's what you tend to see. That tends to be more people intensive. They're aren't always necessarily high salaried, but you tend to need a lot of laborers to do a lot of work, especially in warehouse operations.

My last question is CapEx for the year, including vehicle sales. I think you said $1.2 billion. Is that still the target?

That was the net after the proceeds from the sales. So if I'm recalling correctly, we're about 1.6, 1.7 billion growth and the net of all of the vehicle sales are down to 1.2. Exactly.

Okay. Well, thank you very much. Good quarter.

Thank you.

Our next question comes from Ron [inaudible]. Please state your company name.

[Inaudible] Capital. Good morning, everyone.

Good morning.

I just want to revisit the whole issue of leverages. The goal has been out there for some time now, and you reiterated it today. But when you look at the total obligations to equity metric, it's only creeping up very slowly over time. What's kind of the best way to understand how you'll achieve this goal and what level of commitment do you have to get there? And maybe, Mark, you can talk about any new areas of financial that you've been pursuing in this rising rate environment, as well.

We haven't put a time frame on it. We said that we would get there in three ways, from investment that we need for growth in the business, potential acquisitions and then as appropriate in the future and as appropriately considered by all factors and the board, you also then finally have a share repurchase. We have not put a time frame on that. We just want to give you an idea of general direction. Mark, if there's anything else you want to add in answer to his question to you.

No. As you mentioned earlier, if the -- If Tony's growth plans are successful over the next couple of years, that's a very, very capital intensive business and that'll use up quite a bit of our powder. And then in order, that's investment in the business, acquisitions and we'd look at other ways to return value to the shareholders if we don't come up with a capital intensive idea or need.

Okay. And then just on sticking with your guidance on operating and gross revenue that you laid out at year-end. It seems that, at least in SCS and DCC, you clearly exceeded that in first quarter. Why are you sticking to those numbers for the rest of the year, given the first quarter performance?

Well we said that -- Pretty much in the way that we've talked about our earnings, and we've said that we're committing to 4 to 5% or better for the operating revenue. We still have to ramp up in Fleet Management, which is a big part of that. And in order to hit that average for the year, you obviously have to get better each quarter. So we're on the right path but you know it still has to be accomplished. There's also some variability in comparisons and Supply Chain and DCC and uncertainty and volumes and -- You know it depends on the health of customers and how much activity they have and how much volume they're putting out. So we're at 5% this quarter, net operating revenue. We said we want to make sure that we're in that range that we committed to at 4 to 5%. We also said we, of course, will do our best as always to do better than that. But we also think with the mixture of all of those pieces, it would be premature to commit to something larger than 5.

Okay. Thanks a lot.

And at this time I would now like to turn the call over to Mr. Greg Swienton.

All right. Well I thank you all for your interest and your questions. Here on our premises, it's take your children to work day. So you may be having that elsewhere. So take good care of them and, as always, be safe. And thank you for your interest and support. Bye now.

And that concludes today's conference. Please disconnect your line at this time.