萊德系統 (R) 2006 Q2 法說會逐字稿

Good morning and welcome to Ryder Systems, Inc. second quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]

I would 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 second quarter 2006 earnings conference call. We would like to begin that 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 managements current expectations and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from these expectations, due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this 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 the U.S. Supply Chain Solutions, and Anthony Tegnelia, President of the U.S. Fleet Management Solutions, are available to answer any question you may have at the conclusion of our presentation.

Before I turn the call over to Greg, I'd like to highlight that ,starting this quarter, Ryder's earnings calls will be PODcast. The file will be available on Ryder's website at www.ryder.com for download to do any MP-3 player with 24 hours following the call. You may also continue to access the call replay via the web or telephone dial-in. With that, let me turn it over to Greg.

Thanks, Bob, and good morning, everyone. This morning we'll review our second quarter 2006 results, we'll update you on a number of other items, including our asset management area, and review our outlook for 2006. And then, as always, we'll open the call up for questions. Let me begin with an overview of our second quarter results, and those of you who are following on the power point presentation on the web, I will begin on page four.

We had another quarter of progress and solid financial results. Reported net earnings per diluted share were $1.13 for the second quarter, up 15% as compared to $0.98 in the prior-year period. Earnings in the second quarter this year included an $0.11 tax benefit related to changes in income tax laws in Texas and Canada. while earnings in the second quarter 2005 included a $0.12 tax benefit related to a change in Ohio tax law.

So on a comparable basis, excluding these items in each year, net earnings per diluted share were $1.02 in the second quarter, 2006, up by 19%, from $0.86 in the second quarter last year. Total revenue for the Company was up 15% in the quarter. Operating revenue, which excludes fuel and subcontractor transportation revenue, was up 6%, with all business segments contributing to organic operating revenue growth in the quarter. Fleet Management Solutions posted total revenue growth of 8%, while operating revenue was up 2% versus the prior year. Within FMS, full-service lease revenue was up 3%, driven by higher growth rates in North American operations. This quarter's 3% growth rate in lease is up from the growth rate of 2% we saw in the first quarter, and up from 1% in the fourth quarter last year.

In Commercial Rental, revenue was down 2% from the prior year, but we continue to drive higher pricing in rental, and this helped to offset our reduction in the average size of the global rental fleet by 5%. Net before-tax earnings in fleet management were up 7%. Fleet Management earnings, as a percent of operating revenue were up 60-basis points to 13%.

This 60-basis points improvement in Fleet Management's operating margins was above our full-year planned improvement of 40-basis points, which we shared with you when we provided our original business plan in February. From an earnings standpoint, Fleet Managemen'ts results benefited from improved operating margins in both full-service lease and commercial rental in North America. These earnings improvements were partially offset by higher compensation-related costs in North America and lower margins in our UK operations.

Turning to page five to the Supply Chain Solutions segment, total revenue was up 34% for the quarter, which includes the impact of higher managed subcontracted transportation. Operating revenue was up 17% reflecting the impact of stronger volumes with existing accounts, as well as new and expanded business. Second quarter earnings in Supply Chain were up 117% versus the prior year. Net before-tax earnings as a percent of operating revenue were up 290-basis points to 6.2%, and was significantly above our full-year planned margin improvement.

These earnings improvements stemmed primarily from higher volume levels, as well as new and expanded customer contracts. We also realized a $2.5 million benefit this quarter in Supply Chain, due to a contract termination. So without this benefit, Supply Chain's net before-tax earnings to operating revenue would have been 5.3%.

In Dedicated Contract Carriage both total revenue and operating revenue was up by 7% for the quarter 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 16%, and as a percent of operating revenue were up by 60-basis points to 8%. The 60-basis point improvement in DCC's operating margins exceeded our full-year planned improvement of ten basis points.

Earnings improved in the quarter due to new and expanded customer contracts. Total Central Support Services costs were unchanged from the prior year. This quarters costs included a $1.3 million charge associated with the settlement of litigation related to a discontinued operation. If it were not for this charge, Central Support Services costs would have been down in the quarter. And as an additional clarification, please note that the $1.3 million charge is included in our EPS from the operations number of $1.02.

Page six highlights some key financial statistics for the second quarter. As I mentioned earlier, operating revenue was up 6% for the second quarter as compared to last year, with growth coming in all business segments. From the 6% operating revenue growth, comparable earnings per share, excluding the tax benefits in each year, were up 19%, reflecting very good earnings leverage on operating revenue growth.

The average number of diluted shares outstanding decreased by 2.7 million shares from the second quarter 2005 to 62 million this quarter, due to our share repurchase activity during the prior twelve-month period. The average number of diluted shares outstanding in the second quarter was up, however, compared to the first quarter 2006 number of 61.4 million shares due to employee stock option and employee stock purchase plan activity.

During the second quarter we did not purchase any outstanding shares under our current two million share repurchase program, due to a previously disclosed administrative matter which has now been resolved. The number of actual shares outstanding before dilution at the end of the second quarter 2006 was 62 million shares. Our second quarter tax rate was 32.8%, reflecting a benefit from the Texas and Canadian income tax law changes I mentioned earlier. For the remainder of 2006 we're expecting a tax rate of 39.2%.

If you turn to page seven, you'll see key financial statistics for the year-to-date period. Operating revenue is up 5% year-to-date with all business segments contributing to organic revenue growth. Reported earnings per share were $1.91 versus $1.61 in 2005. Excluding the tax benefits in each year, comparable year-to-date earnings per share were $1.80, up $0.30 or 20% from $1.50 last year. Our adjusted return-on-capital continued to improve from 7.7% last year to 8% this year.

Turn to page eight to discuss our second quarter results for the business segments. Total revenue for the quarter was up 15% from the prior year, while operating revenue was up 6%. In Fleet Management Solutions, operating revenue was up by 2%, driven by lease revenue growth. Total FMS revenue was up by 8% due largely to the higher fuel costs from fuel sold to customers. Fleet Management Solutions earnings were up $6 million, or 7%, and this increase was due primarily to improvements in our North American operating margins for both the full-service lease and commercial rental product lines. These improvements were partially offset by higher North American compensation-related expenses for both commissions on contractual lease sales and options expensing, as well as lower margins in the UK operations.

U.S. Commercial Rental utilization in the quarter was 73.1%, slightly down from 73.4% in the second quarter 2005. We've seen a few selective markets not elevated to their typical seasonal levels and are making the appropriate adjustments to our rental fleet configuration. As a result, although utilization was slightly down, our margins in Rental improved in the quarter.

In Supply Change Solutions total revenue was up 34% in the quarter and operating revenue, which does exclude subcontracted transportation, was up 17% due to improved customer volume levels and new sales activity. This growth came in all areas of our Supply Chain business. SCS, net before-tax earnings were up $9.8 million or 117% for the quarter, due largely to these higher revenue levels. 9.8%. Not counting the $2.5 million from the contract discontinuance benefit I mentioned earlier, the improvement was 83% versus last year.

In Dedicated Contract Carriage revenue was up 7% 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 4% in this segment, reflecting stronger sales activity. DCCs net before-tax earnings improved by $1.5 million or 16% to $11.2 million, due to our new customer contracts.

Total Central Support Services costs were unchanged from the prior year and included the $1.3 million charge related to the settlement of litigation on a discontinued operation. Unallocated Central Support Services costs not charged to the business segments were up by 26% or $2.3 million in the quarter. This increase reflects that $1.3 million charge, as well as higher share-based and incentive compensation.

Earnings before income taxes improved by 15% or $14.1 million to $104.6 million for the quarter. Quarterly net after-tax earnings were $70.3 million as compared to %63.3 million in the prior year. Net earnings, excluding the tax changes, were $63.5 million as compared to $55.7 million in the prior year, up $7.8 million or 14%.

Page nine highlights our year-to-date results by business segment, but in the interest of time I won't review these results in full detail. Comparable year-to-date net earnings excluding the tax changes, were $111 million as compared to $97.2 million in the prior year, up 13.9 million, or 14%. At this point I will turn the call over to Mark Jamieson who'll come -- cover a number of items. beginning with capital expenditures.

Thanks, Greg. Turning to page ten, year-to-date gross capital expenditures, before acquisitions, totalled $815 million, down by $6 million from the prior year. Lower capital spending was driven primarily by a decrease in Commercial Rental spending of $54 million. On a full-year basis we expect Rental spending to be below 2005 levels and modestly below our original 2006 business plan. Our lease capital spending in the quarter was up by $61 million compared with last year.

As we've 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 have expired or are scheduled to expire this year. As a reminder, in looking ahead to 2007 we anticipate a 25% to 30% reduction in the number of lease units scheduled to expire, and this should reduce our capital requirements next year for replacement lease vehicles.

We realized proceeds from sales mostly of revenue-earning equipment of $180 million, up by $9 million from last year. Deducting sales proceeds from gross capital spending, our net capital expenditures were $635 million, down by $15 million from last year. The $4 million of acquisition spending in 2006 represents payments made in the first quarter of a hold back on the [Rulon] Leasing Company acquisition, which was completed in March, 2004. I will address our outlook for capital in the remainder of the year in a few minutes.

Turning to the next page, page 11, you will see that we generated cash from operating activities of $298 million on a year-to-date basis, primarily through our earnings and depreciation add back. Cash from operations improved by $134 million from the prior year-to-date. This improvement resulted from our increased earnings and the fact that last year's number included a $176 million payment to the IRS related to the resolution of the 1998 to 2000 tax audit.

Cash from operations was negatively impacted by increased working capital requirements, due to $45 million of higher pension contributions in the first half of this year. In terms of free cash flow, the Company's $260 million of free cash flow, as compared to using $425 million in the prior year-to-date period. Modest reductions in our capital and acquisition spending, as well as higher proceeds from used vehicle sales, were positive contributors to free cash flow results in the quarter.

On page 12 you can see total debt has increased as compared to the prior-year end. The increased debt level is largely due spending on contractual vehicles, as well as our share repurchase activity in prior quarters. Balance sheet debt is up approximately $300 million over year-end 2005, and is up as a percent to equity from 143% at year end to 151% at the end of the second quarter.

Ryder's total obligations of a little under $2.6 billion are up by $275 million, as compared to the prior year end. Total obligations as a percent to equity at the end of the quarter were 156%, up from 151% at the end of 2005. Our equity balance at the end of the second quarter was $1.65 billion, up by $120 million versus the ends of 2005, reflecting our net earnings offset by first quarter share repurchases.

Turn to page 13, I would like to update you on our outlook for capital expenditures and related metrics for the year. We're seeing good momentum in our efforts to improve the rate of new contractual lease sales. Largely as a result of our strong year-to-date lease sales, we're now anticipating a higher level of capital spending on new lease vehicles this year. As you may recall from our business plan call in February, we had previously forecast $1.1 billion for replacement spending on lease vehicles this year, and we continue to expect to be on track with this forecast. We had also forecast additional lease gross spending in a range of $120 to $205 million in the business plan.

We now expect an increase in this growth spending of approximately $200 million this year, resulting in a full-year forecast for growth capital lease of $310 to $395 million. Including both replacements and growth related spending our current outlook for full service lease capital is now a range of approximately $1.4 to $1.5 billion. It's important to note that, due to the timing of these new lease sales and vehicle delivery times, the additional $200 million of growth capital in lease will not result in a significant change in our expected lease revenues in calendar year 2006. The new sales will primarily impact our lease revenue growth rates starting next year.

We're slighting reducing our forecast to both rental capital spending and for used vehicle sales proceeds. Based on this new outlook for capital, our forecast for free cash flow is now in a range of negative $260 to negative $340 million for the year. Our forecast for total obligations to equity has increased to a range of 157% to 162% at year end.

Turning to page 14, I think the next two pages help to illustrate our business model and the importance of the higher rate of new lease sales and related capital expenditures we now anticipate. Ryder generates significant and highly predictable annual cash flows. This cash flow is driven by our net income and depreciation, as well as by our used vehicle sales activity. We expect this cash generation to remain at our original planned level of approximately $1.4 billion.

Generally these cash inflows are able to easily accommodate vehicle replacement costs and provide an additional amount of free cash flow which can be used for various purposes. In 2006 we expect to replace a higher-than-normal number of lease vehicles and are -- also are ramping up our investment in future lease growth, based upon strong sales activity. This will result in negative free cash flow for the year. The additional new sales activity for future growth results in a variance to our original business plan of approximately $200 million.

Turning to page 15, in a leasing business it's important to look at the asset under management, which are the growth engine for a significant part of the Company in the future. The additional $200 million of lease spending will drive our asset under management in 2006 to $7.9 billion, up approximately 5% from $7.5 billion in the prior year.

This represents a two-year growth rate of 8.2%. The increase for this plan in assets under management will drive income growth starting in 2007, as these vehicles begin generating revenue over a multi-year contract period. As a result, our 2006 earnings before taxes will remain at the high-end of our original plan. However, we are well-positioned to drive earnings growth in 2007. Finally, our balance sheet is well-positioned to support this investment for future growth in the core business, given the significant additional leverage available to us.

At this point I'll hand the call back over to Greg to provide an asset management update and outline our 2006 forecast.

Thanks, Mark. I'll give you a brief update on the asset management area first. We are pleased with the results of our used vehicle sales operation. We sold almost 5,400 used vehicles during the quarter, which was consistent with the first quarter sales numbers. The overall number of used vehicle sales was down 6% versus last year, due to reduction in vehicle wholesale activity, but our important retail used vehicle sales were up by 1% over the prior year. Retail sales prices for both used trucks and tractors are at good levels and we expect them to remain so this year. Retail tractor proceeds were up 4% from the prior year, while retail truck prices were down 1%.

The number of vehicles no longer earning revenue was down by over 1,700 units, or 23%, versus the prior year's first quarter, due mainly to a significant reduction in our used vehicle inventory. In the second half of this year we expect a modest increase in our used vehicle inventories, as we move a sizeable number of units that are coming off lease and out of the rental fleet into our used vehicle sales centers. Our U.S. commercial rental fleet is down by approximately 5% on average over the prior year as we planned. We expect to increase the size of our rental power fleet, as we move into the peak rental season, although we may not take the fleet up by the full amount included in our original business plan.

Turning to page 19, we are increasing our full-year 2006 EPS forecast to a range of $4 to $4.10 per share, which includes the $0.11 tax benefit from the second quarter. Excluding this tax benefit, our earnings foreca -- our earnings would be $3.89 to $3.99, which is up from our prior forecast of $3.82 to $3.97. Our increased forecast represents comparable EPS growth of 14% to 17% versus earnings from continuing operations in 2005 on a base of $3.41 per share. We are also establishing a forecast for both the third and fourth quarter EPS, and both quarters we forecast to be in a range of $1.05 to $1.10 per quarter.

Overall we are very pleased with the results we delivered in the second quarter this year. We are seeing continued profitable revenue growth in each of our three business segments. Our operating teams are continuing to execute well and we're improving our retention, expansion and new business wins with high quality customers. We are particularly pleased with the strong contractual sales we've seen in our largest product line, full-service lease, and we look to continue that positive momentum going forward.

That concludes our presentation and remarks for the morning. At this time I will turn it over to the operator who will open up the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Alex Brand. Please state your company name.

This is George Pickeral] in for Alex Brand with Stephens. I had a few questions for you guys. First of all, the FMS leasing side looks like it's gone from about flat to up 3% over the past year. Can you give a little color on where this growth is coming from? Is it existing customers or are you taking market share from a competitor or anything else?

Well, I think you got the statistics right, that each quarter, going back four quarters we've gone from flat to up one, to up two and now up three. I would say that two things are happening. First, our retention levels have been better. So all of the high level of business that's coming up for renewal we are keeping more of it. So that's important because for the additional growth that we've been gaining that shows up much better. So the net revenue growth and net sales results are from an impact of both better retention as well as new sales.

I won't comment on market share because, again, we are the only public reporting Company in this sector, so I'm not going to comment on that. I will say that we are pleased with the business that we are successful in obtaining. They are business of various sizes and across industries, and I think we have recently, as we said we would, be involved in more significant-sized customers than we had in the past, and I think that that's producing out.

Are you making any in-roads into the private fleet market?

I think we continue to make in-roads into the private fleet. as well as those who have traditionally outsourced. I think, as we said before, we are still more at the early stages than the latter stages and we have much upside in front of us, although we made a lot of progress.

Great. Great. On the CapEx side, are you still projecting positive free cash flow over the entire say five to six-year cycle?

Our comment that you're referring to is that, unlike some of historical periods in which you could look back with Ryder, we said that over relevant cycle times it could range from five, six, seven, to ten years, we intend to be free cash flow positive. I don't think we have any reason to back away from that. We've recognize that last year and this year we've had particularly high additional capital requirements because of the large number of pieces of equipment, rolling stock, coming off leases.

And the good news is we're winning those, we're retaining them and we're spending the capital to keep them. But next year. for example, those replacement volumes fall off by 30%. So I would say that I would agree with your statement that we continue to say that over a relevant business cycle, we expect to be not only operating cash flow positive but free cash flow positive.

Great. Thank you for your time. Great quarter.

Thank you. Our next question comes from David Roth. Please go ahead and state your company name.

Stifel Nicolaus. Good morning, gentlemen. A question, I guess, back on full-service leasing you had some nice acceleration in the growth there. The higher comp in the quarter cited, is that due to rewarding your sales force for growing that a little faster?

David, I had a little trouble hearing. If you're on a cell phone, you may be breaking up. So I want to make sure that -- could you repeat that, please?

Greg, is this better?

That's a lot better.

Sorry, I was on a handset before. With the acceleration of full-service leasing growth in the quarter you cited some slightly higher comp offsetting some of the margin expansion. Is that due to you rewarding your sales force, I guess, for ramping up that growth?

I think that's principally right and that's what we commented on in the script. As you can imagine, when we have higher sales than we've had in a long time, both for replacements and new sales, when that equipment comes into service, that's when the compensation and the commission checks go out ,and that is largely what that represents. There's some impact from the fact that we also do options expensing, but I would say predominantly, you are right. And that comes from improved sales performance which then shows up in a long stream of contracted revenue over a number of years.

In the past you talked about contract maintenance and the contract-related maintenance being a key focus for growth and I guess leverage within your network. But that seemed to be flat to down in the quarter. Is there any specific reason for the less growth there?

I will break that into two pieces. The contract-related maintenance can be affected up or down based on the activity in a particular period of time. We call it contract-related maintenance because we do maintenance on equipment due to the fact that we have leases or other maintenance contracts with the customer. If there is what you might call driver damage or sometimes abuse, and that has to be repaired, then we provide that and that revenue appears in that line.

So depending on driving patterns, time of the year and so forth, you could get some volatility. The more important one is the contractual maintenance line and we still agree and believe that that's an important objective. We think that we are making a lot of progress in that area and I think we will -- we expect to see improving revenue growth from that subitem in Fleet Management Solutions.

Do you think that --

Go ahead.

Do you think that your customers now are renewing their lease contracts after extending the leases in the past couple of years and now having newer fleets is contributing to, I guess, a little bit harder comp?

No, not necessarily. I don't think that moves the base comparison enough. We still have some customers now who are also extending, So it's not that there's been a big cliff fall off. I don't think that that makes enough difference. Tony Tegnelia, who's heading up that segment, if you want to comment further on that perspective, please do.

No, we don't think that's really the driver. We are working very hard with those existing customers to really extend a lot of their vehicles that we have right now. There's life in those vehicles. We'd really like to extend them. And the beauty of that for our product business model is that we sustained our foundation of revenue from a replacement point of view without using up any additional capital. So we do work very hard to focus on more extensions. That's the marketing initiative that we have because it sustains our revenue growth, solidifies our base revenue and doesn't require additional capital.

And this may be a question for Bobby about the UK side of the business in FMS. It seems that that was a little soft. If you can just remind us what percentage of the FMS is over in the UK and what may be different over there from what's happening in the U.S.?

First, in operating revenue it's about 10%, and I will let Bobby comment on activity and his actions for correction.

Just as a reminder, the UK full-service lease market is a little different from the North American market. The OEMs do provide a higher level of maintenance services and it's become a lot more competitive in this area. However, to address those concerns we've become a lot more cost competitive and we've gone through, in the last 18 months, some managerial changes since the reorganization that we hope will lead to a much more improved process.

We also implement a margin improvement program in the last year or so, and similar to what we've got in the U.S., we also separated our sales force from the operations and expect that the direct focus will give us the opportunity to improve our margins and also lease sales. Now, we are seeing some progress as a result of all of these changes, and we do expect that going forward the lease product offerings should improve.

Okay, and one last question I think I missed -- you said something on your comments, Greg, that there's an administrative matter having to do with share repurchase that was taken care of in the quarter. Can you just refresh my memory?

Yes, in terms of the shares that are in the 401K plan, there were not enough shares registered, so we had to administratively clear that up. And while we had been going through that process, we froze any other activity. So that was the reason that we didn't do any of the normal authorized share repurchase for the anti-dilutive plan until that's cleared up. That's now been done, that's cleared up, and we are able to engage in the share repurchase again.

Then last question, off of that, for your EPS forecast in the second half of the year, are you assuming a flat average diluted share count then?

Let me see. I think -- I think roughly close -- yes, there might be some impact from the anti-dilutive buyback but it will not be significantly impacting the EPS calculation or the EPS forecast.

Okay, thank you very much.

You're welcome.

Thank you. Our next question comes from Jon Langenfeld. Please state your company name.

Robert W. Baird. Thank you and good morning.

Good morning.

This has really been a break out year for the Supply Chain side, well ahead of the expectations, I'm sure, laid out externally and probably internally, as well. Can you just talk about the sustainability of the margins, absent that contract termination, but the sustainability of the margins as well as the growth rate?

I think there's a lot of upside. I think there's a lot of upside in that segment. I think there's a lot of upside in every segment. And I think, as you say, a break-out year. More of it has shown up in more dramatic growth in Supply Chain than we've had for a long, long time, both on the top line and the bottom line, and certainly in the recent past. But we have been preparing for this and building for this for three or four years. We did a lot of work on cost management, process change, process improvement, operations excellence, technology, both upgrade and rationalization, quality of personnel in sales. I think establishing a tremendous reputation among customers for operational excellence, flawless execution, leading-edge technology, and now you are seeing the culmination, I think, of all of that in accelerated revenue growth and good returns on the bottom line.

I think our expectation is that, while this is pretty dramatic, it would be hard to keep both of these levels up. But our expectation is we should continue to have strong revenue growth in the future. We're going to keep doing this. We're going to keep at what we're doing.

The bottom line improvement was particularly dramatic this quarter, and you highlighted one; it was due to one contract termination. But at the same time the other fundamentals are pretty good. Sometimes a quarter can have more or less up-front charges or start-up costs for new projects, and this one, as opposed to a negative perfect storm we had sort of a positive perfect storm. So had you a lot more improvement than you normally would.

But apart from looking at an individual quarter, what we've said overtime is, while we want to improve the top line and the quality of that revenue with the customers, the bottom line we wanted to get turned around by 700-basis points, minimum. Three years ago it was losing 2% or 3%. We wanted to get to at least four.

We said if we got to five, six or so on a net before-tax basis that would probably be best in class among logistics providers, because you get a great return on equity and return on assets. So you may not see quite the dramatic improvement each quarter but we want to have overall year-over-year continued improvement, and I think that's our mission.

Very good. Good answer. On the full-service lease side, how much of the success would you relate or the salespeople relate of getting ahead of these new engines that are coming into play next year?

I think that, clearly, that factor is a catalyst for customers making decisions. But that's one piece and we have two other pieces. I think that the renewals are much stronger. So it's not just that there's a thought out there from customers and the availability, but we are also effectively acting upon it.

So I think clearly you have the reality of what's going on with anticipation of engine changes, anticipation that if they're near the end of their engine life, they've got to make some decisions and they're doing that. On the other hand, we're being effective in taking advantage of those opportunities. And again, I'll ask Tony Tegnelia if he'd like to comment further.

Sure. Thank you, Greg. First of all, our pipeline is much higher this year as it stands now as compared to this year last year, and our hit rate on that pipeline is much higher, as well. And within that pipeline we have a higher proportion of large deals and our retention rate is also higher on that business coming up to term. We've done all of that without it being at the expense of the EBA.

So, even though there's a mix of very focused selling and marketing happening to drive that pipeline, drive those hits rates without the expense of EBA because our EBA is up year-over-year on a full-year basis and also year-to-date compared to last year. we don't believe that's all due just to the '07 engine. There is some kick that's in the sales because of the '07 engine, but our net sales year-to-date are dramatically above our expectations. And we believe that our focused sales organization with the new structure we put in place late last year is yielding great benefits to the Company. And that is not just for the '07 engine, Jon.

Maybe if you look at that pipeline, is it -- it'd be difficult, I guess, as we move much further into the year to get an order committed and get the '06 engine. Would that be correct? I mean, we're talking about a six-month lead time?

Well, basically, we are in a very competitive position when it comes to our slots for '06 engines that we have. And the lead times right now are a bit longer than they were earlier in the year and a bit longer than they were last year.

But regardless of lead times and to Marks earlier point, the sales do have a very important impact on delivery time, so when you see the benefits of our increased Capex, the important thing is slot availability for '06 engines. And we think we are in a very competitive advantageous position relative to slots for '06 engines as we sell units throughout this year and take delivery next year.

In terms of taking delivery in '07, do you have business that you are bidding on that still has '07 -- first half '07 deliveries, so basically taking the new '07 engine?

Some, yes, but we also have some '06s that will be delivered in '0,7 as well.

Basically able to secure the capacity, earlier?

Yes.

Okay. And one final question. You know, if you look at the variable portion of your lease revenue that's tied to miles, I'm not sure how closely you watch that, but I think you said in the past that might be a quarter of the aggregate revenue within full-service lease. How has that been trending?

Actually our mileage is up year-over-year and we do watch it very, very closely. We have not seen an increase in our power fleet for full-service lease year-over-year, as the numbers indicate. And all the revenue growth that we've seen in full-service lease year-to-date has been due to rate and also due to mileage increase. So it is a big portion of it. We do watch it very carefully and that's really what's propelled our growth so far year-to-date.

But as the capital expenditure review clearly indicates, when additional vehicles become put into service and we begin to layer those capital expenditure vehicles into the fleet and the fleet grows, you'll get the benefit of the mileage and also the benefit of those additional units. But we do watch that mileage very carefully. Mileage is up year-over-year with our customers, which we'are really pleased to see. That's additional revenue growth without additional capital.And then when we layer the new units on later in the year, you'll see the growth rate that we committed to.

Do I have that right, about 25% of the aggregate full-services lease side is mileage based? .

It's a little bit lighter than that, maybe 15 to 20.

Very good. Thank you for the time.

Thank you. O(r next question comes from Ed Wolfe. Please state your company name.

Thanks, Bear Stearns. Can you talk a little bit about the full-ser -- FSL up to 3%, where do you see that going as you add to the fleet? What's the goal?

We said when we started this year that we want to get to a 5% to 6% growth rate in FMS. That would have anticipated more in commercial rental. But I think it also would imply that you have to end the year at a run rate higher than the 3% revenue growth rate in full-service lease than we are now. For the numbers and the averages to work, you have to start accelerating. We haven't set a specific target beyond this year. I think we are going to be solid in terms of performance this year. We are obviously committing to spend more capital because we;re getting the request for orders, but a lot of that revenue won't show up into next year.

So I won't put a target revenue number until we get closer to doing our actual business plan. But I do believe that our opportunity here, as an outsourcing business, should continue to accelerate and does not have to be tied to where GDP is. So wherever GDP is, I expect our Company to perform better and stronger than -- wherever the market is or the economy is because our principal advantage in all of our segments is that we are an outsourcing provider and very often, even when things diminish, some customers find the need and compulsion to outsourcing more dramatic and more necessary.

So, I'm guessing also from your comments and the fact that you're taking up the fleet, you're not seeing any signs of a slow down at this point?

No. Remember that, in our business model, it's not, we will by it and hope they come. Our model is, we've got contracts and we are going to put the orders in and take the slots and take the delivery.

So from the standpoint of leasing, which is a big driver, obviously, in our performance, no, we're not seeing that. We're seeing heavy customer requests and demand. In commercial rental, we have some geographies, as I said, that haven't ramped up to their ideal levels yet by this time of the year. But that's not the whole country. And we're going to put our assets and redeploy them where they get the best use and the best utilization, so I don't generally see that in that regard either.

I know you have contracts, but in a practical world if the economy changes and you have orders coming in, big customers don't want them, it's hard to make them take them. What is the defense mechanism to that? How late can you cancel an order if things change with the OEMs?

Well, first I've never -- of course, some people have been here four times longer than I've been, but in my seven years I've never heard a great deal of impact from a customer cancelling an order. Because when you are only 16 weeks out from delivery, these aren't like aircraft that you are putting in a slot.

When you are 16 weeks out from delivery and they and their company make a decision, it's not too likely at that point they're going to change. But I will take your example as the very worse possible case. If that were the case, considering the demand we have now, we redeploy it to another customer.

Okay. On the SCS side, there's a lot of ramp-up here. You've been ramping the revenue and now we've finally seen that come to the bottom line. Should we interpret that as start-up costs are going away, or that the new business is better priced, or how should we look at that and how sustainable is this?

As I sort of said earlier in answer to another question this -- you know, we had a lot of positives happening in this quarter. So you can't expect that dramatic an increase in future quarters. In terms of start- up, it always depends on what level of start-ups there are and how many are going simultaneously and how big they are.

However, when you have a steadier growing business, as we now have, the impact of one or two start- ups is not as dramatic on the bottom line because you are kind of doing that on a rolling-forward continuous basis. So a number of years ago when we didn't have so many, it was more noticeable. So I think that start-up costs, as much as they're mitigated and you try to spread them over the life of a deal, start-up costs can always have some impact. But I think that, right now they are having less so because of the fact that we've been having more of these and rolling forward, the comparisons reason as dramatic from one individual start-up.

Okay. Just switching gears for a second on the used truck markets. The way I interpreted your discussion was that you have a lot of sales because of replacement and the pricing is strong. Can you talk a little bit about the pricing in the market for tractor/trailers and straight trucks?

Yes, tractors the price is up 4% and the straight trucks were down one. And what was particularly strong in our performance is that it was as strong as the first quarter and compared to last year, we did more in the retail level. And that's where our significant activity is. So we've done less wholesaling, more retail and better price overall.

When you say tractors are up 4%, that's pricing year-over-year?

Yes.

And the same, obviously, down one for straight trucks?

Yes.

Is there any sense that the market's weakening with higher fuel or anything like that.

I don't see any evidence. n fact I guess we can conjector about all the factors. For people who can still afford to be driving and still be affording to move freight, I'm sure that they must be their fuel and insurance kind of factored in, I also suspect that grandfathered equipment that is known to be reliable and fuel efficient, I think the value increases. Our inventory on trucks on hand for sale is down dramatically.

Your inventories down, is what you said?

The inventory on trucks for sale is down dramatically from this period and year end.

How should we think in terms of gains on sales if it was $15 million this quarter as we go out the rest of the year?

Tony?

We are firmly solidifying the strategy of more retail than wholesale and slicing the cheese by quarter is a little bit difficult, because it depends on when the unit cell. They could sell on one quarter versus another. But for the full year, okay, you will clearly see our proceeds up in total and the average up, as well, and you will also see the total gains up year-over-year in total and also the average up as well.

Predominantly because of the retailing in contrast to the wholesaling, and also because we're doing many more tractors than we are trucks. Now, the total number of units to be sold actually our latest thinking is it may be down a bit because we've been much more successful in engineering more extensions and more redeployment, which I said early is very good for our business. It generates revenue without incremental capital. But we will see total proceeds up this year. And we will see total gains up this year, on average, and in total, as well because of our retail versus wholesale sales strategy. And there are more tractors coming available for sale than there are for trucks.

We have a very fresh fleet right now, relative to age and how long they've been on the lot. The fleet level is a bit lower or it's right at the sweet spot where we want it to be, about three months inventory or so on hand. And they're also very appropriately distributed throughout our network of 50 or so locations, so each location has the right mix of vehicles and the right age of vehicles to really maximize that retail sales value. So we feel very good about the work that's been done in the asset management area.

Thanks, Tony. And Greg, you talked about more consistent growth in Supply Chain. Can you give a little more guidance on that, because the growth rate over the last five or six years has gone all over the map. What should we think about as a long-term growth rate for this business revenue thought process, three, five-year growth rate?

I'll let Vicky O'Meara who is responsible for U.S. Supply Chain and where a lot of the pipeline is, she can comment on that.

Ed, thanks. We would sure like to be able to promise the same year-over-year comparisons that you've seen this quarter, but I think there are a few factors -- Greg's mentioned a couple -- that won't allow for that similar comparability in the second half of the year. I'll come back to that in a second.

Longer term, we see the external markets , domestically and internationally,still very strong for the Supply Chain. In fact, the markets on the international side are pulling the Supply Chain lengthening and then having a good impact on the U.S. market as well. So we are seeing in the U.S. a 10% to 15% projected growth rate, in Asia 20% to 25%, in China, similar numbers. Europe is still also healthy. These growth rates have a direct impact on our business.

We will continue to see the sequential growth that you've seen over the past couple of years in operating revenue and in margins. Greg mentioned the good work that we've done over the past couple of years to enhance the quality of our earnings in the Supply Chain segment. So when you see the sequential growth in revenue, you'll continue to see the NBT growth as a percentage of operating revenue.

The overall numbers that we expect in the supply chain over the next three to five-years can track to an 8% to 10% growth number. We hope that we can continue to see growth at that level, perhaps exceeding it, but that's what we would have projected and expected, based on these external growth numbers.

Thank you. That's helpful. Vicky, just hold your ears for one second. Greg, now that Supply Chain is starting to really grow some profitability, is it a potential -- is it essential to your business or is it something that, if valuations are going up and there's certainly some private money coming into this field, that you would thinking about divorcing from the Company at some point?

Well, I've gotten that question before and what I've said is that we have worked on our portfolio of businesses over the last several years to make improvements in each and every one that total an approved value for our owners overall for Ryder. There are a lot of connections between these various segments, one of them being the provision of the assets. So we provide trucks, equipment and drivers across the DCC and Supply Chain, and SCS and DCC are very closely tied together.

They get that equipment from the sister division in FMS. We tend to also have a lot of value that we gain from our expertise in technology deployment, shared services, logistics engineering, technical capability, IT platforms. And I think, in addition to all of those, which are quantifiable, we also have the qualitative factor that, when we work for some of the best and toughest global companies in Supply Chain, it makes us better in marketing, operations and technology for Fleet Management, as well. So my answer has been and is consistent now that there are connections to all of them. There is value to all of them. We've worked hard on improving each individually and in totality, and we think we are best served for keeping the portfolio where it is.

I appreciate the time. Thank you very much.

Thank you. Our next question comes from [Rahma Bizlov]. Please state your company name.

Hi, [inaudible] Capital. Hello, everyone. Just going back to a comment you made about your Company being relatively immune from the direct of USGDP, can you just confirm that that statement actually also holds for the volume-based parts of your business, whether it be in leasing or SCS?

First, immune might be a strong word. I think everybody always has an impact, but what I wanted to emphasize that a lot of our capability in terms of growth come from the fact that we are not just limiting being tied to GDP but that outsourcing is a totally different trend. It is apart from that, and can break away from pure GDP, especially in periods of decline. So, and your second half of your question I want to make sure I answer the last part of it.

t's just that the vol -- the portions of your business that are volume-based where the economy really needs to be humming, whether it be the mileage-based portion of leasing or SCS contracts, which are volume based, how will those hold up if the economy tails off, let's say?

Volume always matters. It would be incorrect to say volume wouldn't matter because every truck we run, every lease we're managing, the miles are part of that revenue stream. And in Supply Chain and DCC, beating assembly lines, running warehouses, feeding logistics operations centers, running a global supply chain volume matters. So I think that, obviously, if there were some incredibly dramatic event, you always would have some impact. But I think that cushioning a lot of that is the fact that we still are 90%, 88 to 90% contractual.

We have a lot of certainty and solidity in our agreements and contracts. And that even in periods when some customers may have volume declines, other customers may decide that under duress and economic pressure is the time to outsource. So I think it's not just a one-way street. I think there's opportunity as well as some risk.

Are you seeing any pockets of strength in any particular industry segment in terms of renewals or wins?

In Fleet Management, no. I think it is consistent and it's across the board.

On to your CapEx, is it fair to assume that the return on capital will be at current levels or better than current levels on the new Capex that you've introduced this quarter?

That is correct. In fact, when we review these we review where we stand and we present these with our own board and capital committee. That is exactly right. That is the intention. It is to continue to maintain and improve the progress that we make in our returns.

Okay. Thanks. And then lastly on the -- on GMs restructuring plans this year, are you comfortable with your, particularly SCS guidance, given what you know about their plans?

There's nothing in our plans that accounts for some dramatic disruption that might occur. So based on what we know, and this includes all of our customers in that industry and that segment and where things stand in negotiations with their own companies, their own activity with their employees, yes, we're as comfortable as we can be for the facts as we know them. But there is no allowance for -- if there were some significant disruptive event, that's not in the numbers. And Vicki, did you want to add anything else?

Just one more note because it's been in the news, GMs decision to buy out Vector will have no impact on our business.

Okay. Thanks very much.

You're welcome.

Thank you. The next question, David Mack. Please state your company name.

Jay Goldman & Company. Hey, guys, I wanted to just -- if you could just refresh my memory, when you go out and purchase a truck, such as you are with the growth CapEx, how much of that is speculative and how much is precontracted?

The answer is that on leases it's not speculative. So when we expect,and we are forecasting capital, it's because we anticipate that for what we know and the requests and the demands and the negotiating we're doing, we expect to spend it. But not a dollar is spent until we have the order. When we have the order, then we send the order to the OEM, the slot is used up and then it takes delivery, and then we spend the capital.

Okay. That's great. When we think about the cash structure and the efforts to relever the balance sheet and, think about growth CapEx versus stock buy back, what are the puts and takes that you're thinking about there and what types of return metrics and the hurdle marks are you focused on?

Okay. I think that you've set up the subject well and, as you know ,we've said that, over time we expect to increase the leverage because it's appropriate for our business model in leasing. And we've shared those targets of 2.5 to three times leverage because of our leasing business and that makes sense in its modeling, in its infrastructure and its pricing. We've also said that as we did that over time, we would do that carefully because we also wanted to make sure that we maintained confidence with the rating agencies and maintained the high ratings on our credit because that's important as a part of our business.

And that our call and direction is that we believe first of all, we would be best served to have our capital available for investment in the business, secondly to the consider acquisitions and then third other options like share buy-back which we did some of and also considering dividends. Anticipating this question might come up, in fact I asked some of our financial people the last couple of days, if we look at this incremental $200 million versus a $200 million share buy-back, in which case are our shareholders better off?

And based on us continuing to perform only as well as we currently are in the lease business and for the returns we get,, it is in our shareholders better interest for us to invest that money in capital for organic growth because both on an EPS basis, as well as a shareholder value basis the calculations over a wide range of share price comes out to be better. So as long as we continue to have good solid fundamental organic growth, especially in lease where we have lease capital, the internal calculations that I've had some meticulous review over, the shareholders are better off for us to invest in the business for the growth for the long-term, that still is a first call on our priority, and that also inches up the debt-to-equity ratio.

In their calculations and not to sound smart, but do you know what share price they were using because I'm guessing today's price is a little bit lower?

Yes, and it could take a lot lower price before you'd ever cross the breakeven line.

Very good. Thanks a lot.

You're welcome.

Thank you. Our final question comes from David Campbell. Please state your company name.

Thompson Davis & Company. Gentlemen I want to ask you the reasons for the decrease in operating -- in forecasting a decrease in operating cash flow on page 38 of your presentation.

Okay. That must be in the appendix section?

Yes.

It's in the capital, and it's, it comes from the increase in the CapEx for the higher anticipating capital spending that we anticipated above the previous plan for the additional lease equipment that when we get the contracts we expect we will spend.

But then, I'm talking about the operating activities, the $1 billion to $973 million?

Yes, we have a slight increase in working capital that we are forecasting. And we also will drop the sales proceeds from used vehicles about $15, $20 million from our plan.

Okay. Thanks. And on page 19 of the presentation, the earning outlook, the upper end of your range, the forecast went up $0.02 cents for the whole year, excluding the tax benefit. That just seems to be -- that just seems to be the increase you had in the second quarter versus plan -- versus your previous forecast. It doesn't seem to increase anything in the third and fourth quarter's. Is that correct?

That's correct. We raised the bottom range by $0.07 and we increased the upper range by the $0.02 that you referred to. So that being said we are pretty much saying that we are sticking with what we are felt would have been the case in the third and fourth quarter of the range of $1.05 to $1.10, and we thought that was the right bracketed area to be in. That was what we've been anticipating right from the time we did our business plan. And we thought that that was the appropriate range to forecast for the next two quarters.

But you're above plan in some areas of your business but which you've been alluding to.

Yes.

But you apparently don't think you'll be above plan the rest of the year?

I don't see the value of -- right now of exceeding or expecting to increase expectations beyond what our plans have been up to this point. A lot of the upside -- some of the upside you've seen and, in fact, the additional lease spending we're going to do on capital isn't going to appear until next year. You know, if we were three months earlier than now and we were going to start taking some of that equipment earlier, then you'd build in some of that growth and some of the EPS because it would fall through from the revenue. But in terms of the lead timing, a lot of the good things that are going on you won't see until 2007. So I didn't think it was appropriate to start boosting forecasts when a lot of the value will come after this calendar year.

I understand that. You've pretty much answered this question, but a lot of people, if you look at the stock market today, are forecasting recession or some substantial slow down. You said you are somewhat immune to that but, nevertheless, your confidence in the way your equipment is being reordered and renewals are strong, it doesn't seem to indicate there's any slow down coming up. Do you have any more comments about that?

I guess I have the value of not being an economist. All I can do is judge what our customers are asking for. And right now they're expecting to sign business and contract for business, so I only predict based on what I hear from them.

Okay. Well thanks for the good job.

You're welcome.

Thank you. I will now turn the conference back over to Greg Swienton.

I think that probably means we've both a little over time and probably out of questions, so thank you for your participation, and have a safe day and thanks for your support. Bye now.

Thank you. That concludes today's conference. You may all disconnect at this time.