萊德系統 (R) 2006 Q4 法說會逐字稿

Good morning and welcome to Ryder System Incorporated Fourth Quarter 2006 Earnings Release Conference Call. All lines are in a listen-only mode until after the presence. [OPERATOR INSTRUCTIONS] As a reminder, if you're using a headset or speaker phone, please pick up your handset before asking question. Today's is being recorded.

I would like to introduce Mr. 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 Fourth Quarter 2006 Earnings and 2007 Forecast Conference Call. We like to begin with a reminder that in this presentation, you'll hear from 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 filing 's 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 Tegnalia, President of U.S. Fleet Management Solutions are available to answer any questions you may have at the conclusion of our presentation, with that, let me turn it over to Greg.

Thanks, Bob, and good morning, everybody. This morning we will recap the fourth quarter 2006 results, review our outlook for 2007, and then open up the call for questions.

Before I begin, I'd like to take a minute to the thank Bobby Griffin for his many significant contributions to Ryder because as you may have seen in a recent press release, Bobby will be retiring later this quarter after 34 years with Ryder and its affiliates. On behalf of myself and the Company, I'd like to thank Bobby for his outstanding dedication, leadership and years of service to Ryder and wish him all the best in the years ahead. While we will greatly miss Bobby's contributions, we're pleased that we have a very capable leader in house to lead Ryder's International Operations going forward. Dave Bouchard, formerly Senior Vice President of Global High Tech and Consumer Industries in the Supply Chain Solutions business segment. Will head up our international operations reporting to me, and I look forward to introducing him to our Shareholders in the future. With that said, let me begin and go into our fourth quarter results.

Reported net earnings per diluted share were $1.08 for the fourth quarter 2006, up 17% as compared to $0.92 in the prior year period. Earnings in the fourth quarter this year included $0.01 in net restructuring and other charges. The charges included early debt termination costs, severance in connection with global cost savings initiative and the adjustment of post retirement benefit plan obligations. The charges were partially offset by a pension remeasurement benefit, which was unrelated to our recently announced pension plan changes.

In the prior year, earnings included $0.04 of restructuring costs, a $0.04 charge from the cumulative impact of an accounting change, and a $0.03 benefit from discontinued operations. On a continuing operations basis, earnings per diluted share of $1.08 in the fourth quarter 2006 were up by 16% from $0.93 in the prior-year period. Total revenue for the company was up 3% in the quarter.

Operating revenue, which excludes fuel and subcontracted transportation revenue, was up 6% driven by higher operating revenue, in fleet management and supply chain. Fleet Management Solutions posted a decline in total revenue of 1%, while operating revenue was up 2% versus the prior year. Total FMS revenue was impacted by a 10% reduction in fuel revenue, which was the first fuel revenue decline we've had in recent periods. Contractual revenue, which includes both full service lease and contract maintenance, was up 5% due to our strong sales activity this past year.

Full service lease revenue was up 5%, continuing the quarterly sequential improvement we've seen in lease revenue growth over the past few quarters. Contract maintenance revenue was up 16%, reflecting our focus on growing this long-term contractual business with customers. A significantly weaker freight demand environment during the quarter resulted in a 7% reduction in commercial rental revenue. Softer market demand conditions negatively impacted both rental utilization and pricing levels. Net before tax earnings and fleet management were up 3%, fleet management earnings as a percent of operating revenue were up 10 basis points to 12.8%. From an earnings standpoint, fleet management benefited from improved results in full-service lease and contract maintenance as well as higher used vehicle gains. These earnings improvements were partially offset by lower commercial rental results in North America, as well as higher marketing expenses, sales force, and other compensation-related costs. For those following the presentation on the web, we'll turn to page 5.

Turning to the Supply Chain Solution segment, total revenue was up 13% for the quarter, which includes the impact of managed subcontracted transportation. Operating revenue was up an even stronger 17%, reflecting the impact of improved volumes with existing accounts as well as new and expanded business. This marks the fifth consecutive quarter of double-digit operating revenue increases for supply chain.

Fourth quarter net before tax earnings and supply chain were up 22% versus the prior year, net before tax earnings as a percent of operating revenue were up 20 basis points to 5.3%. These earnings improvements stemmed primarily from higher volume levels as well as new and expanded customer contracts. Dedicated contract carriage both total and operating revenues were down by 2% for the quarter as a result of lower revenue associated with declining fuel costs and volumes. Net before tax earnings in DCC were up by 8% and as a percent to operating revenue were up by 80 basis points to 8.3%. Earnings improved in the quarter due to the lower safety and insurance costs including a hurricane-related recovery.

Page 6 highlights some key financial statistics for the quarter. On 6% operating revenue growth, earnings per share from continuing operations were up 16% to $1.08 reflecting good earnings leverage on operating revenue growth. The average number of diluted shares outstanding decreased by 2.7 million shares from the fourth quarter 2005, to 61.2 million this quarter due to our share repurchase activity during the prior 12-month period.

During the fourth quarter, we purchased 331,000 shares under our current 2 million anti-dilutive share repurchase program at an average price per share of $52.91. This brings the total shares purchased under this program to 1.8 million shares at an average price per share of $50.89. Our fourth quarter tax rate was 35.3% versus 36.6% in the prior-year period due to resolution of various tax audits and year-end true-ups. On page 7, you'll see key financial statistics for the full-year period. Operating revenue was up 6%, with all business segments contributing to revenue growth for the year. Reported earnings per share from continuing operations were $4.04 versus $3.53 in 2005. Excluding the previously disclosed tax benefits and pension charge, comparable full-year earnings per share from continuing operations were $3.99. This represents an improvement of $0.58 or 17% from a comparable $3.41 last year. Our full-year tax rate was 36.6%, slightly up from 36.3% last year. Our adjusted return on capital improved from 7.8% last year to 7.9% this year.

Page 8, I'll discuss our fourth quarter results for the business segment. In Fleet Management Solutions, operating revenue was up by 2%, driven by full-service fleet and maintenance revenue growth. Lower fuel costs from fuel sold to customers contributed to a total FMS revenue decline of 1%.

Fleet Management Solutions earnings were up by $2.6 million or 3% driven by stronger full-service lease and contract maintenance results. These improvements were partially offset by commercial rental results, as well as higher sales force and marketing costs, and increased compensation related costs including options expensing. FMS margin improvement was also partially offset by higher interest costs, due to higher debt levels, supporting growth of our lease fleet, our pension contributions, and share repurchases.

U.S. Commercial Rental utilization in the quarter was 71.8%, down from 77.3% in the fourth quarter 2005 due to a weaker freight demand environment. As a result of the slower demand in our transactional business, we brought our rental fleet size down below previously planned levels. In Supply Chain Solutions, total revenue was up 13% in the quarter and operating revenue, which excludes subcontracted transportation, was up 17% due to improved customer volume levels and new sales activity. This growth came in all reported U.S. customer industry segments and in all geographic markets of our international supply chain business.

SCS net before tax earnings were up $3 million or 22% for the quarter largely due to these higher revenue levels. In dedicated contract carriage revenue was down 2% due to higher fuel costs passed through to customers. Excluding subcontracted transportation and fuel costs, revenue was unchanged from the prior year.

ECCs net before tax earnings improved by $800,000 or 8% to $11.2 million due to lower safety and insurance costs including a hurricane-related recovery for business interruption. Total central support services costs were down by 1.6 million or 3% from the prior year. Unallocated central support services costs not charged to the business segments were up by $2 million reflecting higher share based and incentive compensation. Earnings from continuing operations were 65.8 million up $7 million or 12%.

Page 9 highlights the full-year results by business segment. And in the interest of time, I won't review these results in detail but comparable full-year earnings from continuing operations were 246 million as compared $220 million in the prior year, up $26 million or 12%. And at this point I'll turn the call over to our Chief Financial Officer, Mark Jamieson, to cover a number of items, begins with capital expenditures.

Thanks, Greg. Turning to page 10, full-year gross capital expenditures before acquisitions totalled somewhat under 1.8 billion, up by 349 million from the prior year and right on our most recent forecast. Increased capital spending was driven by a higher spending on long-term contractual leased vehicles of 411 million.

This higher leased spending was due to both a heavy vehicle replacement year in 2006, and strong new sales activity. The higher spending in lease was partially offset by reduction in commercial rental vehicle spending of 57 million. We realized proceeds from sales primarily of revenue earning equipment of 333 million on par with the prior year. Deducting sales proceeds from gross capital spending our net capital expenditures were just over 1.4 billion, up by 350 million from last year.

Turning to the next page, you'll see that we generated cash from operating activities of 854 million on a full-year basis, primarily through our earnings and the depreciation add-back. Cash from operations improved by 75 million from the prior year. This improvement resulted from our increased earnings and lower income tax payments, partially offset by higher pension contributions of 117 million.

In 2005, cash from operations included a 176 million payment to the IRS related to the resolution of the 1998 through 2000 tax audit. Including the impact of our used vehicle sales activity and other items, we generated 1.25 billion of total cash as compared to 1.18 billion last year. This strong cash generation is important to the business as it supports our future expected growth in assets under management. Part of the additional cash generated was used to invest in revenue earning equipment under long-term contracts and this resulted in increased capital expenditures of approximately $300 million. Including our capital spending, the Company's 440 million -- 445 million of free cash flow as compared to using 231 million in the prior year period. Free cash flow came in below our prior forecast primarily due to a voluntary 60 million contribution to our U.K. pension plan during the fourth quarter and lower than expected cash proceeds from used vehicle sales.

On page 12, you can see total debt has increased as compared to the prior year end. The increased debt level is largely due to spending on contractual vehicles as well as our share repurchase activity. Ryder's total obligations of 2.9 billion are up by 593 million as compared to the prior year end. Balance sheet debt to equity was 164% as compared to 143% at the prior year end.

Total obligations as a percent to equity at the end of the quarter were 168%, up from 151% at the end of 2005, but still well below our long-term target. Our equity balance at the end of the year was 1.7 billion, up by 193 million versus year-end 2005 reflecting our net earnings offset by share repurchases.

At this point, I'll hand the call back over to Greg to provide an asset management update and get into our 2007 forecast.

Thanks, Mark. On page 14, I'll update you on our asset management area. We're pleased with the results of our used vehicles sales operation where we sold over 4700 used vehicles during the quarter. In the fourth quarter, 2005, we elected to wholesale a significant number of units due to high levels of aged inventory. As a result, the total number of units sold was down 15% this quarter, but the number of units sold through our retail used vehicle sales centers, however, was up by 3% from prior year. Retail sales prices for both used tractors and trucks are generally at good levels. Retail tractor proceeds were up 1% from the prior year, reflecting solid market demand for these units. Retail truck prices were down 6% reflecting a somewhat softer pricing environment, and the fact that the trucks we sold this year were older and with higher mileage than those sold on average last year. We expect these trends for both used tractor and truck prices to continue in the near-term.

Because of the significant number of lease vehicle replacements in 2006, our used vehicle inventory has increased. The increase in the number of units available for sale, combined with the impact of weaker rental utilization, caused a number of vehicles no longer earning revenue to increase by 1600 units. We expect our used vehicle inventories to remain high over the next couple of quarters, as we continue to out service and sell replacement lease vehicles. We expect vehicle inventories will moderate in the second half of the year, due to lower vehicle replacements in 2007 versus 2006.

Our U.S. commercial rental fleet size in the fourth quarter was down 2% from the prior year. Due to the weaker demand environment, we brought the rental fleet size down 4% below our planned levels. We anticipate soft rental demand conditions to continue in the near-term. And as a result, we plan to continue to reduce our rental fleet size below prior year levels and expect it to remain so throughout 2007.

Let me now move into a discussion of our 2007 outlook. Pages 16 to 18 highlight both opportunities and risks for the business as we see them in this coming year, 2007. In terms of the overall environment, generally we foresee a stable economy, with modest inflation levels and moderate GDP growth. Fuel prices will likely be lower than last year on average, which benefits our customers' businesses and emerging markets should remain strong which benefits our international operations. We do anticipate continuation of some issues we've been seeing. However, including -- however including the continuation of a soft housing market, and the possibility of lower automotive production levels with some OEMs. Additionally, the employment market should remain tight which can cause recruiting issues with drivers and other employees.

On page 17, in fleet management, in 2006, we had a strong sales year for contractual business that will provide positive revenue momentum as we start this year. OEM production of new Class A Tractors will be down in 2007, however, and so we'll be focusing on customer retention and sales initiatives to keep our sales activity moving forward. Our transactional commercial rental business will be impacted by softer freight demand this year and we're focused on taking the right steps in the asset management area to aline our fleet capacity with market demand. We anticipate generally stable used vehicle pricing. We will also benefit from improved vehicle residual values in certain asset classes going forward. Our challenge in this area will be to effectively manage our used vehicle inventory, resulting from the heavy vehicle replacement cycle we had last year.

Finally, FMS will benefit this year from improved 2006 market returns and a higher discount rate in our U.S. pension plan. This benefit is directionally opposite from last year, when pension costs represented a headwind to the Company and illustrates the potential year to year volatility of the defined benefit pension costs.

On page 18, for supply chain and dedicated, these two units should continue this their successful focus on strong customer retention and new business development. We'll continue to enhance the diversification of our supply chain customer base, while leveraging our strengths from existing customer segments and expanding our current broad range of service offerings to meet customer needs. A softer freight demand environment and potential automotive plant closures could impact volumes in our Supply Chain Solutions business this year. We'll be closely monitoring these areas through the the year and implementing appropriate mitigating actions as needed.

Finally in both fleet management and supply chain, we'll continue to identify and implement process improvement initiatives that have been very successful in improving the operating cost structure of the Company.

On page 9, turning to key financial statistics, for our 2007 forecast, we expect operating revenue growth of 4% to 5% for 2007. Total revenue growth will be somewhat higher at 5% to 7% largely due to growth of subcontracted transportation revenues. Comparable earnings are forecast to grow by 7% to 9% to a range of $262 to $268 million in 2007. Comparable earnings per share are expected to increase by 8% to 10%, to a range of $4.30 to $4.40 per share in 2007, as compared to $3.99 last year. Our average share count is forecast to decline slightly by 600,00 shares to 61 million diluted shares outstanding. We project a tax rate of 39.4%, up from 36.6% in 2006. As a reminder in 2006, we benefited from tax law changes that reduced our overall tax rate.

Our return on capital is forecast to decline slightly to a range of 7.7% to 7.8% this year, due to the significant lease capital spending for both replacement and growth vehicles we had in 2006. Our longer-term goal is to realize a return on capital in excess of 8%. Our bigger objective is to maximize the spread between our cost of capital and return on capital. At a projected 7.7% to 7.8% return on capital in 2007, we remain well in excess of our cost of capital of 6.7%, which is based on our reported 2006 cost of debt average 2006 leverage and normalized tax rate.

Next page, 20, outlines our growth expectations by business segment. In fleet management, operating revenue is forecast to grow by 2% to 4%. Operating revenue growth is positively impacted by contractual revenue growth in lease and maintenance of 5% to 6%, and negatively impacted by a commercial rental revenue reduction the of 6% to 7%. Supply chain operating revenue is expected to grow by 9% to 10%. Our forecast is based on continuing solid new sales and customer retention activity in this segment, while considering potential volume related impacts from some of our automotive customers. In Dedicated Contract Carriage, we anticipate operating revenue to grow at 4% to 5%. Growth and is expected to be driven from new sales activity while there may be some softness in existing customer volumes due to the overall freight environment.

Page 21 provides a waterfall chart outlining the key year-over-year changes in our EPS forecast from 2006 into 2007. Two items will create head wins for us this year. In 2006, we had a $0.02 benefit from a nonoperational item related to the receipt of Mutual Insurance Company stock which most analysts already excluded from their earnings numbers. Additionally, our tax rate will be significantly higher this year resulting in a $0.07 negative impact to earnings. In the asset management area, we'll benefit from reduced depreciation expenses on certain vehicle classes where residual values have improved. Partially off setting this benefit will be a modest reduction in earnings in the used vehicle area. The net benefit from these two items is forecast at $0.03 to $0.05.

In the employee benefits cost area, we'll benefit from improved returns in our U.S. pension plan in 2006, and an increase in the discount rate from 5.65% at year-end 2005, to a discount rate of 6% at year-end 2006. Partially offsetting this benefit will be higher interest on pension funding costs, increased medical costs, and higher stock-based compensation expenses result of having an increased number of participating employees. The net benefit from these items is projected to be $0.12 to $0.15. The remaining and bulk of the improvements in our plan are anticipated to come from revenue growth and operational improvements. We anticipate revenue growth in all of our contractual businesses partially offset by our reduction in our transact commercial rental business. We also have a number of process improvement initiatives underway in areas such as maintenance and strategic sourcing. The net benefit of these items is forecast in a range of $0.25 to $0.30 per share.

Taken together, including the negative impact of taxes and the positive impacts of asset management, employee benefits, revenue, and other items, is forecast result in EPS growth of $0.31to $0.41 per share or a range of 8% to 10% improvement for the year for a total EPS of $4.30 to $4.40 per share.

The next page, 22, highlights the margin trends and targets in each of our segments. As you can see, there have been significant improvements made since 2001 in all three segments. In 2007, on the basis of segment net before tax earnings on operating revenue, we're projecting FMS to improve by 50 basis points to 13.1%, and we're forecasting both supply chain and dedicated margins to remain flat largely due to potential volume-related impacts. And their forecast in supply chain respectively are 5.3 and dedicated of 7.8. I'll now turn it over to Mark again to cover the next couple pages.

Thanks, Greg. Page 23 provides some additional detail regarding our capital spending plans. Our capital forecast is comprised of two pieces, capital spent to replace vehicles that, which will result in no net increase in revenues, and capitals spent on growth that will increase the revenue base of the Company. In 2007, replacement capital for full service lease is expected to range between 800 and 850 million. Down significantly from 2006 due to the fewer leases coming up for renewal this year.

Growth capital is forecast in the range of 80 to 180 million. The growth portion of our capital is projected to result in 15 to 35 million of higher reported lease revenue in calendar year 2007. We only capture a portion of the annualized revenue on these sales in the first calendar year. This occurs because the contracts are signed during the course of the year, and because of the time lag between the contract signing date and the date of vehicle delivery from the OEM.

On an annualized basis, this growth capital will result in revenue of 30 to 65 million, this will be earned each year during the average 5 to 6-year life of our lease contracts. In commercial rental, our 270 million capital forecast is entirely related to replacement of older vehicles since we're projecting a decrease in our total rental fleet count.

Turn to page 24, we're forecasting total gross capital spending in a range of 1.25 to 1.4 billion, down by approximately 360 to 510 million from almost 1.8 billion in 2006. The decrease in total capital is being drive by a lower spending and a lease product line primarily due to lower replacement spending. With total lease capital projected at 880 million to 1 billion. As has been our general practice for several years now, this capital will only be spent once we have signed the lease contracts with our customers. Commercial rental spending is forecast to increase 270 million from just under 200 million in 2006. This increase is largely due to replacement of older rental units, as well as making some rental investments in the U.K. and Canada following minimal spending in these countries in 2006.

In addition to vehicle spending, our forecast calls for 100 million of capital for operating property and equipment. This would include spending to support anticipated new contracts in our supply chain business. Proceeds from sales of primarily revenue earning equipment is forecast to decline by slightly, decline slightly to 320 million. We're also forecasting proceeds from sale and lease back of revenue earning equipment of 150 million. As a result, net capital expenditures are forecast at 780 to 930 million down by approximately 500 to 650 million from the prior year.

Assets under management are forecast to grow by 1% to 2% to approximately 8.2 to 8.3 billion in 2007. The lower level of capital spending on lease vehicles this year drives our free cash flow forecast to a range of positive 210 to 260 million, as compared to a negative 440 million last year. Based on these projections, total obligations to equity is forecast at 135% to 145%, down from 168% at the prior year end. At this point, let me turn the call back over to Greg to review our EPS forecast.

All right. Thanks again. And turning to page 25, as I previously outlined, our full-year 2007 EPS forecast is for a range of $4.30 to $4.40. We're also providing a forecast for the first quarter EPS of $0.80 to $0.84 versus a comparable prior year EPS of $0.77. Excluding the first quarter 2006 benefit of $0.02 from a nonoperational item that was previously reported, the prior year EPS would have been $0.75 in 2006.

Turning to the next page, 26, let me briefly summarize the key points in our 2007 plan. We strongly focused on continuing the positive momentum we realized last year in increasing growth of our contractual product lines which makes up approximately 98% of our company's revenue. We've had good success in converting customers to an outsourcing solution with Ryder in all of our business segments. Because of the sizable market opportunities available, there's no more important activity underway in the Company than continuing to improve our customer retention levels and winning new business. At the same time, we must take the right actions to manage through cyclical impacts to our business, particularly in the commercial rental product line. Because we're managing our assets centrally, we believe we're better positioned to manage these cyclical impacts than under our prior decentralized structure. Cost controls and business process improvements remain important to realizing our operational goals but we're also making investments in selected areas to drive future growth.

Finally, we have strong balance sheet to support our growth and financial leverage targets. That does conclude our prepared remarks this morning. We had more than a normal amount of material to cover today so our time for questions is somewhat compressed and in order to be fair, we'd like to ask you to limit your questions to a couple questions each, just so that we can take as many calls as possible. If you do have more than a couple of questions, you are welcome to get back in the queue and then we'll take as many calls as time allows. At this time, I'll turn it over to the operator, open up the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] At this time, if you would like to ask a question, please press star followed by 1 on your touch-tone phone. If you would like the with the draw your request -- followed by 2. To ask a question. Our first question is from Alex Brand, you may ask your question and please state your company name.

Good morning this Kevin Sterling with Stephens calling in for Alex.

Good morning, Greg. Real quick, to start off, I just really want to under your 2007 outlook. Because it looked like you're expecting a weak environment is that for the whole year or do you expect a slight pickup in the second half of the year? And are audit plant closures built into your guidance as well? I think the first question was, how we see weakness spread through the year. We do see a weaker environment. I think that's reflecting by many transport firms that you hear from in terms of freight movement. We do expect it to be weaker and this is primarily for the commercial rental activity. We do expect it to be softer in the first half of the year with some pickup in the latter half of the year. And that's the way that we've kind of anticipated and built the plan. In terms of automotive, if the there is something that we know about, we have included that in the plan already.

Okay. Thank you. And maybe talk a little bit about your commercial rental volumes throughout the the quarter and basically what I mean by that is, did they drastically drop off as we progressed through the quarter? Or was it kind of fairly low for three months in the quarter?

All right. For the commercial represent in the fourth quarter, I'll ask Tony Tegnalia, to head that is segment and that whole business segment to comment.

Okay. Kevin, we did see a drop off as the quarter did actually progress. But we had been anticipating that softness in the rental product line. And we know that we are better equipped now to manage the softening of the rental product line than we ever have in the history of the Company. We have anticipated this softening and our fleet levels today in rental for the power fleet roughly at the end of January, is already down about 13% from our fleet level where we were at the end of the summer. So we have anticipated this, we have vision into all of 80 to 85 markets from a pricing and utilization point of view by asset class. And we are prepared for this. We've also accelerated some of our out servicing of the vehicles as well to prepare for this.

And we do see as Greg had mentioned, some continuing softening on rental as we go into the first half for the most part, but then we do believe that those sectors of the economy that do impact rental will improve in the second half, there will be better utilization, better pricing in the second half, and overall for the year, we believe we will be okay. But we have reduced or capital expenditure plan. We continue to reduce did size of the fleet. Peak to peak we'll be down about 15%. So we've prepared for this, we're ready. Our asset management tools are in place. And we'll manage through it well.

Great, Tony. Thank you for that. One last question, Greg so can I let other people ask. What are your plans for the free cash flow? Our you mainly looking at acquisitions? I know you're almost done with your anti-dilutive share repurchase plan. Do you have plans for another buyback? And loan acquisition front if you're looking at acquisitions, what segment would be at the top of your list?

Well, you have many points there, yes, we should have available free cash flow and our answer, which you've commented on a few parts of it are pretty consistent with what we've said in the past. We do want investment dollars available for core growth. We do have areas for acquisition, although I think it probably wouldn't be appropriate for me to prioritize externally what those are. Want dollars available for acquisition. We have in the past maintained a posture of anti-dilutive share repurchase. Anything beyond that, we would only comment when we would reach some other conclusion based on utilization of cash for the top two items, that is core investment and acquisition.

Thanks, Greg. And I hope you guys enjoy the Super Bowl in Miami this weekend.

We expect to. And I think that we're expecting maybe a little bit of rain and I don't know if that will affect the game, but we expect to have a great turnout.

Thanks again.

For next question is from Jon Langenfeld, you may ask your question and please state your company name.

Robert W. Baird. Thank you, good morning.

Good morning.

And it looks like we continue to have good success on the leasing line in terms of contract signings. How would you expect that to progress here in the first and I guess more importantly, the second quarter?

I think there are two points to that. First, I appreciate your acknowledgement of the continuing progress in lease sales and the revenue that shows up. That is something we've been after for some time and I think all of that hard work is showing up. I say there's two points to it because you have the revenue continuation and then you have the sales effort. And I think the sales effort I can let Tony, who heads up that segment again, comment on.

John, how are you? I think first of all, our sales in '06, were actually more than double what they were in the '05. And you'll see those carry into '06 and into '07. The sales that we had at the second half of '06 for the most part didn't generate much revenue in '06 but that will be there for all of '07. So we're going to enjoy attractive revenue growth on the lease side throughout all of '07 and also on the contract maintenance side as well. The sales in that area were also very, very strong and exceeded expectations during '06. Both of those increases in the fleets, the lease fleet and the contract maintenance fleet, will be very attractive as we go throughout the '07. Also, our sales force quota levels right now and more particularly, our pipeline right now, is about 25% to 27% greater than pipeline was this time last year, and our hit rate as we went through '06 with our new focus sales and marketing group is actually up 3 to 500 more basis point 's on the hit rate. So with the higher pipeline, higher hit rate, very strong sales in '06 carrying into '07, we feel very good about the lease growth and the contract maintenance growth as we go into '07.

Would you expect the new sales growth then, that's still going to be down this year, I'm assuming just based on your growth in CapEx assumption, though.

The new lease business to be written in '07 may be lower than '06 because we did have a bit of a benefit during '06 from the new technology. But we still very good about the sales force momentum, very good about the pipeline. We do have available to us '06 engines that are still available for lease. So we still feel very strong about lease sales in '07.

Okay. And then secondly, just in term of the profit on the FMS line, it looked like that came in several million below where you would have been expecting it. What was the biggest Delta between what you did on that line and what you would have expected when you provided guidance?

I think one of the biggest difference year-over-year would have been compensation related. So you certainly have up front costs from sales commission that tends to be paid earlier. If there's anything else that might be significant, Tony, I don't know if you'd have any.

Well, I think the rental product line margin clearly in the second half of the year was not at the level that we had really wished it had been. And so we do have that pull-through and that leverage on the rental product line that we missed. But as I said, we have our asset management plans in place and as you know, John, we don't really chase revenue on the rental product line. We adjust fleet levels according to demand to get return and so we have dramatically reduced the size of that fleet relative to the demand. So we'll work through that very well as we go into '07. But the rental product line reduction in revenue did impact the third and fourth quarter.

Okay, great. And then, Greg, good luck to you this weekend.

Yes. You know my original home, so you know my predisposition.

I got a couple at home rooting for you.

Thank you.

Thank you, our next question is from John Larkin. You may ask your question and please state your company name.

Company name is Stifel Nicolaus. Good morning, everyone.

Good morning.

I had a sort of a net-out type of question regarding the restructuring and other charge of $0.01 last year I gather it was $0.04, yet the absolute restructuring and other charge net on the detailed income statement seemed to be about the same in both periods. Just wondering what made up the incremental $0.03 per share there.

Yes. You're right. And the net-out calculation, Mark, do you want to comment?

On the schedule they look flat. We had a pension credit in the fourth quarter of '07 driven by a remeasurement of our pension plan. And that offset most of the restructuring charge ending up in a $0.01 charge.

That doesn't show up on the income statement.

It isn't recorded in the restructuring line. It's in compensation.

Okay. That's very helpful. And then I guess for my second question, Tony, you sound reasonably enthusiastic about the sales momentum on the full service lease side of the house. It seems to me that about maybe a year, year and a half ago, you first had the notion of repositioning the sales force to more of a consultative sales force to help people understand the benefits of outsourcing, et cetera. That struck me as being a multi-year process. And a little surprised at how strong the momentum is so quickly, can you comment on how much more work there is to do to reposition the sales force and whether there's additional momentum that might result as that sales force gets fully repositioned?

Well, John, as you know, we did restructure the sales force at the end of '05 in the fourth quarter of '05 with much more focus on the selling in the marketing side and also for our rental side as well. Which that sales force has responsibility for. We're very pleased with results of that focus sales force. We have introduced new technology tools which manage their productivity, much better, their quota attainment much better. We've also dramatically enhanced the training for that sales group so there are on a much more consultative basis, relative to that. And we think we're going to continue to see the benefit of that as we go on out into '07. We've also had a stronger focus on our national account program. Than we've had in previous years and as Greg had mentioned a number of times on this call we are going for some of larger fleets as we do get into that program. And we've seen the national account larger fleet transactions really grow very handsomely during '06 as well. The portion of our pipeline today that represents much larger transaction in the past, is up meaningfully. And so we're very pleased with that. So there is enhanced training, enhanced technology, completely reinvigorated sales force and restructured sales force and you will continue to see the benefits of that. Not only in lease, but also in contract maintenance at the same time and that's that sales force that does get momentum for the rental product line also.

Maybe just one follow-on to that. Does the softening of the economy actually help with that consultative sales force or are companies your customers, that is, more inclined to outsource the fleet management function in a slowing economy than they would in a roaring economy?

Yes, actually, they do. That is one benefit of the softening sectors and they are more open to doing different things. And is when you go into sell to lease product line we also introduce them to Vicki's service offering in dedicated contract carriage as well because both of those product lines in a softer environment are prone to carriers and also prone to private fleets looking at different alternatives and dedicated contract carriage and outsourcing the leasing really does end itself to that. We take full advantage of regardless of what's happening in the marketplace. But we'll also introduce DCC to those environments as well.

That's great color, Thank you.

Thank you. Edward Wolfe, you may ask your question and please state your company name.

Thank you. Bear Stearns. Good morning, guys.

Good morning.

Could you just give a little bit more guidance on depreciation and on interest expense going forward? If you can't give interest expense, and/or at least what your average debt would look like in '07?

'07, yes. Average debt was 2.5 billion in '06. It's going to go up to 2. 8 billion in '07.

And what's your average cost of that debt?

It's going to go up 20 basis points. We were 57 in '06 it's going up to 59 in '07.

Okay.

So total interest expense will be moving from 141 to 167 million.

Okay. And on the depreciation side?

Depreciation side, we had, let's see. I've got the first quarter. I've got the first quarter for you, 178 '06 going up to 198 '07. And on a total-year basis it will be up modestly, up about 3% to 763.

Okay. And when I look at, in the quarter, there was a miscellaneous net of 55 offset by a positive 55 and then a negative restructuring expense of 36. What were those and is how ongoing are those?

Well, the miscellaneous income was driven mostly by hurricane insurance recovery in the fourth quarter.

Okay. That's not ongoing?

No, that is not ongoing.

What was the 36 that worked against you?

In the restructuring?

Yes.

That was, that was compensation related charges. We had 1.5 of severance related activity. And 2.1 million related to early retirement of some high-cost debt that we retired early. That was a prepayment penalty.

So both of these are ongoing basically.

No, they would not be.

Probably

Right.

Okay. And then the last one, gains on sales, you've talked about a lot of moving parts here. More inventory, lower pricing, hoping that the timing kind of comes back with pricing on some of these trucks. If I look at gains on '06 of 51 million, how should I think of them for the full year '07?

Tony?

Ed, we think they'll be done a bit in '07. We feel very good about tractor prices, they're holding very firm. There will be a good number of trucks on the market as all of our competitors, as well as us, reduce the size of their rental fleet. So in the earlier part of the year, there may be some softening on the proceeds for the trucks. But we feel very good about particularly our emphasis on the retail channel in contrast to the wholesale channel which we've used in the past. And we also go for proceeds. We did not jettison the fleet, we go for proceeds. And we really manage through that pipeline of the retail outlets to try to maximize proceeds and therefore, gains. So we feel good about the use of the two channels. We feel good about tractor proceeds as we go out into the year and we'll manage through the truck side and in the latter half of the year, we think that our competitors as well as us will have worked through the trucks that will hit the marketplace and we think the prices will be good and gains may be down slightly, but we'll manage through that well.

Okay. And you think they should pick up through the year, though, importantly?

We think tractor prices will be fine. And the truck prices in the latter part of the year we think will firm up as well. After the supply diminishes a bit.

Okay, thanks, I'll get back in line, thank you.

Thank you. Adam Thalhimer, you may ask your question and please state your company name.

It's BB&T Capital Markets. Good morning, guys. First question here, on the acquisition front you mentioned acquisitions, just curious how the valuations are looking out there, I know you guys are valuation conscious have you seen the prices people are asking come in a little bit with the decline in freight demand?

I think that's, that wouldn't serve our interest to comment.

Okay. Just help me understand something in regards to the cyclicality of your rental business. Right now, that's a fairly big drag on results with where the freight demand is right now. Could that be an equally big benefit when the freight demand reaccelerates, particularly right when it reaccelerates?

Yes, the commercial rental business obviously will have a little bit more direct impact from what's going on in the immediate economy than anything else in our business. Because it is the one transactional piece whereas the other 90% of our business is contractual. And even half of the rental customers in rental happen to also be lease customers. So they utilize those fleets for surge capacity. So you have obviously on the down side, if freight generally is not moving, you don't have the transactional activity and you don't have the extra demand where fleets are counting on that rental when they're heavier. And you typically see the same thing on the upside. So, I think that it's safe to assume that that's the one area that's more connected to what's going on in the various markets like housing and so forth that have so many knock on industries connected to it and general freight movement.

Okay. Fair enough. And then just I guess higher level question on your outlook. In line with a lot of trucking companies and logistics companies, you guys do anticipate a soft freight environment potentially picking up in late '07. I mean, what's the discrepancy between freight environment that you're seeing and GDP growth which in came in 3.5% in Q4, positive commentary by the fed. Would you be willing to comment just directionally maybe what the disparity is there in your view?

When we gave those overview comments on pages 16 do 18, we expect fairly modest GDP growth. We expect modest interest rates, we expect fuel prices to decline which tend to be in the benefit of the economy and customers. There's often a lag between everything that happens in the way a freight movement and manufacturing on a national and global basis, compared to some of those statistics. So I don't think it's too far off. I think that we're probably pretty well correlated in those transactional activities with the expectations of others in the industry. The one difference is that we may not have as much transactional and we're also not just pure transportation. So when you see the leasing business, that's contractually been strong. That revenue growth has been strong. In areas of supply chain that are beyond just the transportation components, those have been strong. So, I don't think we're totally decoupled from those statistics but we do have some differences.

Okay. Thanks for the time.

Sure.

Thank you, Tom Fowler, you may ask your question and please state your company name.

Thank you. It's Key Banc Capital Markets. Good morning, everybody.

Good morning.

Greg, I guess this kind of follows on with Adam's question, but looking at the EPS growth forecast for 2007, 8% to 10% versus a longer-term forecast of 10% to15%, what's kind of the difference in 2007 in the environment? Is it more on the dedicated side or is it the commercial rental side or is it a function of the macro economy and the GDP growth or those sorts of factors?

I would say generally it's macro economic related because if you then, if you take some of this down to another level, you also see that the number of miles being driven even by lease customers is down. So that's more evidence that there's something broader having occurred in the last quarter or so. But in response to your question, I think where we've seen obviously more significant decline more rapidly was in the, the commercial rental in the fourth quarter. Dedicated activity was less impacted. In fact, when you take the impact of fuel out of it, they were basically flat. Where as commercial rental really had a real decline.

Okay. And that's helpful. And then I guess kind of shifting gears but looking at the supply chain side of the business, how does the pipeline look right now considering some of the change in the economy within the last two quarters or so as you look out into 2007, I know you talked about automotive, but is there anything else we should consider looking at the overall environment for supply chain?

I'll let Vicki O'Meara comment who heads up supply chain in U.S.

Tom, thank you for the question.

Including everybody.

Our trends look very strong even though you see automotive volumes stronger or declining in some OEMs, they're increasing with other OEMs and remember that the first quarter is historically a slow quarter in the automotive industry. And in our automotive business, we have worked hard at diversifies our portfolio over a number of years and are still doing so. So we see a strong and healthy growth pipeline in automotive. In our other verticals and supply chain we also see a rate of growth that's higher than our automotive growth and that's reflected in the documents and numbers that you've received, that's what we did in '06 and what we anticipate continuing to do for next year. And dedicated the growth is more modest than supply chain. But despite the current moderation of revenue, which we did warn you about over the last couple of calls, we're still predicting a healthy growth for that business in '07.

And let me also let Bobby speak to international in supply chain because there's a lot going on there that sometimes are in different industries as well.

Thank you, Tom, for the question again, like Vicki. Pipeline international similar to what you were seeing in the U.S. operations is about the strongest we've ever had. In fact, we had a very, very solid, solid growth year in 2006. And based on the information that we had at our disposal now, the packages that we're working on, we expect to see a very strong growth year also in 2007. And it's coming in the all product offerings that we have that we in the all product offerings that we have that we provide to our customers. So the automotive industry is strong. We're also seeing strong, very strong growth in the other verticals.

Okay. Thank you for the call. Just lastly and I'm jump off here. But sticking with the dedicated side of the business, the benefits from the lower safety insurance costs, are those pretty much one-time in the quarter or will we see some recurring benefit from the favorable trends here?

I think that's pretty much one-time, because those were some recovery costs that go back to Katrina and the prior year.

Okay, great. Thanks very much.

Thank you, Art Hatfield, you may ask your question and please state your company name.

Morgan Keegan. Good morning, everybody. Thanks for taking my question. I really just have one question and it's kind of of more strategic and long-term in nature. If your guidance holds in '07, it appears that you'll delever the Company a little bit. You've put on slide 12 in the presentation that your long-term goal is to be between 250% and 300% of equity on your leverage. If I look at you from the standpoint of a leasing company, you do appear to be under levered. What's the process to get you up in that range to -- and what kind of earnings do you think you're leaving on the table at the current leverage ratio that you're at, the difference between where you're at and where you should be?

I don't know about an earnings answer to that. I'm not sure that really there are any. I think the other broader question is one that we've commented on previously. It is under levered as a leasing company. And we know we want to move that up. That means that the we'll utilize, we'll utilize our available balance sheet to invest. We did heavy investment this year. We can consider acquisitions and we need to see how those play out during the course of the year. Those could definitely impact the leverage in the right way to increase the leverage. And then, the last choice that we've had before is to consider share repurchase, which is also kind of a final activity or dividends or anything that, that's in that vein. And we say that that's, the third priority. The other thing that's relevant is that even if under leveraged, we want to move in the direction but not all in one step. We want to be able to do that over time and with progress and that's particularly appropriate for us because of our needs for capital and the importance that the rating agencies see in supporting our higher leverage, which they do. But to also see that in steps over time as opposed to trying to do that in one large, one large transaction at one moment in time.

Great. Thank you. That's all I had.

Okay.

Thank you, Brannon Cook, you may ask your question and please sate your company name.

J.P. Morgan. Had a question of clarification. You talked about 9% to 10% operating revenue growth in the SCS business. You also talked about some potential plant closures. Are some closures factored into that guidance or if there were some closures they would likely be downside from there?

Anything we know about is already factored in there. If there should be something happening that we don't know about and usually these have some fairly significant lead time, they would not be in there. But everything we know about is certainly in our plan.

Okay. So you are expecting some negative impact from plant closures in '07?

Yes.

Okay. And then just, a question on dedicated. Those revenues were down 2% in the fourth quarter obviously a weak truck load market and you've given some warning on that the beforehand. Could you talk about how pricing trends in that business, the kind of how that impacts margins and what could be a more challenging truck load market in the first half of '07? Sometimes it makes sense to give up a bit on price to get some of the revenue growth you're talking about in the 4% to 5% range this year?

Sure, I'll let Vicki comment.

Thanks, Brannon. First, the revenue in the fourth quarter [inaudible] the results of fuel price and volume declining. And if you discount the fuel out of those numbers, we were really flat quarter to quarter year-over-year and up full year 4%. Looking ahead, we're in a very I'd say relatively strong position even if a light freight volume market where you have excess capacity precisely for the reason you mentioned. We're mainly did pricing discipline. That keeps our margins healthy. We rely on in this business, long-term contracts and long-term contract relationships. So we actually can withstand lightening of the freight market and loosening of capacity better than some of the other companies that are, that are not as focused on long-term contract arrangements. We are exercising good pricing discipline which is helping on those margin increases that you also saw over the past year in that we expect to continue. We also balance our portfolio with TM, which further can help that transportation management product offering is an upside in a loose freight market. So that's, that is a balancing and a positive impact in our portfolio. Overall, we see strength in the growth of the dedicated business as a result of the sales initiatives and we see enhanced quality of earnings potential in that business through other efficiency and productivity initiatives that we also have under way. We are investing in the dedicated business and this is an important year for us in that business.

Okay. Thank you.

Thank you. Our final question is from David Campbell. You may ask your question and please state your company name.

Thompson Davis and Company. Thank you very much. It's now good afternoon.

Good afternoon.

I wanted to question you about the commercial revenue first. You are projecting 6% to 7% decrease for the whole year, which was the decrease in the fourth quarter. Most of the trucking companies I've heard and both asset and non-asset, suggest that the revenue and truck tonnage decrease was worse in the fourth quarter than it will be in the first quarter. That some of the decreases stabilized and they're looking for improved or less growth, less decreases in the first quarter. You seem to be forecasting a bigger decrease in commercial rentals in the first. Can you try to -- how much visibility do you have in this? Is this just a -- are you just trying to estimate what you think is conservative?

I'll let Tony comment. But the one visibility we know we definitely have in commercial rental is the size of the fleet. And as Tony said earlier, in this segment, which is the transactional business, we're not just trying to drive revenue, we are trying to maximize the returns both in earnings as well as the return on the capital deployed. So, part of this, part of the visibility is the size of the fleet which we've been managing downward. Tony, anything else you want to add?

Yes. David, we really watch the housing starts. We watch the manufacturing sector. And we also watch total truck tonnage when we project out our fleet levels. We are planning to continue as I had said earlier, reduce the size of our fleet as we go into the peak season and particularly in the first half of the year. Peak to peak will be down about 15%. We had very good asset management disciplines and as Greg and I both said, we do not chase revenue, we go for return. We do see the first quarter and perhaps the second quarter, in those sectors of the economy that impact our rental business being soft. More than likely in our view, as soft as the fourth quarter, one sector or so perhaps softer and we will prepare our fleet levels for that kind of environment. If we are wrong, and those economic sectors recover more quickly or are much more firmer than we anticipated, we will enjoy excellent up pricing, excellent up utilization rates will be anticipated. We'll generate higher returns on a smaller fleet. And we'll be very well prepared to enjoy that benefit. If we're right, we'll be thrilled that we reduced the fleet levels to the level that we're currently planning. So we are planning conservatively. We think that's real think right way to do it. Because on the up side, we'll have many opportunities to up price and up the utilization.

Okay. Thanks. And my second and last question is, in compensation-related costs, in the full-service -- in the Fleet Management Solutions area, you cite that as a problem in the fourth quarter. And yet you also mentioned some pension credits. I'm trying to figure out what -- what was the net cost of all of this -- you may call it nonrecurring dollars in the fourth quarter.

Not all of that accrues to FMS. The FMS compensation cost that I know that were on that one slide that I mentioned had to do with additional commissions, up front sales costs, and then throughout the Company, it spread and partially to FMS, you have additional options expensing, and then there was the pension --

The pension credit was lifted out of the segment.

Right.

And put in at a corporate level on the restructuring line. But it's not, that credit is not in FMS results.

Uh-huh. So, the, that basically means that the, the FMS compensation costs in the fourth quarter were fairly normal? Was there something extraordinary amount of increases?

The commissions would have had them up. We had a very strong sales quarter in the fourth quarter. And we, and so the commission would have been driven up notably.

Okay. Okay. Thank you very much.

You're welcome.

I would now like to turn the call back over to your speakers for any closing comments.

Well, we're already a little over time but I think we have got everybody's questions in. Thank you all for participating and have a good, safe, fun, Super Bowl weekend. Good-bye now.

Thank you. This concludes today's conference. Thank you for participating. You may disconnect at this time.