萊德系統 (R) 2009 Q1 法說會逐字稿

Good morning and welcome to Ryder System Incorporated first quarter 2009 earnings release conference call. All lines are in a listen-only mode mode until after the presentation. (Operator Instructions). Today's call is being recorded.

I would like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's first quarter 2009 earnings conference call.

I would like to begin with a reminder that in this presentation you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations, and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission.

Presenting on today's call are Greg Swienton, Chairman and Chief Executive Officer, and Robert Sanchez, Executive Vice President and Chief Financial Officer. Additionally, Tony Tegnelia, President of Global Fleet Management Solutions, and John Williford, President of Global Supply Chain Solutions, are on the call today and available for questions following the presentation.

With that, let me turn it over to Greg.

Thank you, Bob, and good morning everyone. This morning we'll recap our first quarter 2009 results, review the asset management area and discuss our current outlook. After our initial remarks, we will open up the call for questions.

So let me begin with an overview of our first quarter results, and we'll begin on page four for those of you who are following on the PowerPoint presentation. Net earnings per diluted share were $0.12 for the first quarter 2009, as compared to $0.96 in the prior year period. EPS in this year's quarter included a $0.13 charge, related to restructuring and other items. The charges related primarily to an increase in previously announced estimates for initiatives and actions undertaken in the fourth quarter 2008.

Excluding this item, comparable EPS was $0.25 in the first quarter 2009, as compared to the $0.96 in the prior year. Comparable EPS came in slightly above our most recent forecast of $0.22 to $0.24, but was below our original forecast provided on February 4 of $0.40 to $0.50.

The economic environment significantly deteriorated throughout the first quarter, beyond our original expectations, resulting in lower overall freight volumes. This resulted in lower than anticipated FMS results, primarily due to customers down sizing their contracted fleets, and fewer miles driven with existing fleets.

Total revenue for the Company was down by 22% from the prior year. Total revenue reflects lower fuel services revenue, unfavorable foreign exchange rate movements, and lower operating revenue.

Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, declined by 14%. Operating revenue was negatively impacted by lower automotive volumes, unfavorable foreign exchange rates, lower SCS and DCC fuel revenues and lower commercial rental revenue.

Turning to page five, in Fleet Management, total revenue decreased 22% verses the prior year. Total FMS revenue was down primarily due to a 53% decrease in fuel services revenue, reflecting both lower fuel costs and fuel volumes. Operating revenue, which excludes fuel, declined 7% due to foreign exchange rates and lower rental revenue.

Contractual revenue, which includes both full service lease and contract maintenance, was down 2%, but was up 2% excluding foreign exchange. Commercial rental revenue decreased 25%, or 21% excluding foreign exchange, reflecting a worsening slowdown in the economy. Gains from the sale of used vehicles declined by $8 million, reflecting fewer units sold and lower pricing.

Net before tax earnings in Fleet Management were lower by 67%. Fleet Management earnings as a percent of operating revenue decreased by 780 basis points to 4.4%. FMS earnings were negatively impacted by commercial rental results, used vehicle sales, higher pension expense and lower contractual business performance. These negative impacts were partially offset by our cost reduction initiatives.

Turning to the supply chain solution segment on page six, both total revenue and operating revenue were down by 28%. The revenue decline was due to lower automotive production volumes, unfavorable foreign exchange rates, and both lower fuel volumes and fuel prices.

SCS reported a first quarter net before tax loss of $1.9 million. Net before tax earnings as a percent of operating revenue declined 320 basis points to a negative 0.8%. Supply chains earnings were negatively impacted by lower automotive results, and losses in our south American and European operations, which we previously announced are being discontinued.

In dedicated contract carriage, both total and operating revenue was down by 16%. The revenue decline was related to lower fuel costs passed through to customers and lower overall freight volumes. Net before tax earnings in DCC decreased by 9%.

Earnings in the quarter were negatively impacted by lower revenues but benefited from improved operating performance and lower overhead spending. DCC's net before tax earnings as a percent of operating revenue improved by 70 basis points to 9.1%.

Page seven highlights some key financial statistics for the first quarter. I already reviewed our quarterly revenue results. Comparable EPS was $0.25 in the current quarter, down from $0.96 in the prior year. Comparable EPS for the first quarter 2009 included pension costs of $0.20, which were $0.17 in EPS higher than in the prior year.

The average number of diluted shares outstanding for the quarter declined by 2.7 million, to 55.3 million shares compared to the first quarter of 2008.

In December 2007, we announced both a $300 million discretionary share repurchase program, and a 2 million share anti-dilutive repurchase program. During the first quarter this year, we didn't repurchase any shares under either program in accordance with our prior announcement that these programs were temporarily paused due to unusual credit market conditions. To date we have not resumed these programs, and we continue to monitor market conditions for potential continuation in the future.

The remaining availability under the $300 million program totals approximately $130 million, and the remaining availability under the 2 million share program totals 637,000 shares. As of March 31, there were 55.9 million shares outstanding.

The first quarter 2009 tax rate was 62.3%, and reflects the impact of non-deductible restructuring charges. Excluding these items, the comparable tax rate would have been 47.4%, as compared to 39.1% in the prior year period. The adjusted return on capital was 6.6%, down from 7.5% in the prior year, reflecting lower earnings.

I'll now turn to page eight to discuss our first quarter results for the business segments. In Fleet Management Solutions, total revenue declined by 22%, primarily due to lower fuel costs and volumes. Operating revenue, which excludes fuel, decreased by 7%, including a negative 4% impact from foreign exchange.

Lease revenue was down 2%, but was up 2% excluding foreign exchange, driven primarily by our recently closed acquisitions. Miles driven per vehicle per work day on US leased power units decreased 9% in the first quarter 2008. This represents the largest decline in lease miles we've seen in this decade. We also saw an increase in the number of lease units that are no longer earning revenue due to customer fleet downsizing.

Contract maintenance revenue grew by 2%, or by 5% when excluding foreign exchange. The increase reflects continued new sales to the private fleet market, which resulted in an increase in the number of units under contract maintenance agreements.

Rental revenue was lower by 25%, or 21% excluding foreign exchange, on a 9% smaller average fleet. We have accelerated our rental fleet downsizing plan within this year in light of weakened market demand. Global pricing on power units decreased by 11%, and was in line with our expectations. Global commercial rental utilization on power units was 61.3%, down 740 basis points from 68.7% in the first quarter 2008, and was somewhat below our expectations.

Fleet Management Solutions earnings declined 67% due to lower commercial rental and used vehicle results, higher pension expense and lower contractual business performance. These items were partially offset by cost reduction initiatives.

In Supply Chain Solutions, total and operating revenue decreased 28% in the quarter. And as anticipated, automotive volumes were dramatically down, with the plants we serve for our top couple of customers experiencing volume declines of 50% to 65%. Volumes in January and February were significantly down, while volumes in March leveled off. Revenue was also negatively impacted by unfavorable foreign exchange rates in both lower fuel volumes and fuel prices.

SCS reported a net before tax loss of $1.9 million for the quarter compared with earnings of $8.3 million in the prior year. The earnings variance is due to a $7.2 million impact from lower North American automotive results, and an operating loss of $3.5 million in our South American and European operations, which are being discontinued this year.

In Dedicated Contract Carriage, total and operating revenue declined 16% due to lower passed through fuel costs and lower overall freight volumes. DCC's net before tax earnings were down by 9%, but were largely in line with our expectations.

Net before tax margin was actually up by 70 basis points to 9.1%. Excluding the impact of lower fuel, NBT margin was largely unchanged versus the prior year. DCC earnings were negatively impacted by lower volumes but benefited from improved operating performance and lower overheads.

Total central support services costs were down by $8.6 million, reflecting lower spending across all functional areas, due primarily to cost reduction actions. The portion of central support costs allocated to the business segments and included in segment net earnings was down by $4 million. The unallocated share, which is shown separately on the P&L, decreased by $4.6 million.

Net earnings were $6.8 million, including restructuring and other items of $6.9 million. Comparable net earnings were $13.7 million, as compared to $56.1 million in the prior year.

At this point, I'll turn the call over to our Chief Financial Officer, Robert Sanchez, to cover several financial items beginning with capital expenditures.

Thanks, Greg. Turning to page nine, first quarter gross capital expenditures totaled $225 million, down by $107 million from the prior year. This was driven by planned lower spending on rental vehicles of $50 million and leased vehicles of $43 million.

We realized proceeds primarily from sale of revenue earning equipment of $47 million, declining by $28 million from the prior year. This decrease reflects both fewer units sold and lower used vehicle pricing.

Including proceeds from sales, net capital expenditures were $178 million, down by $79 million from the prior year. We also spent $85 million in acquisitions primarily on Fleet Management's acquisition of Edart Leasing in the northeast US.

Turning to the next page, you'll see that we generated cash from operating activity of $254 million in the quarter, which was $46 million below the prior year. The decrease was mainly due to lower net earnings and lower deferred taxes, partially offset by higher depreciation. Depreciation increased largely due to higher adjustments in the carrying values of used vehicles, the impact from acquisitions and the impairment of an SCS facility being marketed for sale.

Including the impact of used vehicle sales, we generated $322 million in total cash, down by $71 million from the prior year. Cash payments for capital expenditures were $252 million, a decrease of $22 million versus the prior year. The decline in CapEx cash payments was not as great as that for reported capital expenditures due to the timing of cash payments to vendors. Consistent with our normal vehicle payment timing, some lease vehicles ordered and recorded in CapEx in the latter part of 2008 were not paid for until the first quarter of 2009.

Including our cash capital spending, the Company generated $70 million in positive free cash flow in the current year. This is a decrease of $49 million from the prior year, due primarily to lower cash-based earnings.

First quarter free cash flow did not reflect the benefit of lower vehicle purchases that we anticipate for the full year of 2009, due to the timing of cash payments to vendors. We expect free cash flow comparisons to significantly improve throughout the remainder of the year primarily due to lower cash capital expenditures.

On page 11, total obligations of approximately $3 billion are up by $31 million as compared to the year end 2008. The increase in debt levels is largely due to spending on acquisitions. Balance sheet debt to equity was 214%, as compared to 213% at the end of the prior year. Total obligations as a percent of equity at the end of the quarter were 226%, versus 225% at the end of 2008.

Our equity balance at the end of the quarter was $1.33 billion, down by $17 million versus the year end 2008, reflecting foreign exchange adjustments and dividends, which more than offset earnings in the quarter. Equity was down much more substantially in the first quarter of 2008 however, reflecting a decline of $546 million. This decline was due to an increase of $330 million in the pension equity charge largely as a result of the declining market values in our pension investment portfolio.

The equity decline versus the first quarter of 2008 was due to the share repurchases of $162 million, currency translation losses of $197 million, and dividends of $52 million. These combined items more than offset net earnings.

At this point, I'll hand the call back over to Greg to provide an asset management update.

Thank you, Robert. Page 13 summarizes key results in our asset management area. I want to point out that beginning this quarter, we are reporting asset management statistics on this page for our global FMS operations, so that includes the US and Canada and the UK. Previously, this information was only presented for US operations. And we have included US stats in parentheses for historical comparative purposes.

At year end, our global used vehicle inventory for sale was 9,500 vehicles, up by 3,000 units from the prior year or up 1,800 units from the end of the fourth quarter. The increase is due to a softening of rental and used vehicle demand trends, and was largely in line with our expectations. We sold 4,500 units during the quarter, down 21% from the prior year, but up by 22% or 700 units from the fourth quarter 2008. Used vehicle sales were relatively softer in January and February, but improved significantly in March.

Proceeds per vehicle sold decreased from the prior year by 11% for tractors and 19% for trucks, due to softening overall pricing levels. As planned, we also sold modestly more units at wholesale prices, as we are focused on keeping our used inventory at targeted levels.

At the end of the quarter, approximately 14,000 units were classified as no longer earning revenue. This was up by 4,600 units from the prior year or up by 3,400 units from the fourth quarter. And this reflects both an increase in the number of units held for sale, and surplus non-revenue earning units, many of which we are actively working to redeploy into other applications.

Our global commercial rental fleet in the first quarter declined on average by 9% from the prior year. We're continuing to reduce the size of our rental fleet to meet weaker demand conditions and have accelerated the timing of our planned fleet reductions within the year.

In closing, let me turn to page 15 to summarize our current outlook. We saw overall economic conditions and freight volumes deteriorate in the first quarter, significantly beyond our initial expectations. As we have yet to see any material indications to the contrary, we anticipate these worsened conditions will continue throughout 2009.

We expect that these unprecedented market conditions resulting in overall weak freight demand, as well as specific, unpredictable automotive industry issues, will primarily impact earnings in our FMS and SCS segments. Because the degree of this extended economic decline is considerably more severe than in historical cycles, the overall environment has become significantly less predictable.

Due to the unprecedented market conditions, and the uncertainty and volatility in the current economy, we're suspending our EPS and related forecasts. While we've seen and anticipate a significant impact to earnings from the current environment, we continue to expect to generate strong and positive free cash flow this year.

In fact, free cash is expected to increase from our prior forecast mid-point of $363 million,(Sic-see press release) by at least $100 million additional due to two specific items. First, a reduction in our previously anticipated pension contributions this year due to pension legislative changes, and second, reduced cash taxes resulting from accelerated tax depreciation benefits that were extended into 2009 in the government stimulus package.

In addition, because of the nature of our business model, free cash flow should improve further due to reduction in expected lease vehicle capital spending in this weaker environment. The reduction in capital expenditures is expected to more than offset the impact of lower earnings. Therefore, free cash flow is expected to further improve beyond the $100 million additional that I just mentioned.

We continue to focus on delivering strong free cash flow, as it is an important differentiator for the Company, and provides stability in the current environment.

That does conclude our prepared remarks this morning. So at this time, I'll turn it over to the operator to open up the line for any questions.

Thank you. (Operator Instructions). Our first question today is from David Roth. You may ask your question and please state your company name.

Good morning. Stifel Nicolaus.

Good morning.

First let's start with FMS. I guess we were surprised by the lower miles driven by the existing customers. And also maybe existing customers downsizing their fleets. Our saying has always been that you're protected by contracts now on the down side when they do downsize their fleets versus the last downturn. Can you comment a little bit about whether or not you did get the appropriate pricing when they did reduce their fleets from maybe 20 to 15 for example.

I would say that reductions in fleet have primarily come at the end of the contract of those leases. So if they were renewed, I think those prices tend to hold up. But that's not the problem that we're talking about right now.

The issue was the number of units that actually come out of service. If you realize that these leases are on average going to be five, six, seven years depending on the miles that are anticipated in their service, we're now into the third, third and a half year of a lot of contracts that have been on the books for a while.

So, at the time those were created, those were all solid leases and solid contracts. A lot of those are beginning to time out and run out, some of them are running out now in a very weak environment. So the issue is not that we're getting a lot turned back early or that we're taking them back early, that really is an issue of timing in which many of these contracts are just terming out and things are so soft that many customers are choosing either not to do renewals or not to do extensions.

The lower miles, I think that's been another bit of evidence that for the contracts that are under lease and that we're still being paid for, clearly a lot of customers are just parking those vehicles right now, or they're putting a lot fewer miles on them in consolidated routes.

Okay. In terms of the mileage, that's about 20% of the variable revenue component for the contracts, yet at what point do they run few enough miles where Ryder is no longer making money on that contract?

Well, first the number we've used is actually about 15% relative to the entire portion paid to us rather than 20. So it's not quite as significant. In the short run, the impact on the reduced miles tends to rapidly fall to the bottom line. That doesn't mean we're not making money on the lease and the financing and the maintenance. But a lot of that reduction falls to the bottom line.

What happens over time is when you start running fewer miles, you're maintenance costs start going down, but that takes a longer period of time to happen because you're putting less miles on the units and therefore less wear and tear. So in the short run, more of that mileage drops, falls to the bottom line. If it's an extended period of less miles then we are going to save it in maintenance costs, but we do not save it immediately.

Okay. That's helpful. Has there been a difference between the large fleets and the small fleets you service on the small service leasing side in this environment.

Maybe I'll ask Tony Tegnelia to comment whether he sees any difference in size of customers.

Dave, what we are seeing is that the significant number of downsizing units is obviously coming from the larger fleets, where they may have had 100 units, they only need let's say 85 or 80 in some cases. 500 units, 1,000 units, you are seeing some downsizing. It's predominantly the larger fleets. If you have a fleet of five units, then it you downsize two units, it's 40% of your fleet.

So what we're seeing contribute the most to the number of units in downsizing clearly is the large fleets. And we can see that continuing. We continue to see requests for downsizings of the fleet. We work with our customers when we have those requests, and in many instances, the early term fees are paid or rerated so we're working with them in that regard. It's also an opportunity to solidify relationships with them.

Understood. And then if the large fleets are downsizing, what percent of your small fleets might have gone out of business over the past year. Is there a lot of that, granted they are not going to reduce five to three, but maybe just go away altogether.

We are not seeing our number of bankruptcies really decline materially. We protect our assets very well within the Company. We have a stock loss group that really works with customers if we see aging, and in many cases we'll initiate the early terming of those units where we do see some of the receivables really growing, where we feel they may not be able to pay. So we're not seeing the bankruptcies rise.

And to add a further point to that, that was not a material significant impact on the P&L because of bankruptcies in the first quarter, and in fact in terms of payment, our days receivable outstanding actually improved from the fourth quarter.

That's certainly a good sign, and then last question, on FMS you do have such a broad customer base in terms of industries represented, is there any positive signs out there, any signs of strength in different sectors?

Dave, I'll tell you what we're seeing on the request for fleet downsizing and what we're seeing with regard to the utilization rate of our customers' private fleets, the decline in the mileage as Greg covered earlier, we do not see any improvement in those trends at all.

Thank you very much.

You're welcome.

Thank you. Our next question is from John Barnes. You may ask your question and please state your company name.

BB&T Capital Markets. Sorry if I missed this. I was a couple of minutes getting on the call late. Just in terms of the equipment left, and as I was trying to back into the numbers, do you have actually a little bit of equivalent not earning revenue that was bought for something, new equipment that is sitting idol at this point?

I'll let Tony clarify that for you.

No. Our non-revenue earning equipment is up because of our early terminations. But those units still on average are generally halfway into the lease. We do not have any brand new units that were purchased in advance of a lease commitment on the ground at all. Our surplus rise is due to early terms and those are typically halfway through their lease. We have no new units sitting on the ground not generating revenue.

Okay. And then in terms of prices paid for used equipment and the like, have you seen any change in or stabilization in used equipment values at this point?

No. I think in my comments I quoted with tractor prices down 11% and trucks were down 19%, I don't think any of us are seeing any stabilization or any improvement.

Okay. Very good. And then lastly, as you look at the maintenance side of the business, obviously there is going to be less maintenance work with fewer miles driven and that type of thing, are you doing anything to right-size the network or is it just necessary to maintain those facilities. And the personnel I would imagine, technicians aren't the easiest thing to hire and train and the like, so you just try to keep them working through this or is there some attempt to right-size that service network?

John, two points that you raise. First of all, as Greg had mentioned, over time with the absence of those miles, we do anticipate recovering some previously anticipated running cost, but a lot of our maintenance work is done a time basis to support the safety of the equipment, so that portion of running cost would be incurred generally anyway.

We're always looking at profitability by location as we look at the network, and also the impact on customers if we decide to eliminate a location depending upon where another location may be in proximity. We're very sensitive to closing locations for the fear of losing a customer, but we're always looking at profitability by location, regardless of this economic environment and that's a standard asset management test that we do.

And if there are locations nearby where customers won't be materially inconvenienced and the profitability is down, we do look at closing those locations. We do that regardless of the economic environment. We do that even in good times.

I I think generally our position is that our network is about right where it needs to be in terms of locations for customer service, and we're in this for the long term. When things rebound we want to make sure that we're in the right places still, with the customers and the potential customers we would like to attract.

I think the other general thing is in terms of productivity. The productivity we measure is improving even in this environment, so that means that the hours worked are being watched. You are obviously not going to have as much over time, and we are certainly not sending out any equipment for other work, we're doing it in house to take advantage of the existing better cost from our own maintenance heads.

Gotcha, alright, guys thanks for your time, I appreciate it.

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

Robert W Baird. Greg, if you look at the trends by truck, have you guys gone back and looked at all in terms of the trends your trucks that you've organically grown, have experienced versus the trucks you've added through acquisitions.

That's a level of detail I might know. I'm not sure that Tony would know that distinction either. If we don't, we can certainly try to figure that out, but I don't know that we have that readily available now.

And -- I'm sorry? I guess the question is --

What trends specifically do you mean, lot business?

Yes. I'm thinking that, I'm thinking miles per truck? I'm thinking retention levels as the contracts come up for renewal. Just want to do kind of a back check on how well the acquisitions have done, now that we're in an extreme environment.

Generally speaking, the companies that make our acquisition list are very high-quality companies and were known to us as very good competitors. So we liked their customer base when we purchased them, we still like their customer base. The mileage trends are pretty much consistent all across the country actually, and therefore all across our customer base including the acquisition customers, and we're seeing retention rates largely the same. They were quality companies with good reputations with their customers, we don't see any trends really different in the acquisition companies than we do in our base business.

And I think you'd probably also add to that Jon, that when Tony talks about good customers and well run companies, that they probably had pretty good market based pricing so they are not going to have sticker shock when it comes time to renew. So they're really more influenced by the economy than anything specific to us or that acquisition.

And so how does that -- with that as the back drop then, any thoughts on the acquisition environment? I would think there are more opportunities out there today than there were over the last two years, just given the financial market.

Well, Jon, there is more opportunity out there. But given this economic environment and also our desire to preserve capital, we want to make certain that as we go into this environment that we have the right values assigned to the companies. So we have our acquisition list, we're excited about some of those companies, we're being very careful about valuation, we're watching how they perform during this window of time, and at the right time we believe that there will be more.

Is there any reason on the cash balance side, I mean you're going to generate maybe close to $500 million of free cash, calls on that cash I guess are simply the pension, the pension payment over the next four to five years, and then supporting growth when things turn around. But I mean are you feeling as though, look, that free cash you're generating, you are going to be able to deploy as acquisition opportunities come up.

I would say the answer to that would be yes, and especially when you have a healthier environment, we're going to be as interested as during this period.

Okay. And then what about the share buyback side? At what point given this additional free cash we're talking about, at what point do you say, look, this is enough to get us comfortable to at least start buying some shares.

I'll let Robert comment on that.

Hi Robert.

How are you doing, Jon? The free cash flow is obviously a real positive for us. The other issue we have though is leverage. And in this environment we do not want to be running -- really the purpose of the share repurchase was really to try to get the leverage back up to our targets.

In this environment, having taken such a run-up in leverage as we took at the end of the year due to the pension equity hit, we want to make sure that we can show that that leverage can come down over the next several months before we could consider doing something around share repurchases.

But obviously that's something that we'll continue to watch. Certainly with the share price where it is, as we look at tradeoffs between acquisitions and share repurchases long-term, that will come into play also.

Okay. Good. And then on the miles per truck. I understand you can't necessarily adjust the maintenance cost structure as quickly. Greg, you made the comment that takes some time. Is that a matter of months or quarters or years? Can you just maybe put that in perspective. If volume, miles per truck stay at the current level, down 9%, 10%, 11%, and do not come back, what actions would you take that reduce the supporting maintenance costs?

Well, Jon, it does depend on the asset class, as to how frequently the vehicle comes in. And that would determine how much money would be saved within a certain period of time, whether it be several quarters or several months. I would say a number of quarters would have to pass before you saw meaningful recapture or savings in running costs as a result of the reduced miles.

Generally speaking, regardless of economic times, we're always looking at productivity for our technicians, and based upon mileage, based upon fleet level, we always are adjusting the tech count, and we're constantly monitoring productivity ratios of their hours worked on vehicles and also as it relates to the number of vehicles per tech. So all of those productivity metrics remain very intense, and we do believe over time we'll recapture some of the revenue in the lower running costs.

And then the last question, in terms of miles per truck, how do you track that? Is that something you just can remotely track on every vehicle or do you look at that as the vehicles come in for service, and is there any catch up that would occur because you haven't seen a truck for a while and then the miles per truck are actually lower than what you thought?

Generally, Jon, all of the above. We check the mileage every time the vehicle comes in to fuel. We also check it every time it comes in for maintenance, and on occasion there is also a true-up on mileage with the actual odometer readings.

Okay, great. Thank you.

Thank you. Our next question is from Ed Wolfe. You may ask your question and please state your company name.

Thanks. Wolfe Research. Good morning, everybody.

Good morning.

Can you talk a little bit about depreciation. Excluding the write down of 218.6, up from 206 a year ago, and CapEx coming down, and up from 212 in the fourth quarter, what is going on with depreciation? How do we think about that going forward?

Okay. Ed, this is Robert. As you mentioned, you have acquisitions in there. You also have the additional write downs at the used vehicle centers, due to the lower proceeds that we're seeing. And those two are really driving most of the increase in depreciation.

So is it a good run rate, 218 a quarter or are we ramping up to something higher? How do I look at that.

No, you would probably want to back down. And one other thing that I didn't mention is $4 million due to that supply chain facility that we are trying to market, that we had to write down, that's in that number.

I thought that you had reported it at 222.5, I took out the four.

Okay, then you are in, that will give you a good number then.

And how much of that roughly is acquisitions? Year-over-year or even from quarter-over-quarter, you closed one deal, is there a good will involved in there? What am I looking at that's in there?

They're looking in the book now, Ed, so we'll get the answer in just a moment.

Okay. Do you want me to keep asking, Greg, in the mean time, other things.

Yes. You can ask other things while they're looking that up in the book.

Just trying to understand the consistency of the lease business, because you guys have always talked about it and I've always thought about it as 90% of your business, doesn't change that quickly, it takes a little while to see the fall-off. I understand it's historically unprecedented times. But outside of learning that some percentage of the business miles do matter, what other biggest issue that is all of a sudden hurting the leasing margins as you see it?

Tony.

Ed, this is Tony. The second largest issue impacting the quality of earnings of lease in this quarter was our non-revenue generating earning units. They are up. And the way our model works is, generally, if you go to full term, the vehicle will be sent to the UTC and sold. If it is a before term unit that still has life on it, according to our asset management principals, that vehicle becomes surplus and available for redeployment.

As you know, we have a very heavy redeployment initiative within the Company, and I'm very pleased to say that in the fourth quarter, of all of the new sales and all of the replacements that we had in the quarter, 50% of it was fulfilled from existing redeployed units. Those are units that are coming from surplus.

Our surplus units are up. As we had said earlier because of downsizing, we are working with customers on the downsizing, you must do that. We are also, some of it is self-initiated to protect the vehicle and our accounts receivable.

So we are pleased that we have a fulfillment rate of 50% coming from that surplus group, so that hopefully the amount of surplus units will decline in the future. But second to mileage, the surplus vehicle impact on the P&L is the second largest one, and that's because you have the fixed cost relating to those vehicles but zero revenue.

Is there anything else other than that Tony, third or fourth, that show up that we should think about or is it really those two that we have to focus on.

Those are really the two that you have to focus on, offset by the productivity improvements and overhead savings that we had announced in the fourth quarter. Those are the two issues that we focus on completely. And the mileage is tough. That's dependant upon our customers' activity. But the surplus, we have strong redeployment initiatives on surplus and we are pleased with the fulfillment rate.

Okay, I think Robert has the answer to the question you asked.

The depreciation expense associated with the acquisitions was $5 million.

Five for the year or for the quarter.

For the quarter. That's a pretty good run rate, too.

Thank you. That's helpful.

Back to the miles. How do we think about the miles? Is there some percentage in the fleet that has miles? Does every contract at some point have miles? If we're trying to get our hands around that, talk a little bit about what it means that they're not running their miles and how that impacts your revenue.

Well, as we had said Ed, we're pretty much 85/15 on how the revenue works and it's the 15% that is variable. But we will make money based upon that 85/15 mix.

So even though, as Greg had mentioned, in the short-term that revenue will drop right to NBT, because it takes a while to recapture some of the running costs, we still will be profitable with our fixed and variable percentage portions that we have of those vehicles. So we're just working with our customers as the mileage per unit drops.

Now, as they downsize the fleet, and as we redeploy those units, then you would see the miles per unit on the existing fleet more than likely stabilize a bit.

If you're asking if we can discern between actually fewer miles running on a truck or whether it's coming down because some trucks are just parked, that, I'm sure the shop would know, they would know that on a location basis, but in the aggregate trying to disaggregate all of that, that would be a guess at this point.

But I guess my question is, is every contract give or take, not every but the average for every contract, it's kind of every contract has some piece of miles -- Or are they two separate types of contracts?

No. We have the fixed and the variable. You have to have that from an asset management point of view. If they run way over the miles, then originally rated, okay then of course you are going to want to recapture that in your mileage piece.

I don't ever recall hearing it at that mile component, so what was the level that we got to that was so weak that the mile component started to be an impact.

It started in the third and fourth quarters in '08. Because even in the previous periods of rate decline, we were still showing increases in average miles driven per unit in all of that lease fleet. In the third quarter and fourth quarter of last year, I think we got to maybe 4% down, 6% down and now it's 9% down. So it's just starting to be a bigger and more accumulating number.

So it's been down?

It's freight levels, Ed, is what it is. It's just general freight levels in the economy. Unfortunately, our customers do not have the freight to move so the utilization of their fleets are going down and that's manifest in mileage.

Understood, so if it's minus 9 for the quarter, where were you in March and April, is it similar, is it worse, is it better?

We will not comment on April because that would be forward-looking. But March was worse than January and February.

Well, up to April 21, would be backwards looking.

Well we're considering this the call for the first quarter, so I'll comment only on the first quarter. March was worse than January and February, so it took the 9% average higher.

And March down 15, down 11, you can give us some magnitude.

Low double digits.

Okay. You talk about the rental utilization, where the numbers are versus a year in last quarter.

I'm doing this from memory, I think 61.8 was this quarter and that may be 7.4% lower than last year.

How about in fourth quarter?

Fourth quarter, that I don't have from memory. I'll have to look across to Tony on that one to see if he has it in his pages.

I assume that if it's in your memory, it's something you care about it.

I care about all of it. I just want to give you absolute precision when I answer these.

Understood, but I'm guessing that's something that needs to improve-. Can you give us the CapEx, Robert, for both gross and net where the guidance is now for '09, not the cash flow but the CapEx.

We're not putting out guidance on the CapEx. All we're really saying is that we're expecting CapEx to come down further because lease is softening.

So in other words, you can be variable enough with that to hit your cash flow targets if you need to adjust it?

I would say of the things that -- the one thing we're confident about over a fairly wide range of earnings, and again we're not providing an earnings forecast, the one thing we're quite confident about as we've modeled this, is that the cash flow will still hold up over a significant range. And a big driver of that are the two knowns that I mentioned, as well as the significant portion of the business model of the CapEx reduction when lease sales are coming down.

And remember, cash CapEx is a lag from when you sign the lease. So we have a pretty good view of what's been signed so far to forecast what cash CapEx will be for the balance of the year.

Want to share? Can you talk a little bit about, if you've got any sense from the government or from GM, what happens if there is a processed bankruptcy. Obviously you are a critical vendor and what would that mean for you one way or another. Do you have any sense of anything there?

I don't think we have a sense as to how it is going to be concluded. We know that their dates are-- that the calendar pages are flipping. And there are supposed to be decisions made. How it turns out, we don't know.

What we have been doing throughout this process is managing that portfolio business. We have a team of people who are looking at all of the contracts we have, the receivables are disclosed in the Q that will be going out today. I think our GM trade receivables are about $35 million, somewhere in that vicinity.

So it all depends whether we would be named a preferred supplier for some or all of that business, and whether any of that would be at risk.

Okay. On supply chain, if you reverse the 3.5 million in international, is the implication that the 2 million or so of the contribution margin should be positive within a quarter or two?

When that's ultimately completed. So during the course of '09, all of those should be transitioned out. I'll let John Williford comment on that further.

Yes, hi, Ed. We expect that the discontinued operations will almost all be shut down at the end of the second quarter and all be shut down at the end of the third quarter. And then, yes, when you back that out, SCS would be profitable.

Okay. So maybe a little bit more of a loss in second and then by third it should be, or by fourth?

Well we're not giving specific guidance by quarter. But I think that overall trend is that the third quarter would be better than the second quarter, if that was your question.

Interest expense, Robert, at 38.8, came down a bit. Can you just give some guidance for how that should look going forward, any major changes there that we should be thinking about.

Well what is driving that is that it's actually -- our debt levels were up, mostly due to the acquisitions, our average debt levels. And then with, the rate came down a bit. So it's the combination of those two.

As you might imagine, what we're expecting is that with free cash flow, you'll pay down some debt throughout the year, so those debt levels should come down some.

What are you paying right now as your debt levels came and how much are they down?

5.4% is the rate we're paying.

And does that feel like a pretty fair number to use going forward.

Yes, that's probably a good number to use.

Okay, one last one and I'll pass it. Used trucks, you said pricing isn't showing any signs, but I thought I heard you say, Greg, earlier that you're selling more trucks. That that market has improved a little bit.

We were up I think 700 units compared to the fourth quarter, and the total number of units, the 4,500 in all of our network, the numbers sold in March were considerably better than in January and February. So the prices weren't better, but we sold more units.

Why do you think that is?

I'm sorry. You broke up.

Why do you think that is? What are you seeing in the marketplace?

Tony, do you have a clue.

January is typically very low, that carried into February, and we saw a little bit of a tickup in the month of March, which is more typical and some of the customers actually were able to get some credit in March that they were not able to get earlier in the quarter.

Thanks so much for all of the time.

Sure.

Thank you. Our next question is from Art Hatfield. You may ask your question and please state your company name.

Thank you. Morgan Keegan. Good morning, everybody.

Good morning.

Greg, just a couple of questions. Back to the 15% variable component of the full service lease business, do you have a utilization number where you can say, based on the contracts that have been signed, we're getting 75% of the potential revenue or some number like that?

I don't know. I don't know if Tony knows that answer either, but if anybody would, he may.

We track the variable mileage on a combined fleet basis, and also the fixed on a combined fleet basis. We can go back actually by vehicle number and look at the mix within any period of time of what percentage portion of the total revenue for that vehicle came from fixed and what percentage portion of it came from variable. And we do that on occasion for certain fleets, so we do have the ability to look at the mix between the 85/15 by actual vehicle number, by month, for the need to arise and to understand what is happening better in individual customers' fleets.

Okay. So that's not something you could talk about fleet-wise.

No. We actually do that more on a customer type basis, that's correct.

Okay. And then re-educate me please if you could on early terminations and how that impacts you financially in the short run and also in the long run. And how that flows through the financial statements.

Okay. The way our business model works, generally speaking, if a vehicle goes to full term, that the end of that term, that vehicle will be sent to the UTC operation to be disposed of and generate cash and also generate a gain.

For whatever the reason may be that a unit may be early termed, there is life in the vehicle. Let's say it's only three years old or four years old, and typically it would be out on lease full term for six or seven years. Because there is still life in that vehicle, we will keep that vehicle within the asset base for the balance sheet that specifically relates to the full service lease product line.

That being said, the depreciation, the interest, taxes and things of that nature, remain in the earnings for the full service lease product line, but because it's surplus and not out with the customer, there is zero revenue. So if you look at the P&L exclusively for the vehicles not generating revenue, either combined as a portion of our fleet or unit by unit, you'll see virtually zero revenue, but a number of costs associated with it.

So you have an NBT loss for non-revenue generating vehicles that are surplus. Those are growing, as we had mentioned, because of the early terms, and our objective is to redeploy those as quickly as we can, and get the units on ground that are not generating revenue generating some revenue.

So if it goes full term, it gets sent to the UTC and sold, that asset is no longer in the full service lease product line earnings implications. If it's early term, it stays until redeployed where you have its cost but zero revenue.

On the early terms, is there not a penalty that customers will pay in that situation.

Yes there is, with the exception of bankruptcy. But yes there is. Typically we receive those early termination fees or we'll make other financial arrangements with the customer with rerate on remaining units that exist, or they may be putting on some other vehicles at another location and the rate on those vehicles may absorb some of that early termination fee.

Okay. And so is that early termination fee generally classified as a revenue in the quarter it happens?

Yes, it is.

And then the early terms in the first quarter, do you have a rough estimate of what the life left on those vehicles as a whole was?

Generally speaking about 3.5 years, roughly.

Left or what was utilized?

They are generally halfway through their life, for the most part, on average.

That's very helpful. Thank you. That's all I had today.

Sure.

Thank you. Our next question is from Todd Fowler. You may ask your question and please state your company name.

Good morning. Key Banc Capital Markets.

Good morning.

Greg, I know you're not having quantitative guidance, but directionally, where should FMS go from a margin standpoint and then from a trend standpoint. It sounds like the lease fleet is about 50% through, in general, 3.5 years on a 7 year lease fleet, should we expect to see -- continue to rolloff some people not taking on new vehicles going forward. And then what is the impact that has on margins for the next couple of quarters, is there anything you can do to get margins up from the levels that we were at in the first quarter.

Well I think that the expectation for margins is that they would return to where they've been, but the key question and the reason that we're not providing the guidance is we don't know, we do not have a good idea when that's going to be. You and anyone else who could prognosticate, can determine when this economy is going to turn around.

When the economy does turn around, the big plus you'll see going to the bottom line are going to be what are currently the big negatives. You start seeing additional miles driven on existing leased equipment, and then also getting some supplemental demand for commercial rental, you're going to get a quick drop to the bottom line that is going to probably restore the level of net before tax earnings as a percent of operating revenue, you'll get back to that 12%, 13% that we had. But what I can't answer, because I don't know, and I don't know anyone who does, is when is that going to happen.

No. That's certainly fair enough. And I guess maybe from a historical perspective, when you've seen in previous downturns, your customers downsize their lease fleets, is this generally something that takes the course of a year, six months, two years, is there any historical context in past cycles for the length of time that we should expect customers to be downsizing their fleet, and I certainly understand if this cycle is different.

Yes, I guess that is their pure expectation. I think the last downturn, when it was 2001, 2002, I don't know that we had as rapid or dramatic loss in miles. I think we had a lot more loss in units. And what recovered more quickly in that case was the commercial rental. I think in this case, because of the nature of this severity, we're going to see two items that we're watching very closely that move up and go to the bottom line, and that's the miles plus the commercial rental and then the actual increase in leased fleet sizes.

Okay. I got you. And then just as far as thinking about the cost structure right now, I know that you guys have done a lot of work over the past 2.5 years to take out costs. What is your feel right now as you look across the business as what you need to do. It sounds like you're always working on productivity. Is there anything that you look out going forward from kind of a larger scale type thing that you would consider or are considering right now to reduce costs?

I would say not something that is one big large drastic lump that we can go get. I think we've modeled this business over time and made a lot of changes and a lot of reductions that we're not in the position that we might have been in 7, 8, 9 years ago to look for big single, easy to identify lumps of cost. I think what we continue to do, and this is true in overhead generally, in supply chain and Fleet Management, is we keep making adjustments based on the declines, but that doesn't come from a big further announcement of a reduction in force or some other big location of money in a P&L somewhere. It's going to be adjustable and gradual based on a lot of volume levels and a lot of transactional activity.

Okay. And then question on the cash flow guidance. Greg or maybe Robert, what is the expectation here for the benefit from deferred taxes for the full year of 2009. I would assume a lot of that is related to the change in tax laws. How much are you factoring that that is going to be a benefit or favorable cash flow impact for '09.

We're not giving guidance on that specific, but of the $100 million that we talked about, we're looking at $30 million to $40 million. And that's really dependent on capital expenditures, how many new trucks we buy for the year, because that is really related to bonus depreciation on new investments.

And of that $30 million to $40 million, you got 17 of that in the first quarter or that's $30 million to $40 million additional to the 17 you picked up here in the first quarter.

No, we really didn't pick up anything in the first quarter, associated with that bonus depreciation. It's really going to be in the latter part of the year, it's really going forward, second and third and fourth quarter.

Oh, I'm sorry, okay, I it's $14 million that was favorable from working capital and deferred taxes in the first quarter.

Right.

And then directionally though, for the full year working capital in general should be a positive this year.

Yes, I would think so. We're certainly looking at that as being a positive due to the volumes that we're seeing.

And just one last one here. Expectation for the tax rate going forward, should it come down from where we were at in the first quarter.

I hope so, right. What you'll see is, from the 47, which is really the more comparable number, you'll see that come down certainly as we get out of some of the operations and supply chain outside of the US, which really those foreign losses are really what is driving that number up to the 47. And then clearly as earnings improve at some point, that is really going to get us back to a more normalized number.

But you should see it improve from the 47 as we -- as John Williford mentioned earlier, we'll be getting out of those operations by the middle of the year and certainly all of it by the third quarter.

Sure. Okay. That makes sense. Okay. Thanks a lot.

Thank you. And due to time constraints, our last question comes from David Campbell. You may ask your question and please state your company name.

Yes. Thank you very much. I'm just curious as to why we can't use the base of revenues and profitability say in the month of March as a base estimate for this year, for 2009? It seems like that would probably be a good assumption that things aren't going to get any worse?

Well I don't know that any of us can say that it will get any worse or any better. I'm personally not that confident that I know. It certainly could get worse. I mean it depends, there are a couple of camps out there right now generally. One says they think they're bottoming out and another says that perception is a bit premature, and either one could be right, and right now we're sort of in the camp that says it's premature to say we're bottomed out because we have no evidence of it yet, and it certainly could get worse.

And you spent $85 million in the first quarter for an acquisition. How much revenue did that generate.

The annualized revenue for that acquisition we anticipate to be about $35 million.

And was it all fully effective in the first quarter.

I don't know when it was effective.

Generally it was in February, so not full effect for the quarter.

Okay. And then the last question is, do the supply chains solution margins of 45%, I mean does that depend upon getting auto business back to where it was two years ago or how does one do that? How do we do that?

John, do you want to take that.

Yes. Hi, David. That depends on the automotive business settling out to a level that is more predictable than it is today. And to our initiatives in the other sectors, starting to result in the growth and profitability we expect there, and of course the changes outside of the US that we've already talked about rolling out later on this year. You won't see that obviously this year.

Right. Okay. Thank you very much for your answers. I appreciate it.

Okay. You're welcome.

Thank you. This concludes the question and answer session, and I'd now like to turn the call over to Mr. Greg Swienton for any closing remarks.

Well as we are past the noon hour already, and a little bit over time, I'll thank all of you who are still remaining on the call, and have a good, safe day.

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