萊德系統 (R) 2009 Q2 法說會逐字稿

Good morning, and welcome to Ryder System Inc.'s second-quarter 2009 earnings release conference call. (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 second-quarter 2009 earnings conference call.

I would like to begin with a reminder that in this presentation, you will 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 (technical difficulty) 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 Sweinton, 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.

Thanks, Bob, and good morning, everyone. This morning, we will recap our second-quarter 2009 results, review the asset management area, and discuss our current outlook. After our initial remarks, we will open it up, as always, for questions. So let me get right into an overview of the second-quarter results, and for those on the PowerPoint, we'll begin on page four.

Net earnings per diluted share were $0.41 for the second quarter of 2009, as compared to $1.09 in the prior-year period. EPS in this year's quarter included a $0.02 restructuring charge related to the closure of our supply chain operations in Europe and South America.

EPS in the prior-year's quarter included a $0.12 charge for accruals and tax deferral adjustments in Brazil for previous years.

Excluding these items in each year, comparable EPS was $0.43 in the second quarter 2009 as compared to $1.21 in the prior year.

Total revenue for the Company was down by 25% from the prior year. Total revenue reflects lower fuel services revenue, lower operating revenue, and unfavorable foreign exchange rate movements.

Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, declined by 15%. Operating revenue was negatively impacted by lower automotive and other freight volumes, unfavorable foreign exchange rates, lower commercial rental revenue, and lower SES and DCC fuel revenues.

On page five, in Fleet Management, total revenue decreased 26% versus the prior year. Total FMS revenue was down primarily due to a 58% decrease in fuel services revenue, reflecting both lower fuel costs and fuel volumes.

Operating revenue, which excludes fuel, declined by 8%, mainly due to lower rental revenue. Contractual revenue, which includes both full-service lease and contract maintenance, was down 2%, but was up 1% excluding foreign exchange.

Commercial rental revenue decreased 26%, or 23% excluding foreign exchange, consistent with first-quarter results and reflecting continuing weaknesses in the overall economy and freight demand. Gains from the sale of used vehicles declined by $7 million, reflecting lower pricing, but with a modest increase in the number of units sold.

Net before-tax earnings in Fleet Management were lower by 64%. Fleet Management earnings as a percent of operating revenue decreased by 910 basis points, to 5.9%. FMS earnings were negatively impacted by commercial rental results, used vehicle pricing, lower full-service lease performance, and higher pension expense. These negative impacts were partially offset by cost-reduction initiatives.

Turning to the Supply Chain Solutions segment on page six, total revenue was down by 30% and operating revenue was down by 28%. The revenue decline was due to lower automotive and other freight volumes, unfavorable foreign exchange rates, and lower fuel volumes and prices. SCS returned to profitability, however, in the second quarter, with earnings of $2.8 million.

Supply Chain's net before-tax earnings, as a percent of operating revenue, declined 80 basis points to 1.1%. SCS earnings were negatively impacted by lower automotive results, including plant closure costs and losses in our South American and European operations, which we previously announced are being discontinued.

In Dedicated Contract Carriage, total revenue was down by 19% and operating revenue was down 20%. 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 14%. Earnings in the quarter were negatively impacted by lower revenues resulting from reduced freight volumes. DCC's net before-tax earnings as a percent of operating revenue improved by 60 basis points to 9.4%, largely due to lower fuel costs.

Page seven highlights key financial statistics for the second quarter. I already highlighted our quarterly revenue results, so let me begin with earnings per share. Comparable EPS was $0.43 in the current quarter, down from $1.21 in the prior year. Comparable EPS for the second quarter 2009 included pension costs of $0.19 per share, which were $0.17 per share higher than in the prior year.

The average number of diluted shares outstanding for the quarter declined by 1.6 million to 55.4 million shares. During 2009, we haven't repurchased any shares in accordance with our prior announcement that our share repurchase programs were temporarily paused due to unusual market conditions. As of June 30, there were 56 million shares outstanding.

The second-quarter 2009 tax rate was 44.6%, as compared to 44.1% in the prior year. Tax rates in both periods reflect the impact of nondeductible losses in our South American operations.

Page eight highlights key financial statistics for the year-to-date period. Operating revenue was down by 14%. Comparable earnings per share were $0.67, down from $2.17 in the prior year. The average number of diluted shares outstanding were 55.3 million, down by 2.2 million shares.

Adjusted return on capital, which is calculated on a rolling 12-month basis, was 5.9% versus 7.4% in the prior year, reflecting lower earnings.

I will turn now to page nine to discuss our second-quarter results for the business segment. In Fleet Management Solutions, total revenue declined by 26%, primarily due to lower fuel costs and volumes. Operating revenue, which excludes fuel, decreased by 8%, including a negative 3% impact from foreign exchange.

Lease revenue was down 2%, but, excluding foreign exchange, was up 1%, driven by acquisitions closed during the past year. Lease revenue was negatively impacted by slowing new lease sales and increased non-renewals of expiring leases due to customer fleet downsizing.

Lower usage of leased vehicles also hurt lease revenue, as miles driven per vehicle per day on the U.S. lease power units decreased 9% versus the second quarter 2008. The mileage decline was in line with what we saw in the first quarter this year.

Contract maintenance revenue grew by 1%, or by 3% 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 26%, or 23% excluding foreign exchange, on a 13% smaller average fleet. We've accelerated our rental fleet downsizing plan within the year, in light of weakened market demand.

Global pricing on power units decreased by 11%. Global commercial rental utilization on power units was 68.9%, down 570 basis points from 74.6% in the second quarter of 2008.

Fleet Management Solutions' earnings declined 64%, due to lower commercial rental pricing and utilization, decreased used vehicle pricing, lower full-service lease performance, and higher pension expense. These items were partially offset by cost-reduction initiatives.

In Supply Chain Solutions, operating revenue decreased 28% in the quarter. Automotive volumes with plants we serve were dramatically down versus the prior year, but were higher than in the first quarter. Operating revenue was also negatively impacted by unfavorable foreign exchange rates, lower freight volumes in non-auto sectors, and lower fuel revenues.

Following a one-quarter loss in the first quarter, Supply Chain Solutions returned to profitability in the second quarter, with net before-tax earnings of $2.8 million. While the segment was profitable, earnings were down from the prior year by $4 million. The earnings variance is due to a $5.6 million impact from lower North American automotive results, stemming from both lower volumes and $1.6 million in plant closure costs.

SCS earnings were also negatively impacted by an operating loss of $3.6 million in our South American and European operations, which are being discontinued.

In Dedicated Contract Carriage, operating revenue declined 20% due to lower passthrough fuel costs and lower overall freight volumes. DCC's net before-tax earnings were down by 14%. Net before-tax margin was up by 60 basis points to 9.4%, due to lower fuel costs. DCC earnings were negatively impacted by lower volumes of freight shipped for customers.

Total Central Support costs were down by $5.1 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 lower by $5.3 million.

The unallocated share, which is shown separately on the P&L, was largely unchanged. Net earnings were $22.9 million, which includes restructuring and other items of $0.8 million. Comparable net earnings were $23.9 million as compared to $69.8 million in the prior year.

Page 10 highlights our full-year results by business segment, but in the interest of time, I won't review all these results in full detail but will just highlight the bottom-line results. Comparable full-year net earnings were $37.6 million, as compared to $125.9 million in the prior year, down by 70%, or $88.3 million.

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

Thanks, Greg. Turning to page 11, year-to-date gross capital expenditures totaled $342 million, down by almost $300 million from the prior year. Spending on leased vehicles declined by $155 million, or 34% year to date.

Lease capital is down due to the slowing new and replacement lease sales, as customers continue to downsize their fleets. Lease spending is also down due to the successful implementation of our strategy this year to increase the number of lease term extensions and increase the use of surplus and other midlife vehicles to fulfill new lease sales.

These actions reduced the requirement for new vehicle purchases to fulfill customer fleet needs in the lease product line.

Year to date, gross capital spending was also down, due to lower spending on rental vehicles of $115 million as planned in light of the weak rental demand environment. We realized proceeds primarily from the sale of revenue earning equipment of $103 million, declining by $40 million from the prior year. This decline reflects both lower used vehicle pricing and fewer units sold year to date.

Including proceeds from sales, year-to-date net capital expenditures were $239 million, down by $257 million from the prior year.

We also spent $85 million on acquisitions, primarily on Fleet Management's acquisition of Edart Leasing in the northeast U.S. in the first quarter.

Turning to the next page, you will see that we generated cash from operating activity of $492 million year to date, which is $30 million below the prior year. The decrease was mainly due to lower net earnings, partially offset by higher depreciation. Depreciation increased largely due to higher adjustments in the carrying values of used vehicles, the impact from acquisitions, and higher per unit investments on new vehicles.

In addition to our normal process of annually revising depreciation rates on all vehicles to reflect the used market valuation changes over time, we've increased the depreciation rate of vehicles expected to be sold through December of 2010. This change increased depreciation expense by $2 million in the quarter.

Including the impact of used vehicle sales, we generated $632 million in total cash, down by $66 million from the prior year. Cash payment for capital expenditures were $391 million, a decrease of $218 million versus the prior year.

Including our cash capital spending, the Company generated $241 million of positive free cash flow in the current year. This was an increase of over $152 million from the prior year, primarily due to lower vehicle purchases in both the lease and rental. We expect favorable free cash flow comparisons to continue throughout the remainder of the year, primarily due to lower cash capital expenditures.

On page 13, total obligations of approximately $2.85 billion are down by $174 million as compared to the year-end 2008. The decrease in debt level is largely due to the use of positive free cash flow to pay down debt. Balance sheet debt to equity was 191%, 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 201%, versus 225% at the end of 2008. Our equity balance at the end of the quarter was $1.42 billion, up by $71 million versus the year-end 2008. This increase reflects the net earnings and foreign currency translation gains which more than offset dividends year to date.

Equity was down substantially from the second quarter of 2008, however, reflecting a decline of $434 million. This decline was largely due to the increase of $330 million in our pension equity charge in the fourth quarter of 2008, largely as a result of the market values of our pension investment portfolio that declined last year.

The equity decline versus the second quarter of 2008 was also due to the net share repurchases of $63 million, currency translation losses of $134 million, and dividends of $51 million. These combined items more than offset net earnings.

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

Thanks again, Robert. Page 15 summarizes key results in our asset management area. As a reminder, we began in this year to report asset management statistics on this page for our global FMS operations, including Canada and the UK. Previously, this information was only presented for U.S. operations. We have included the U.S. stats in parentheses for historical comparative purposes.

At quarter end, our global used vehicle inventory for sale was 9,000 vehicles, up by 3,600 units from the prior year, but down by 500 units from the end of the first quarter. The increase versus the prior year is due to a softening of rental and used vehicle demand levels, and was largely in line with our expectations.

We expect used vehicle inventories to remain around current levels throughout the remainder of the year.

We sold 5,600 units during the quarter, up 2% from the prior year and up by 24%, or 1,100 units, from the first quarter this year. Used vehicle sales were relatively stable throughout the quarter. Proceeds per vehicle sold decreased from the prior year by 17% on tractors and 18% on trucks, due to softening overall pricing levels.

We expect used vehicle pricing to remain weak in light of market conditions.

At the end of the quarter, approximately 12,500 units were classified as no longer earning revenue. This was up by 5,700 units from the prior year, but was down by 1,500 units from the first quarter of 2009. The decrease versus the prior quarter reflects a decrease in the number of units held for sale and an improvement in rental utilization.

We did see an increase of approximately 500 units year to date that were terminated early with lease customers. The increase was due to Ryder's decision to pull certain units from customers due to credit reasons in order to avoid potential bad debt expenses on receivables. And we are actively working to redeploy these units with other customers.

We have continued to successfully implement our strategy to increase the number of lease contracts on existing vehicles that are extended beyond their original lease terms. Year to date, the number of these lease extensions was up by over 500 units versus the prior period. These extensions are a positive tactic in the current soft market environment, as they retain our revenue stream with the customer, reduce the number of used trucks we need to sell, and also reduce new capital expenditure requirements.

Our global commercial rental fleet in the second quarter, declined on average by 13% from the prior year. We are 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. We expect our year-end fleet count to be down, from a percentage standpoint, by the mid-teens versus the prior year.

In closing, let me turn to page 17 to summarize our current outlook. Overall economic conditions and freight volumes continued to be very weak in the second quarter. While we saw some modest seasonal improvements, underlying fundamental demand was generally unchanged from what we saw in the first quarter.

As we have yet to see consistent material indications to the contrary, we continue to expect that these weak conditions will remain throughout at least 2009. We anticipate that these unprecedented market conditions will primarily impact earnings in our FMS segment.

Revenue comparisons in lease will become continually more challenging in the coming quarters, due to reduced new and renewal sales levels stemming from customer fleet downsizing. While we believe there may be some modest seasonal improvement in rental, we anticipate overall demand conditions will remain weak.

We expect that general used vehicle sales trends will continue at current levels. We expect to be able to continue to sell a reasonable number of used vehicles, but at lower prices.

In Supply Chain, based on our discussions with OEMs, we expect that second-half automotive volumes will modestly improve relative to the first half, and this will help improve SCS results.

The reorganization plan announced by GM will result in closing or idling plants that we serve, totaling approximately $17 million in annual revenue or about only 1% of SCS revenue. We expect to incur $2 million to $3 million in costs in the second half of the year related to these closures.

In addition to overall improved automotive volumes, SCS earnings will also benefit due to completing the closure of the majority of our European and South American operations by the end of the third quarter.

In terms of capital spending, we now forecast our full-year gross capital expenditures to total approximately $550 million, down from $1.3 billion last year. This represents a decrease of $390 million from the original capital expenditure forecast we communicated in February in our original business plan.

The decline in forecast capital expenditures is due to slower new and replacement lease sales, as well as increased usage of term extensions and the use of midlife surplus vehicles to fulfill new lease sales.

We now expect positive free cash flow to further improve above our prior expectation of $465 million, due to lower CapEx, partly offset by reduced earnings versus the prior year, higher cash taxes, and lower used vehicle sales proceeds. We may also consider a voluntary pension contribution as the year progresses.

Our ability to generate strong free cash flow 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, we'll turn it over to the Operator to open up the line for questions.

(Operator Instructions). David Ross, Stifel Nicolaus.

Good morning, gentlemen. It's Stifel Nicholas. Greg, can you talk a little bit, I guess, about this full-service leasing sell right now? Are you seeing a lot of businesses look at their capital investments and say, hey, you know what, we don't need to tie up quite as much capital in our private fleets? Is that any different than it was six months ago or a year ago? I know it's a long sales cycle and the salesforce has refocused back on it. But can you give a little more color on the success they might be having?

Sure, your question really revolves around how we are seeing things on full-service lease sales, and recently, and maybe go back six to 12 months.

I would say that one thing has remained consistent. And that is extreme caution on the part of customers. I think they are all being very watchful and very careful about their own business, their business volume, and the freight they need to move.

While our pipeline of activity continues to increase, the time that it takes for a customer to make a decision is becoming longer, and they are pushing off decisions for as long as they possibly can. I think that is -- that has been something that has continued for the last six to 12 months. We don't see that changing yet, and I think until individual customers, relative to their own businesses, see some confidence in the volumes that they need to be pulling through their own networks, that will remain the case.

So that's something we're watchful of. But I think, in answer to your question, no material change, no real difference. Customers are being very cautious and they're putting off making those capital decisions because they are not sure they will have an increase in freight to move yet.

Yes, that makes sense. And usually, I know you guys see the commercial rental side tighten up before you really see a growth in full-service leasing activity in normal cycles. Given that commercial rental hasn't really recovered yet, how long of a lag, you know, historically, have you seen in the full-service leasing market after the rental market improves or pricing tightens, however you want to look at it? Is it six months, a year later, in terms of really improving the leasing following the rental improvement?

I'm not sure that we can compare what's gone on in these extraordinary circumstances to what we've seen in past cycles, but I will add one perspective to what you've already said.

We've also, in the last number of quarters, seen a decline in the miles per unit per day of our power units. I think that that's what we will see recover first in this recovery because equipment that customers are already paying for and are leasing, I think that's where we will see the first signs of some recovery, when those miles improve again. And then, I think after that we'll see the commercial rental return.

So I think that, because of the extraordinary environment we are in, it might be a little bit different this time and therefore may even be a little bit uncertain as to what that timing may be.

That's very helpful. Also, on the new 2010 engines that are coming up, you guys obviously have a large fleet of Class A trucks and have been testing all kinds. Can you talk a little bit about what you're seeing out of the different engines, the SCR versus EGR, and what you're looking for with your customers?

Probably not. I only say that because we don't usually comment on the individual manufacturers. If Tony wants to comment at all about experience with the technologies, without naming manufacturers, from early tests, I will let him comment on that.

David, we are in the process of testing the different technologies right now.

But to your earlier question, relative to preserving capital, we do know that those units, regardless of the OEM, will be handsomely increased in price. And we think, given the price increase that you'll see relative to those engines, we think that's a good opportunity for us to have people come over and use our capital for those units, rather than invest into those much more expensive units.

We also do know, even in this early stage of testing with those technologies, that the maintenance on those vehicles are much more complex than in previous emission control increases in complexity, and so we think that would also be a positive reason to compel people to want to outsource the maintenance of those more expensive vehicles, because the maintenance will be more complex as well.

But the early stages, we don't have any conclusions yet on the view that they may actually improve fuel yields on those vehicles.

Todd Fowler, KeyBanc Capital Markets.

KeyBank Capital Markets. Greg, I was wondering if you could talk a little bit more about your outlook, specifically related to the FMS business, the impact that you expect from the sales trends within the leasing business and in the renewals. Is the expectation, then, that sequentially revenue is going to decrease into the third and fourth quarter, and also if you can talk about what's going to happen on the [marg align], that would be helpful.

Yes, I think -- it's hard to know for sure, but, when you've got a certain amount of lead time, especially for the full-service lease sales, you kind of have an idea when revenue will continue, when revenue will increase, or when revenue will decrease.

So, certainly based on sales in the last six months in particular, we see a decline in the number of replacement units and new units added to leased fleets because of a general downsizing in customer fleets. And for any new business being sold, it is not enough to offset that lease revenue.

So how that will all play into Fleet Management Solutions is a part of a bigger equation. It all depends -- what happens to revenue and margins will depend on what else happens concurrently on the part of customers. If, even though our recent past sales have been down, if miles begin to accelerate that haven't been there in the recent past, that will help mitigate some of the issue.

If miles increase on existing units and there is a need for supplemental or complementary demand, then commercial rental will move up. The question of whether that will cover what we know about decreasing full-service lease sales is what we can't yet fully guess about, and I don't think our customers can fully guess about.

So in its pieces, we don't know for sure when demand will turn. We don't know when miles will go up. We don't know when rental demand will go up, but the piece that we can feel somewhat certain about is that we'll still have some declining full-service lease commitments because of what's happened in the last six months.

Then when you come to the margin portion, it all depends where are the earnings coming from, because you get different returns, as you'd expect, from rental. You get higher margins in rental, of course, than lease, as you'd expect. Miles, when they are added to the system, tend to more quickly fall to the bottom line, and a lease sale is quite normal.

So there's a lot of parts and variables in that equation, so I hope I've given you enough pieces that you can try to figure out, as time goes by and when demand picks up, how that may look.

Well, no. And I guess, maybe let me ask it a little bit differently. If we are kind of at this new normal level and things -- activity, miles, basically are flat going into the third and fourth quarter, and based on the trends that you are seeing with non-renewals and the lease sales cycle, I guess do you have enough levers on the cost side that you are able to maintain FMS margins, or do FMS margins come down a little bit, just based on the fact that I would expect that revenue would continue to drift a little bit lower?

For the scenario as you just depicted it, you would expect the revenue to come down and the margin to come down because we couldn't offset enough of that with cost reduction.

That's helpful. And then, as far as customers not renewing their leases, is the lease book still pretty radical from the standpoint that -- if I'm assuming that there is a five-year commitment on a lease, that most of the leases are going to come up, or you got 20% of lease renewals on an annual basis, or is there a little bit of a bubble going back to the heavy lease writing activity that happened in late 2005, 2006, and maybe early 2007?

Yes, I think there are two factors. One is that you do have a bubble, especially in 2006 going into 2007. So if you go five years out, you skip over another year, and then secondly, because customers have done a fair amount, and we support them doing it, is to do lease extensions rather than just turn in the truck. That's going to also create another mini bubble or smaller bubble, but I think those would be the two factors.

Good. That's helpful. And then, just lastly here on the dedicated business. With revenue down about 20%, the margins did come up nicely. I think that you talked a little bit about fuel having an impact there. Can you walk me through the impact that fuel has on the dedicated margins, and maybe from a higher level, how you are able to get the leverage in the dedicated business with the drop-off in revenue and volumes?

I think the easiest way to understand it is that in DCC, those fuel costs are largely a passthrough. So as they are moving up or down, you're not going to have as much impact on the overall net earnings, but you see it in the percent of earnings because you will have an earnings level based on a smaller revenue level on the topline.

And that would be what we described largely caused, again, an improvement to 9.4%. All the rest of the impacts really come from volume and productivity in the normal parts of the business. And John, I don't know if you want to add anything?

Our dry operating revenue is down, I think, about 8%, versus the number you cited, so a lot less. And if you look at our margin on dry operating revenue, it's down a very little bit. And that's kind of what you would expect.

I think what you see going on here is we lost some low margin accounts, mostly late last year. We've added some better margin accounts, and then we've had a decline in volumes at existing accounts, and those things kind of traded out where we were able to keep our margin on dry operating revenue and had a slight decline in dry operating revenue based on current volumes at existing accounts.

Okay, and then looking ahead with -- based on those trends, does anything change materially, then, on the dedicated side to the back half of the year??

Not really materially. We're -- I think we're getting some momentum in winning new accounts. But I don't think you're going to see a dramatic change in growth rates or anything like that, or in margins. So, no, not materially.

Edward Wolfe, Wolfe Research.

Welsh Research. Good afternoon, guys. Can we start, maybe, Robert, by going through interest expense and how we should think about that going forward? Obviously, there's going to be more cash flow. Your interest expense was basically flat in the second quarter over first quarter. Is that as good as any run rate, or is there anything significant going to change as we look at that going forward?

You're going to see -- overall interest expense should come down because, as the year progresses, we'll be paying down debt with the free cash flow. So you will see the debt balances come down and interest expense come down as a result of that.

In terms of the rate, you should see -- we are about 5.4% in the second quarter, which was consistent with the first quarter. And for the balance of the year, you should see that creep up a little bit towards the tail end of the year as we pay off the commercial paper, which is the lower interest rate debt that we have.

Okay, and at this point, no change to your thought process on share repurchase, given the extra cash that's coming in and has somewhat stabilized? It feels like at least cost structure at this point.

At this point, no. But we continue to monitor it closely. Clearly, this is the first quarter where we saw the leverage come down, which is something we wanted to see.

As you saw, we increased the dividend as a result of that and our view of free cash flow for the balance of the year.

We do have acquisition candidates that we continue to look at. So we're kind of waiting to see how that turns out. Also, obviously looking at the equity markets, and making sure that we're not going to have a significant pension equity hit at the end of this year. We want to see that as it evolves, and continue to work with the rating agencies.

And one other thing that we want to do is -- we are in our strategic planning season now, over the next several months, so we'll have a better view of what the next -- or at least our view, internally, as to what the next two to three years will look like in terms of need for capital. And we want to take that into consideration as we decide if and when we are going to initiate the share repurchase again.

Around that, can we talk a little bit about the CapEx reduction in terms of what the extra cut means? It sounds like you are going to be using some used trucks for customers instead of new trucks. But can you talk about that and how maybe -- does that impact your leverage on the upturn at some point?

On the -- as we take, obviously, as we take vehicles out of the network, especially in rental, on the upturn, you're right, initially you'll get a price benefit, and then eventually we'll have to bring more vehicles into the network.

So what that will do is obviously impact the amount of capital we'll need in the future for rental because we will need to replenish the fleet. In lease, it's just based on when customers sign up for additional releases. That's when we'll go out and make those capital expenditures.

Now, if I heard what was said before, the rental fleet is currently down about 13%. Is that year over year or quarter over quarter?

That's year over year.

With a goal to getting to mid-teens by year-end? So there's only another couple of points or so to take out of rental, is that right?

That is correct. That's correct.

What's the seasonality, Greg, in third quarter? If you're printing $0.41 in the second, I'm guessing, historically, well, since you've been out of the bus business, it's fairly flat third to second normally, but Supply Chain is getting a little bit better. How do I think about some of the seasonality here?

I can answer your question about seasonality, but I won't automatically, necessarily let you assume that it has something to do with earnings.

The seasonality clearly normally picks up a little, a little bit above second quarter, which is what you indicated, and then the third quarter is up and a strong Christmas season or about equal to the third. That's normal. That's normal seasonality. Always.

The first is the lowest. Step up in the second, a little bit to the third, and then kind of leveling off in the fourth. That is -- you can graph that year over year, good times, bad times, and that's what you see.

The reason that I don't want to necessarily relate to any comment about earnings is, first, we are not -- we are still not doing a forecast, and there is an awful lot of variables that are going on right now that have nothing to do with seasonality. That is, customer confidence, they are willing to take on new equipment, to renew equipment, lease miles being driven, rental, used truck prices and sales -- all of that is in there, whereas the only thing that we really can feel somewhat confident about is a little bit of uptick in automotive volume from what we've been told by the OEMs.

So, there are so many variables in that soup. That's why -- we can talk about seasonality; what that means for upcoming quarters, I can't conjecture.

Thank you, first of all. That's very helpful. What's the timing of when the manufacturers are telling you to expect the uptick?

John, do you have -- just kind of a general trend from automotive activity?

Yes, we will start to see plants come back online in early August, and -- it varies by plant, obviously.

The key for us is we're going to have a little more consistency in production. The thing that really hurt our operating profits a lot is the up and down of these plants. We think that with some of the new schedules now, we are going to have more consistent operations at the plants that are staying open.

So we're still going to have some -- as Greg mentioned, we're still going to have some plant closure costs in the second half, but we should have more profitability because we're going to have a little more consistency in plant schedules.

And that will get a little better during the second half, so the fourth quarter will be better than the third quarter.

That makes sense. One last one. Just -- when you look at used trucks, you talked about numbers weren't the issue. It was pricing that was the issue. And as you look out to third and fourth quarter, is there any reason to expect a further stepdown in pricing or volume, or is $3 million or so as good a placeholder as any for gains on sales?

I may let Tony comment a little bit. But you are right. We had more units moved and we think moving units is the most important thing we could be doing right now, so as not to be saddled with old or depreciating assets. So that's critical and that's good.

But the price is soft. You know, 17%, 18%, 20%. Tony, if you want to -- (multiple speakers) what you're seeing in the market right now?

We think, for the most part, in the third and fourth quarter, or therefore, the second half, we'll pretty much sell the same number of units that we sold in the first half of the year.

We are pleased with what our sales have been. We have very targeted year-end inventory levels for our used vehicle inventories. We do not want to be held holding long on units going into next year.

It probably will be a little softer for pricing, going into the third and fourth quarter, than we did in the first half. But our objective is to convert those units into cash at good rates.

We continue to monitor the channels that we sell them to, retail versus wholesale, and we are pleased with the mix of where we are right now with retail versus wholesale to get the best price.

And we are doing a lot more progress in international sales as well. Our portion of the sales that went international this year versus last year is up, so that gives us another avenue.

But we target asset utilization and we target year-end inventories. Probably be a little bit softer pricing to get to those inventory levels. But more use of international markets helps as well.

Alex Brand, Stephens Inc..

This is actually George Pickral for Alex Brand, and the company is Stephens. First question, on the FMS side, how much did acquisitions add to full-service lease revenue in the quarter?

I think it helped about 1%, if I'm not mistaken. But Tony or Robert, if you've got a better number available?

No, the acquisitions in the first -- in the first quarter or the first half?

In the second quarter.

In the second quarter, okay. It was about 2%. It was around 2%.

Sticking with the FMS, when you have -- obviously, customers are coming back to you and returning trucks and just renewing existing contracts on the trucks they want to keep. When they do that, is it a pure renewal of the existing contract, which might imply annual price increases, or is it something where they are looking for flat or down pricing on the contract extension?

I'll let Tony answer.

George, we have seen model change price uplifts since the initial investment of the units that they've turned in, and also 2007 EPA emission uplift as well.

And we are maintaining our pricing discipline during this environment, so those rates go up. We are maintaining the pricing discipline, the investment in the vehicle is higher, therefore the lease rate is higher. And when the 2010 engine emission uplift hits those unit investments, you will see an uplift in lease rates as well at the same time.

We cannot renew a new vehicle at a, basically, five-year-old vehicle rate because of all the increases in the investment level over that period of time. So the rates are up.

Extensions are typically about the same rate. For a unit that just termed out. But generally speaking in new units, the rate has got to go up. And we maintain our pricing discipline and they are going up.

Along -- you mentioned the 2010 engine. What are you hearing from your customers on the demand side of that? Is it something they want? Something they want to avoid?

I think there are two things. As Greg had mentioned, everyone is preoccupied more with extensions right now, and our extensions are up in the second quarter over the first quarter, and that does save our capital.

There is some view from the OEMs that the new 2010 emission engines will actually improve fuel yield. I think that customers are a bit skeptical of that and they are going to hold out to see if that really is true or not.

But right now, we do not see any anticipated pre-buy to avoid the 2010s. They are more concerned on feeling better and more confident about what their freight volumes will be over the next 12 to 18 months.

Yes, I think what Tony said is really the heart of it. Customers are more concerned about their businesses than technology changes in engines.

Thank you for that. I've just got two more quick questions. You said miles driven per tractor and lease was down 9%. How close are we getting to contractual minimums, or are we below them? And if so, are you allowing customers to drive fewer miles or are you still charging them for the contractual minimum rate?

George, basically our pricing structure within full-service lease is about 85% fixed and about 15% of the total revenue is variable. The minimum, if you will, is basically in the fixed portion of what the lease rate charges. But there are not minimum miles that the customers would owe us money for.

For the most part, for the balance of the year, we see those mileage declines pretty much staying where they are right now.

Okay, thank you. And the last question here is, you said you chose to terminate 500 leases in Q2 on credit concerns. Is this a harbinger of things to come, or was this kind of a one-time clean sweep, let's get rid of the low-hanging fruit type of move?

I think it's something that we review constantly. However, it could be that half of those units or more was an unusual situation with one fairly significant customer. So you would have a bigger impact in the second quarter than normal.

Mike Halloran, Robert W. Baird & Company Inc..

The company is Robert W. Baird. Good morning. Just piggybacking on a question there, you said that the acquisitions on the full-service leasing side were about a two percentage point benefit. Does that basically imply if you strip out acquisitions and you strip out the foreign exchange impact, your organic FSL is down somewhere in that 1 to 2 percentage point range?

Sounds about right.

And then, similarly, just kind of looking through the trends in the last quarter on the full-service leasing side, I think you just previously said that you are expecting that miles per truck per unit to trend about the same here. I'm just curious about how that looked in the quarter? The miles per truck per unit, the renewal rates, and the retention rate, things like that. Were you seeing a stabilization theme through the quarter or were things moving a little bit more one way or the other?

So by -- was June much different than April, is your question?

Yes.

Yes. Tony, do you want to comment?

Yes. On the mileage side, we actually saw June deteriorate a little bit from where we were in May, from that perspective.

And the indications that we have from our customers, and, of course, we are in continuous contact with them, is that they will pretty much stay at these levels for the balance of the year, for the most part. We do not see any improvement in the utilization of our customers' private fleet as we go on out into the rest of the year.

As far as the renewals are concerned, and as far as new customers are concerned, we are seeing those rates pretty much stay where they are right now, declined as well. And as a result, you can see the less need for capital in the second half of the year.

But we also have a very, very strong program for our rental-to-lease program and our surplus redeployment, and also our extensions, and all three of those avenues, if you will, sources of capital -- rental, surplus, and extensions -- were all up in the second quarter versus the first quarter. As a matter of fact, half of the units that were put into service -- new units put into service in the second quarter -- really came from existing assets, and that was only about a quarter compared to the first -- to the second quarter of last year.

Makes sense. And then, on the supply-chain side. Just quickly, when does that international headwind from exiting the European and South American operations, when does that headwind really start abating? Is this a pretty full run rate through the first -- third quarter and then abates in the fourth quarter, or is it more towards the year end?

I think it will continue to decline in the third, and we should be out by the end of the fourth quarter.

David Campbell, Thompson Davis & Company.

It's Thompson Davis & Company. Just wanted to ask if we could zero in again on this miles per day, since that seems to be one of the key factors in forecasting the future. So the 9% decrease in the second quarter, how much was it down in the first quarter?

9%.

Same?

Yes.

And therefore, I guess June was down from May but still down 9% year to year?

That's correct.

So you really have stability there. At least not any deteriorating trends, right?

That's one way to look at it.

Which could imply the next step will be up. Or -- I mean, eventually, I guess by the end of the year, you'll be sort of flat year to year. Is that the way to look at it?

Well, the comparisons will begin to get a little easier. The third quarter 2008 was down 4%, the fourth quarter 2008 was down 6%, and the last half a year, we've been down 9%, so I guess it all depends on what customers are going to do. But the comps become a little bit easier.

I'm not sure that will show a recovery, but I agree with your sentiment. We would love to see that number turn around at any time and get back up.

Okay. All of my other questions have been answered. Thanks for the help.

Thank you. That's all the time we have for questions. I would now like to turn the call back over to Mr. Greg Sweinton.

Well, apparently, if we've answered all questions that are in queue, and I think that's the case, we've got five minutes to spare, so thank you all for participating, and have a good, safe day.