萊德系統 (R) 2010 Q1 法說會逐字稿

Welcome to Ryder System Incorporated first quarter 2010 earnings release conference call. (Operator instructions). Today's call is being recorded. I would now 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 2010 earnings conference call. I'd 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.

Thanks, Bob, and good morning everyone. Today, we'll recap our first quarter 2010 results, review the asset management area and then discuss our outlook and forecast for the year. And after our remarks, we'll open up the call for questions. So, let me get right into an overview of our first quarter results. And for those of you following along on the PowerPoint presentation, we're on page four. Net earnings per diluted share from continuing operations were $0.24 for the first quarter 2010, as compared to $0.20 in the prior year period. In 2009, the first quarter included a $0.10 charge related to restructuring and other items. Excluding these items in the prior year, comparable EPS from continuing operations were $0.24 in the first quarter 2010, as compared to $0.30 in 2009.

While earnings were down versus the prior year, they were above our forecast range of $0.17 to $0.22. As a reminder, we discontinued all supply chain operations in Europe and South America by the end of last year. And have now restated our historical EPS to reflect the exclusion of these discontinued operations. The comparable EPS we originally reported in the first quarter 2009, including these operations, were $0.25. So our restated results, excluding these operations, for the first quarter 2009 were $0.30.

Total revenue for the Company was up by 4% from the prior year. Total revenue reflects higher fuel prices and favorable foreign exchange rate movements, partially offset by lower fuel volumes. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue was unchanged from the prior year. The impact of favorable foreign exchange rates was offset by lower FMS contractual revenue.

On page five, in fleet management, total revenue increased 2% versus the prior year. Total FMS revenue includes a 21% increase in fuel services revenue, reflecting higher fuel prices, partially offset by lower fuel volumes. FMS operating revenue, which excludes fuel, declined by 2% due to lower contractual revenue. Contractual revenue, which includes both full-service lease and contract maintenance, was down 3% or down 4%, excluding foreign exchange, due to fewer contracted units in the feet. Commercial rental revenue was up by 2% but was unchanged from the prior year when excluding the impact of foreign exchange rates. Rental revenue benefited from improved utilization, offset by a significantly smaller fleet size.

Net before tax earnings in Fleet Management were lower by 28%. Fleet Management earnings, as a percent of operating revenue, decreased by 110 basis points to 3.2%. FMS earnings were negatively impacted by lower full service lease performance due to fewer vehicles in the fleet and higher maintenance costs on an older fleet, as well as higher depreciation expense per unit. These negative impacts were partially offset by better used vehicle results, improved commercial rental performance and lower expenses in our retirement plans.

Turning to the supply chain solutions segment on page six. Total revenue was up 10%, reflecting higher automotive volumes and favorable foreign exchange rate movements. Operating revenue grew by 4% due to favorable foreign exchange rate movements and higher automotive volumes. Partially offset by some locations we closed in the latter part of last year as we rationalized underperforming accounts. SCS net before tax earnings were $7 million for the quarter, up over 360% compared to a very weak first quarter last year. Supply chain's net before tax earnings, as a percent of operating revenue, increased by 220 basis points to 2.9%. Higher SCS earnings were driven largely by improved automotive volumes.

In dedicated contract carriage, total revenue was up by 1%, reflecting higher fuel cost pass-throughs. Operating revenue was down 1% due to contract non-renewals. Net before tax earnings in DCC decreased by 28%. DCC's net before tax earnings, as a percent of operating revenue, declined by 250 basis points to 6.6%. The decline reflects higher self-insurance costs, accrued compensation expense and costs related to investments in new technology initiatives.

Page seven highlights key financial statistics for the quarter. I already highlighted our quarterly revenue results, so let me start with EPS. Comparable EPS from continuing operations was $0.24 in the current quarter, down from a comparable $0.30 in the prior year. The average number of diluted shares outstanding for the quarter declined by 2.6 million shares to 52.7 million. In December 2009, we announced a 2 million share anti-dilutive repurchase program. And in February 2010, we announced a separate $100 million repurchase program. These programs run simultaneously and were authorized for a two-year period. During the first quarter, we repurchased 550,000 shares at an average price of $35.09 per share under the $100 million program.

During the first quarter, we also purchased 170,000 shares at an average price of $33.91 under the 2 million share anti-dilutive program. As of March 31, there were 53 million shares outstanding, of which, 52.3 million are currently included in the diluted share calculation. The first quarter 2010 tax rate was 42.8% versus 51.2% in the prior year. The prior year's tax rate was impacted by foreign restructuring and impairment charges. Excluding these items in the prior year, the comparable tax rate would be 42.8% in 2010 versus 42.6% last year. Our current year tax rate is somewhat above our normalized rate due to a higher proportion of non-deductible charges on a smaller earnings base.

I'll now turn to page eight to discuss some of the key trends we saw during the first quarter in each of the business segments. In Fleet Management Solutions, full service lease revenue was down 2% or 4% excluding foreign exchange. The average fleet size was down 5% over the prior year's first quarter and down 1% versus the fourth quarter 2009. The reduction in the lease fleet primarily reflects the cumulative effect of customer non-renewals of expiring leases, resulting from the protracted freight recession.

The fleet size in our contract maintenance product line shows similar trends. During the first quarter, we continued to see customers downsizing their lease fleets at a somewhat higher rate than planned. However, we continue to effectively use our centralized asset management process to extend lease terms and redeploy vehicles with customers. You can see some of these graphs highlighted in the appendix to the presentation on page 23, if you want to take a look at those later. Lease pricing on new units has been and remains firm. As we're focused on realizing appropriate long-term returns for investments made in this asset-based contractual product line.

For the first time in almost two years, miles driven per-vehicle per-day on US lease power units increased over the prior year. Miles-per-unit were up by 1.4% versus the first quarter 2009, which is an improvement over the 2% year-over-year decrease we saw in the fourth quarter of 2009. Excluding foreign exchange, commercial rental revenue was unchanged from the prior year on a 12% smaller average fleet. Despite a significantly smaller rental fleet, we rented each vehicle for a greater number of days during the quarter, resulting in higher utilization.

Global pricing on power units was flat, which represents an improvement from the 4% decline we saw last quarter. Global commercial rental utilization on power units was 68.6%, up 780 basis points from 60.8% last year. This is a strong utilization rate for what is typically the seasonally slowest quarter and it was seen in all vehicle classes. The improvement reflects both the actions we took last year to right size our rental fleet, as well as higher demand. While our initial business plan called for our rental fleet to remain flat year-over-year, we're continually reevaluating our plan in light of recent stronger demand conditions and we'll modify the fleet size as appropriate throughout this year.

Also in FMS, we saw stronger used vehicle results, reflecting both our initiatives and an improved environment. I'll discuss those results separately in a few minutes. FMS also benefited from lower retirement plans expense. We saw higher maintenance costs in FMS due to the aging of our lease fleet. Since we haven't been replacing lease units at a normal rate, the fleet has become relatively older. We also saw negative operating leverage on our fixed facility network as the fleet size contracted. We expect these trends to continue until our lease fleet resumes growth. Finally, depreciation expense per unit in FMS was up due to our lowering of residual values and accelerated depreciation on some units.

In supply chain solutions, operating revenue was up by a better than expected 4% in the quarter. Automotive volumes with plants we serve were higher as compared to the very weak period of early 2009. Improvements in auto volumes were partially offset by the closure of certain operating locations we undertook in the latter part of last year, as we rationalized underperforming accounts. SCS earnings of $7 million for the quarter were up strongly over the weak prior year period, driven largely by higher automotive volumes. SCS net before tax, as a percent of operating revenue, was 2.9% and reflects the typical seasonally slower period, as well as some impact from planned shutdowns by a significant automotive customer, among other items.

In dedicated contract carriage, operating revenue declined 1% due to some contract non-renewals. DCC's net before tax earnings were down by approximately $3 million, due to higher self-insurance costs, accrued compensation expense and costs related to new technology initiatives. As shown in the appendix, total central support service costs were up by approximately $4 million or 11%, reflecting higher spending for technology and professional services and accrued compensation expense.

The portion of central support costs allocated to the business segments and included in segment net earnings was up by $2.2 million. The unallocated share, which is shown separately on the P&L, was up by $1.9 million, due primarily to technology and professional fees. Technology spending included costs related to mainframe, shop maintenance and purchasing systems, which we expect to result in cost and productivity benefits in future years. And at this point, I'll turn the call over to our Chief Financial Officer, Robert Sanchez, to cover several items, beginning with capital expenditures.

Thank you, Greg. Turning to page nine, gross capital expenditures in the first quarter totaled $276 million, up by $51 million from the prior year. Spending on lease vehicles declined by $85 million or 41%. Lease capital is down due to lower new and replacement lease sales as customers downsize their fleets. Lease spending is also down due to successful implementation of our strategy to increase the number of lease term extensions and increase the use of surplus and other mid-life 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.

Gross capital spending on commercial rental vehicles was $142 million in the quarter due to our planned refreshment of the rental fleet this year. This was an increase of $138 million over last year, where we spent virtually no capital on rental vehicles for the full year in 2009 due to the soft economy. While we expect full-year total capital spending to be at or near our prior forecast range, we may reallocate some capital between the product lines, as demand conditions merit.

We realized proceeds primarily from sales of revenue earning equipment of $49 million in the quarter, up by $3 million from the prior year. This increase primarily reflects higher used truck pricing. Including proceeds from sales, full-year net capital expenditures were $227 million, up by $48 million from the prior year. We had virtually no acquisition spending this quarter, as compared to the $85 million last year, which was primarily on Fleet Management's acquisition of Edart Leasing in the northeast US in the first quarter of 2009.

Turning to the next page. We generated cash from operating activity of $271 million in the quarter, which was in line with the prior year. Depreciation declined by $11 million due to lower adjustments in the carrying values of used vehicles, prior year's supply chain facility impairment charges and a smaller fleet. These items more than offset higher depreciation costs per vehicle, stemming from lower residual values and accelerated depreciation rates on certain vehicles. Including the impact of used vehicle sales, we generated $336 million of total cash, unchanged from the prior year.

Cash payments for capital expenditures were $200 million, down by $52 million from the prior year, due to the timing of payments for vehicles received late in the current quarter from the OEM's. Including our cash capital spending, the Company generated $136 million of positive free cash flow in the current year. This is an increase of $52 million from the prior year, due primarily to the timing of cash payments for vehicles. We continue to expect the full-year, free cash flow to be at or near our prior forecast of $225 million to $275 million.

On page 11, total obligations of approximately $2.5 billion are down by $72 million, as compared to the year-end 2009. The decreased debt level is largely due to the use of positive free cash flow to pay down debt. Balance sheet debt to equity was 172%, as compared to 175% at the end of the prior year. Total obligations as a percent of equity at the end of the quarter were 181% versus 183% at the end of 2009. Our equity balance at the end of the quarter was $1.4 billion, down by $19 million versus the year-end 2009. The equity decline was driven by net share repurchases of $23 million and dividends of $13 million. At this point, I'll hand the call back over to Greg to private an asset management update.

Thanks, Robert. Page 13 summarizes key results for our asset management area globally. At the end of the quarter, our global used vehicle inventory for sale was 6,800 vehicles, down by 2,700 units from the first quarter 2009, and down by 100 units from the end of the fourth quarter 2009. We are very pleased by the reduction we've achieved in our used vehicle inventories, which are slightly below our target range. We sold 4,700 vehicles during the quarter, up 4% from the prior year. We saw improved used vehicle demand in the first quarter and this demand has continued into April. Stronger demand has allowed us to start to become more selective on used vehicle pricing and increase the proportion of retail sales of vehicles.

Compared to the first quarter 2009, proceeds per vehicle were down 4% on tractors but were up 12% on trucks. From a sequential standpoint, however, prices on both vehicle types were up strongly versus the fourth quarter 2009, with tractor pricing up 7% and truck pricing up 15%. At the end of the quarter, approximately 9,800 vehicles were classified as no longer earning revenue. This was down by 4,200 units, or 30%, from the prior year and unchanged from the fourth quarter 2009. This decrease versus the prior year reflects fewer units held for sale and an improvement in rental utilization.

We've continued to successfully implement our strategy to increase the number of lease contracts on existing vehicles that are extended beyond their original lease term. For the first quarter, the number of these lease extensions in the US was up by approximately 550 units or 37% versus the prior year. Increasing lease extensions is a beneficial strategy in the current market environment, as it retains the revenue stream with the customer and lowers new capital expenditure requirements. We also successfully redeployed almost 600 more units than in the prior year's quarter, a 66% increase, as we continue to focus on driving return from vehicles already in the fleet. Early terminations of leased vehicles declined by 350 units and returned to relatively more normalized levels. These are all positive indicators and results from our asset management area.

Our global commercial rental fleet in the first quarter declined, on average, by 12% from the prior year. This reflects the successful execution of our plan last year to reduce the size of our rental fleet. The smaller fleet, coupled with recently increased demand, has driven significantly improved utilization rates in rental.

Finally, let me turn to page 15 to cover our outlook and forecast Overall, we've begun to see some improvements in customer demand levels. In FMS, we expect to see higher demand continue to benefit our transactional commercial rental and used vehicle sales areas first. This should benefit us primarily through higher utilization and pricing in rental, and through increased pricing on used vehicle sales. However, given the long-term nature of contractual lease commitments, customers still remain cautious about expanding their contracted lease fleets at this time. This will continue to put pressure on lease, due to the typical lag in the timing of a recovery in lease sales and an aging fleet resulting in higher maintenance costs.

In supply chain, we expect the improvement in automotive volumes we've been seeing to benefit our performance for the remainder of the year. So given these factors, we're revising our full-year 2010 EPS forecast to a range of $1.85 to $1.95. And this represents an increase of $0.15 to $0.25 or a 9% to 15% improvement from a comparable $1.70 in the prior year of 2009. We're also providing a second quarter EPS forecast of $0.45 to $0.50 versus a comparable prior year EPS of $0.48. That does conclude our prepared remarks this morning. So, we'll move now to questions and answers. 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 is from David Ross. You may ask your question and please state your company name.

Yes, Stifel Nicolaus. Good morning, gentlemen.

Good morning.

Greg, you talked about the increase the maintenance costs on the older fleet. There's a lack of renewals right now. How much can the average fleet continue to age before there's a need for renewals?

I think the true answer to the question is that the fleet will kind of normally seek its course. The lease fleet is where we've commented on the additional maintenance and it is getting older. We are a part of causing that because we think it's in our net-net benefit on the bottom line because we're extending leases and keeping units in service longer. We're not saying that it's a tipping point burden that's going to cause an extreme problem. But it's just one more factor that, with an increasing age of fleet, we're just going to add to some expense. And you won't have as much bottom line impact as fast, until customers really have confidence in their long-term futures of the business, to actually begin to add units to their fleet that are leased, as well as to do more renewals. I hope that that gives you a little bit more perspective.

Yes, that's helpful. And then, also as you go out and you talk to the FMS customers, the 2010 engines and the 2010 trucks are obviously a lot more expensive than the older trucks but I don't think that that's necessarily coming into a lot of discussions yet because people can do extensions and kind of get around this year. When do you all see that becoming a real selling point for Ryder, in that people are going to have to get these more expensive trucks and then, it kind of tips the decision to lease versus own?

Well, I think what we always try to communicate is that one of the real values of our value proposition and what we offer, is the quality and the ability to deal with maintenance and these increasing new issues and areas of complexity. So, I think that's an ongoing message that we certainly try to communicate with prospects and existing customers. And I think, as they become familiar with the new units, the complexity, the expense, all of that hopefully should play in our favor. And that's a part of our marketing and sales effort. I think it is -- customers have been so focused on just kind of getting through this period, surviving, that they really haven't focused yet on the complexity, as well as the expense of these new engines but I think that day is coming.

And then, the last question is on the contract related maintenance side. That was down 11%, more so than any other piece of the FMS puzzle. What are your thoughts there and why was that down so much?

I think it's only down because there are just fewer units that customers have to be maintained. And I think that when there does become a rise in fleet size and customers have stopped downsizing their fleets and have leveled off, then the revenue and the related earnings from that will also continue to increase and improve.

And what's the breakdown of that maintenance between preventative maintenance and serious maintenance?

It really is all preventive. The idea that it is just standalone without a lease. But it is the same kind of idea as we have with our lease customers. It's contracted, they bring them in for regular maintenance and the idea is to make sure that they have extremely good uptime.

So, even the aging of their fleets wouldn't necessarily increase maintenance revenue to Ryder?

I'll let Tony give you a little flavor on that, if he has some more perspective.

Yes, I think on the net basis, I think Greg is exactly right. The customers have reduced their fleets in total. So, this product line is one where it's not on lease with us. But I think generally, even though they've aged those fleets a bit, if the actual average repair on those units is a bit higher, that average higher amount is still more than offset by the reduction of the units actually running out there. And also, the reduction in the miles of those units that are running out there. So, that portion of our customer's fleet is smaller and they're running fewer miles, which means less transactional activity on that, even though the average repair may rise because the units are older.

Thanks Tony. Thanks very much for the color.

You're welcome.

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

Robert W. Baird. Good morning.

Good morning, John.

On the commercial rental side, Greg, what would be the year-over-year growth of pricing there, both in the first quarter here, as well as the fourth quarter?

You broke up a little but you were asking about pricing?

Yes, commercial rental pricing, year-over-year growth in the fourth quarter and the first quarter.

Year-over-year, it may be less bad or it may be up a bit but I think kind of flat from the fourth to first quarter.

So, flat, meaning flat on a year-over-year basis?

No, flat on the fourth quarter versus first quarter.

Okay. And so, if I looked at Q1 relative to Q1 last year, would that still be down?

Slightly.

Okay. So the ability to drive rates in this line of business, I'm assuming, part of this is seasonal and part of this is the cycle but the expectation for higher rates would be very likely here, I would think, over the course of the next couple of quarters?

If you continue to see the demand that we have seen in March and into April, that would be a logical conclusion.

Okay, all right. And then, on the lease fleet size, it's still declining sequentially. When should that stop? Are we still several quarters out from that actually stabilizing?

Given no other external dynamics that cause a problem and the we're sort of in this same general economic scenario of gradual improvement, we think that the net sales improvement ought to show up more toward the latter part of this year. Which means that the revenue and earnings from that would not occur until -- by the second quarter of 2011.

Okay. And then, historically, the extension side of the equation, what sort of conversion rate do you have on the extensions to be able to then convert them into a new vehicle?

Well, I think we've probably never done as much in our history as we've done recently. But I would put it this way, since these are customers who have chosen to extend and therefore, have chosen to stay with us as customers, I think that there is a high probability that, as they've maintained the relationship with us, they're going to look to us when it's time to actually get new equipment.

Okay. So, we shouldn't look at that as necessarily a headwind. I think we've talked in the past that you have anywhere from a 12 to 18 month average extension timeline. Don't necessarily look at that, those vehicles as falling off when that -- when those start to come due later this year in early '11?

No. I would think not. Because the important thing is to maintain the service and the quality and the relationship with the customer. And the very fact that they've extended would indicate that they're satisfied with that service and relationship.

Okay. And has the availability of capital become a larger part of the selling proposition? It's always out there but given the capital markets today, has that been more of a value proposition that customers have focused on?

I think it will and it would be, except that there probably hasn't been enough of a critical mass to say that that's proven to be a factor. I'm sure in some cases where customers are confident enough about their businesses and are looking for financing. Or more importantly, since cash and capital and credit is so dear, they're more likely putting it into their core business and considering something like transportation and leasing and maintenance to be something that they can get through us and then spare their available capital for their own business.

Right, okay. And then, just two number questions, if have you them. Do you have the not yet earning number for the global fleet?

Yes, we do. And I know it's on a note I have here.

And then, while you are looking for that, I was also wondering if you had the amount of losses or gains of -- in the depreciation line.

The not yet earning is 1,400.

1,400, okay.

Robert can find it in the 10-Q better and faster than I can.

That's actually an acceleration from the second half of last year, correct? Because you were at 700, I believe.

No, that was 700 at year end. March 31, 2009 was 1,100.

1,100? Okay.

What was the second question?

The second question was the amount of losses or gains in the depreciation line.

Just under $10 million of expense was from the writedowns at the used vehicle center.

Great, okay, thanks a lot, guys.

You're welcome.

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

Good morning. Scott Group from [Wolster Hahn]. Hi, guys. How are you?

Good, thanks.

A couple of quick ones first. Can you give a little more color on the new technology initiatives and dedicated? And then, how much was the expense in 1Q and what do you think that should be going forward?

Yes, broadly, those are intended to provide some software capabilities that we believe will enhance our service for customers and improve our administrative efficiency. But I'll turn that over to John Williford who heads that segment.

Yes, we're putting in a new operating system for dedicated contract carriage. I think we'll improve our capabilities quite a bit. And in the first quarter, I think the impact was about $0.5 million.

And any expectations for that going forward?

I think by the end of the year, it should net out. We should start to see the benefits equaling the cost.

Okay, great. Also, the essential support services expense, it's been pretty choppy the past few quarters. Can you guys give any kind of color or guidance on that going forward?

Usually that's a place that we look to maintain pretty significant cost controls. That's kind of been our history in that expense area over time. We have said that we're not managing this business for a quarter or two. We're managing it for the long term. And we want the opportunity to make investments in technology and certain platforms. And I think we'll see that continue. Not in an usual or particularly choppy level but as a commitment for improving our infrastructure going forward because it will be necessary and valuable as we go through recovery.

Okay. And then, last one, just bigger picture. Can you just talk about the lease and rental fleet and where we are through the first quarter relative to peak? And when you think you get those fleets back up to peak levels? What's the timing ?

Yes, well, we're quite away away from where the peak size of the rental fleet was. I think that will depend on demand and sometime over the next few years, as I sort of intimated in my comments, we're looking at that even this year, whether it will make sense to increase that. But compared to where we were, it will be a while to get that fleet size up. But as long as we're getting good utilization, very strong utilization and improving pricing, that's less of a concern than the fleet size. On the lease units, I think that's going to also be a multiyear progress activity. And it has to do with not just strength in the overall economy but confidence levels of 15,000 customers generally that they are ready to believe and commit that the recovery is long-term and their businesses are sound. And they're going to add to their fleet. So, I think that's also a multiyear effort.

Right. Until you get those fleets back up to those peak levels, can you get back to that 450ish kind of peak number that you had in 2008? If or is there something else you can do to get there? Or do we just have to wait for the fleets to get back up to peak levels?

Well, if you freeze everything else going on, I would say that it is important to get the lease fleet back up to a higher level. It's less critical in rental. And you also have to look; how much now can DCC and supply chain provide? Because they had some very soft years as well and they will contribute. In addition, we haven't taken acquisitions off of the table and we still have the wherewithal for share repurchase. So, organically freezing a lot of other items, it will take awhile but there are other factors that can influence the speed with which we reach former peak earnings.

Okay, great. Thanks for the time, guys.

Thank you.

Your next question is from Alex Brand. You may ask your question and please state your company name.

Hi, Stevens Inc. Good morning, guys.

Good morning.

Greg, is it -- I think you've sort of answered this question but the CapEx in the back half of the year, you still don't have anything other than customers who are looking to pick up '09 engines that are still available, right? Nothing in addition to that so far?

I'll make sure I understand your question correctly, are you talking about the back half of 2010?

Right.

Well, the 2009 engines are running out as we speak, because there's only -- they had to be manufactured and put into vehicles. So by the end of the year, that's all that's going to be available, are 2010's.

Right. I think you had said before that you had $250 million of CapEx that was mostly related to replacement vehicles and people trying to grab the '09 engines while they could.

That was primarily -- the $250 million was primarily a reflection of our commitment to replenish and refresh the rental fleet.

Okay. And as you go out to talk to private fleets and obviously trying to generate organic growth from new customers, are you yet seeing the interest in the private guys maybe saying, "Hi, we don't want to get into that position again come next cycle and maybe we do want to outsource our fleet needs."?

I'll let Tony comment, if he'd like, about what he and the sales organization are encountering these days.

Yes. I think what we're seeing is that there is -- and you can see it manifest in the extensions as well. There is a lot of concern about the expense and complexity of maintaining these new vehicles in the marketplace today. And we think that is a great play for us. It doesn't use their capital. It uses our capital instead. We do buy better than they buy. And we're better equipped to really manage the running cost aspect of these more complex vehicles than we believe any of the customers are, clearly. And also, of course, the residual on own is something that we have more knowledge about as well.

So, we do believe that the complexity and a lot of the unknowns relative to these units will be very good for leasing. And that is their concern. I think, first, what they're doing is extending. And watching to see a little familiarity with the new units. And then, we believe that, given the complexity of maintaining those, that we'll get that renewal business on extensions. They will be the 2010 technology. And we think that complexity is a good thing for leasing.

And just one more question for Robert. Can you remind us what we should expect on pension expenses and overall retirement expenses for the rest of the year?

Well, pension expense, if you'll remember the waterfall, the pension expense benefit was about $0.18. And that's spread evenly across the year. So, that comes out to about $0.04 in the first quarter. And you've got another $0.12 to $0.14 left in the rest of the year.

Okay. Thanks for the time, guys.

You're welcome.

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

Thank you, Morgan Keegan. Morning, everyone. Hi, Greg, thinking about the commercial fleet utilization and what's gone on there in the first quarter, can you talk about kind of where utilization was in March versus January or December?

I would say that, anecdotally and looking at lots, the utilization was much higher in March than it was in any of the -- December, January or February. If we've got a specific stat, maybe Tony might have it nearby.

Well, in -- the second quarter utilization of '09, we were about 68.5%, something like that for the second quarter of '09 for the power fleet.

Do you have utilization by month?

By the month?

First quarter?

The first quarter was about 60%, for the first quarter.

Last year.

Last year.

And you have it by month now?

For this year or for last year?

For this year.

For this year, it was about 69% in January, about 71% in February and about 72% in March.

Okay. Great. That -- thank you.

Which are very attractive utilization rates for that early in the year.

Yes, that was my next question. How does that compare to kind of what you've seen historically on average for the first quarter?

Well, last year, this time, those rates were all in the low 60's, 60%, 60.1%, 60.4%. So, we are dramatically above in utilization rates for each of the months, January and February, March in 2010 compared to '09. And they're actually very high even for that period of season. So, generally, they're high for that early in the year and also much higher than they were this time last year.

Greg, as you go forward and you mentioned you're discussing the possibility of growing and maybe getting more aggressive with growing the commercial rental fleet. How do you balance that against -- and if you grow it too fast, can that create a potential disincentive for customers to sign long-term lease agreements?

Well, you would think not because you have a disparity in the price level.

Okay.

I think customers will use rental almost regardless of the price, until they're confident that they've got long-term certainty in their business. So, I don't think that that's a concern. I think that, by our nature, you've seen that we've been pretty aggressive in downsizing the fleet in order to be careful. We'll be careful on the way up. But once you start getting to some of the utilization rates that we're now seeing, you don't want to have empty lots. You don't want to have inadequate spectrum of vehicles for customers to come in and rent. So, we took some pain, several years of pain on the downside on rental. And this is going to be the first thing out and the first thing up. And we don't want to lose the opportunity on the way up.

Got it. And then, finally, on extensions, as we've gone through this downturn, you have been extending a lot of leases as they were rolling off. Do you have enough data, say, for extensions that expired in the first quarter to get a feel for what customers are doing? Or is it too early in the roll off of those to have many to say that -- be comfortable in saying 50% are going with new vehicles or they're just letting those vehicles go away?

Tony?

I think some -- for the most part it is a bit too early. But reflecting on Greg's comment earlier, these are customers that are solidly loyal to Ryder. And I think they're waiting until they get better indications as to what's happening to their business. And when they get those indications to feel more confident about the future, we think a very good proportion, a strong proportion of that group will go for the longer term 50, 60 months scenario with us. So, it's a bit early but we think a preponderance of that group will stay with us.

Okay. And have you had the experience yet of having extensions expire and then re-extending those or are you being firm to the initial terms of the extensions?

For the most part, they stay with the initial term of the extension. We're very careful that there is some life left in the vehicles when they go to the used vehicle centers. So typically, they are extendible for one period of time.

Okay, great, thank you. That's all I had. Thanks for your time.

You're welcome.

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

Hi, good morning. It's KeyBanc Capital Markets.

Good morning.

Greg, sticking with the commercial rental fleet. At what point would you have to make the decision in the year to actually grow that fleet to get those vehicles into service by the end of the year?

Well, there's some lead time. I'm not sure that the lead time is real long. I think that we'd be making expectations about what we've seen thus far, what we're seeing in the near-term. And if you want to talk about lead times, Tony, you can add that.

Sure. I think, basically, the lead times are about two months or three months or so, something like that, before we can get the vehicles into the fleet. But I think, most importantly, if we do see the demand that we do anticipate now, we would just slow the out servicing of the units that are currently planned to be out serviced. And that's one way to really grow the fleet. But our peak fleet this year is planned to be up quite a bit versus the peak fleet last year to take advantage of this demand that we see. But notwithstanding the fact that it's about 12 or so weeks for delivery times, it's easier to swell your fleet by delaying the out servicing of the units to be retired. And that is our plan right now.

Okay. So, you can grow the fleet without having significant CapEx then in the short term?

In the short term, yes.

Okay. And then on commercial rental pricing, if memory serves me, I think that 50% of the commercial rental revenue comes from full service lease customers. Is that pricing established on an annual basis or how quickly does that pricing reset or is it looked at and renewed based on some of utilization trends?

Well, generally, the portion of the rental revenue that's generated by a lease customer will be at the contracted lease rate. And that's typically -- right now, that's running about 35% or 40% of our total rental business. The pure, which is outside customer pure transactions, is more in about the 60% range. But for those lease customers that do rent from us, they will rent at the contracted lease rate.

Right. And how frequently is that price updated? Is that an annual decision or is that something that's over the life of the lease product?

Well, it would be whatever the lease rate is at that period of time, which also adjusts for CPI and things like that as well. So, whatever the outstanding lease rate is for a lease customer at that time, that is the rental rate that they'll pay.

Okay. That's helpful. And then, just switching gears here. With the supply chain business, the margins here in the quarter slipped a little bit again from that high water mark in the third quarter of 2009. What's the expectation for that going forward? And was there any impact in the quarter from the Toyota shutdowns or the Toyota issues on the business?

John?

Yes, okay. First of all, most of that is seasonal. Right? If you look at our history, even going back to '06, '07 and '08, we tend to do about 200 basis points better for the year than we do in the first quarter. And a lot of that is automotive and and some of that is high-tech seasonality. And that's exactly what we expect this year. So, that's most of the discrepancy between what you might be used to for a full-year margin and what you saw in the first quarter. Then, the impact with the one large auto customer that you referenced is -- that's about $1 million impact for the quarter, that we don't see on a going forward basis.

Okay. That's actually very helpful. And then the last one that I have, just thinking about the guidance for the second quarter and knowing that your business does have some seasonality. Can you talk about, Greg, some of the drivers that get you from the $0.25 here in the first quarter to kind of the midpoint in the range being $0.47, $0.48 in the second quarter?

Yes, the big step up is normal seasonality and an improving environment economically and financially. And I think the four pieces that would cause the improvement, second quarter to first, would be the commercial rental improvement in utilization, the used vehicle sales pricing, the miles driven continuing to be -- anticipated to be stronger. And you've got a big improvement in supply chain when you look at volume and activity, especially in the automotive portion compared to last year. So, those four really carry you, as well as the seasonality.

And did you say what miles driven were on a year-over-year basis in March?

It was 1.4% for the quarter. I don't know if you have March.

March was 3.5%, a very, very nice increase.

Yes, it carried the quarter.

Okay, perfect. Thanks a lot for the time this morning.

You're welcome.

Thank you. Our next question is from Matt Brooklier. Your line is now open. You may ask your question and please state your company name.

Yes, Piper Jaffray. Good morning, guys.

Good morning.

I wanted to go back to the commercial rental fleet. You guys indicated that you're potentially reallocating some of your CapEx this year to expand that fleet. Where are you in terms of that process? Is that kind of an initial discussion phase? Are you out speaking with some of the OEM's in terms of putting together packages to purchase new equipment? I'm just trying to kind of measure your conviction level in terms of expanding the commercial rental fleet going forward.

It's under consideration.

Okay. Under consideration, just in conversation or you're actively actively looking at equipment currently?

It's certainly under consideration internally and we'll let you know when we've done something externally.

Okay. And on the DCC side, you guys showed nice sequential profitability improvement in that particular business line. Want to think and look at pricing going forward. I know that the pricing on that particular product is more kind of longer term contractual. Wondering, given the current freight environment and things getting tighter here, are you guys able to take up price going forward? When do the majority of those contracts come up for renewal? Is it kind of balanced throughout the year? Is it skewed more towards the beginning of the year? Maybe just sort of add a little bit of color on DCC pricing going forward.

Yes, I haven't thought about that issue in terms of DCC pricing but more in terms of growth opportunities. In the last year, we've been competing with truck load carriers with excess capacity. And as their capacity tightens up, we do expect to see a better environment and higher retention of existing business and more growth.

Okay. But are you actively able to start ratcheting price up contracts come up for renewal or are there more contracts that come earlier or later in the year? Kind of what does that look like during 2010?

Yes, on the pricing -- and because it is contractual pricing and you have to -- you're pricing a long-term contract where you have to make a decent return on capital, added competition from truck load carriers really didn't affect our pricing. It caused us to -- we priced at the same level and lost some business. And now, I think we'll price at the same level and retain more business and win more business.

Okay. And just one last question for Robert. In terms of expected depreciation expense during 2010, I think you guys had given guidance that it's going to be up year-over-year. Has that changed going forward? Because the kind of the run rate and what we saw in first quarter was a little bit lower than, at least, I had in my model.

Yes, we actually -- I don't know about it being higher. We're expecting it to be slightly down for the year. And a lot of that is because of the reduction in the writedowns at the used truck centers and the fact we have a smaller fleet. So, what we'd expect there is for -- you look at what happened in the first quarter, to kind of remain at that level and maybe a little bit higher at the tail end of the year, as the rental vehicles come on. But it would be slightly down from last year.

Okay. That's helpful. Thank you for the time.

You're welcome.

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

Thompson, Davis and Company and thank you very much. Good to hear your good results. I wanted to ask you about the miscellaneous income in the first quarter, the $1.5 million. What was that from?

Robert?

That was better performance for the securities in our deferred compensation plans. The better performance caused that gain.

Okay. And will the -- so I take it from your comments that you think the gains from the used vehicle sales will increase in the next two quarters. But I'm not sure if it will because you might have less vehicles for sale.

No, we wouldn't say that they're going to necessarily increase the gains. The gains, I think as you mentioned, we'll have -- the inventories are down. So, I'd expect them to be kind of close to the run rate that you're seeing, the current gain levels. What we expect is a reduction in the writedowns for the vehicles at the used truck centers year-over-year.

Which will impact your D&A charges?

Correct.

Those D&A charges?

That's right.

Okay. And you mentioned that you're talking about reallocating capital expenditures to the commercial rental fleet if there continues to be increases in demand. So, where would the CapEx reductions come from? Where would you spend less money?

You'd spend less money on capital expenditures for lease if the demand for lease is not as we had originally forecasted. And right now, it's a little bit softer.

Full service lease, you mean the long-term leases?

That's correct.

Right. And then, the problem will come when both of them are stronger. Then you're going to have to do something different. Right?

Well, it's a problem we'll look forward to.

Right. I get it. And so, anyway, the delaying of outsourcing of units to be sold, can you explain that? You said that you could increase the fleet size without adding CapEx immediately?

Yes, this is, Tony. Typically what we do is we'll sequence some new vehicles in right before the season and out service vehicles on a timely basis to make sure that we maximize the size of the fleet during peak season. But if demand does protract, if you will, and goes on later into the year and carries further beyond the season, we'll just delay the out servicing and keep the fleet levels high. We would never take vehicles away from customers, if you will, who are renting them and stick with our out servicing plan, given the fact that those vehicles are targeted to be out serviced. We'll just keep the units in the fleet, enjoy the revenue and the very high margin pull-through on that business and grow the fleet from that strategy.

Okay. Thank you very much. All my other questions have been answered.

You're welcome.

Thank you. Our final question today is from Jeff Kauffman. You may ask your question and please state your company name.

Thank you. Jeff Kauffman from Stern Agee. Congratulations, guys, terrific lead indicators here. John, I don't want to discount what's going on in your business because I thought logistics looked great but my questions are going to be directed at Tony.

That's okay, Jeff.

First of all, rental utilization picking up has always been historically a precursor for full service lease. That's good. I've always thought that at 75% utilization, we grew the fleet. 65%, we shrank it. It sounds like at 72%, you're ready to grow. Are we kind of preempting this or are you telling us that you think that you're going to be at that 74% utilization rate pretty soon?

We believe that the demand for rental is going to come on very strong. And we feel very good about what we're seeing with the demand, actually, this early in the season. So, we believe we've done the right thing by right sizing the fleet in '09. Our refreshment program, the vehicles are delivering right now as we speak. Perfectly on time for our peak season. And we think the demand will really be there. Because a number of those lessor/renters, if you will, and also because of the private fleets, have all been reducing their fleets over the last six to eight quarters; we think that there will be very strong demand for cube when we go into the season. And this will cause upward pressure on pricing, as well. So, we'll have the units, our peak fleet will be greater this year than it was peak last year. And we think there will be a lot of pressure on price because of demand and the reduction in a lot of private carrier fleets. And we think it will be an excellent season for us.

Okay. Well, knock on wood you're right. Just so I can get an idea because it sounds like we're near the bottom of fleet cycle. Do you have the vehicle counts for the rental fleet and the full service lease fleet at the end of 1Q?

Yes.

Okay and we can follow up offline as well. I just want to get those counts if you happen to have them handy.

Yes, we have them now.

Okay. Thank you.

At the end of March, by product line, full-service lease was 112,700, commercial rental 28,800, service vehicles and other 3,000, 144,500 active units, 6,800 held for sale. For a total of 151,300, plus 33,900 customer vehicles under contract maintenance.

Okay, so that's the RPM maintenance.

Right. And that will all be out in the Q pretty soon.

Thank you. One final question. This is a business where the margins tend to lag the volume growth. You're signing new business. I know that pricing is tough, getting better but you also have a fair amount of business that was signed in '06, in '05 and '07, that's coming off the books probably at higher margins. To the extent you're comfortable and however you want to describe this, can you give me an idea of the difference that you're seeing in the margins of new business being signed today versus the average business that might be coming off the books?

Well, remember what we measure, Jeff, we measure EVA per unit. And the EVA per unit is higher than it was several years ago. So, we have not changed our standards. The fact that equipment is more expensive or will be more expensive, the important thing is the return on that investment. So, you can't assume that just because we've gone through a difficult time, that lease is acting like other transactional products. So, our commitment and our requirement for the long term because you sign a six-year lease, you're burdened with that on your bottom line, your P&L and your returns. So, our critical measurement there is still EVA per unit and it is better than it was several years ago.

So, with the cost of equipment being higher, is it safe to assume then that your cost of capital is lower?

I don't think that you can assume that necessarily because it also comes from our leverage ratio and there are costs involved. But obviously, what we're trying to increase is the spread between the return on costs, the return on capital and cost of capital. And that's where, because of what's occurred in the last couple of years, we've taken such a dip. But we want to make sure we're in good stead and good position for that recovery.

Okay. Well, that's great news. Guys, thank you very much.

You're welcome.

Thank you. And that concludes the question and answer session. I would now like to turn the call over to Mr. Swienton for closing remarks.

All right, well, we're a little after noon, so our time is finished. I thank you all for attending and have a very good, safe day.

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