萊德系統 (R) 2010 Q2 法說會逐字稿

Welcome to Ryder System second quarter 2010 earnings release conference call. All lines are in a listen-only mode until after the presentation. (Operator Instructions). Today's call is being recorded. If you have any objections, please disconnect at this time. 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 second quarter 2010 earnings conference call. I would like to begin with a reminder in this presentation you will hear 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 result 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, good morning everyone. This morning we will recap our second quarter 2010 results, we will review our asset management area and discuss our outlook and forecast for the year. After our initial remarks, we will open up the call for questions. Let me begin with a overview of our second quarter results. For those of you who are following along on the power point, I will begin on page four.

Net earnings per diluted share from continuing operations were $0.58 for the second quarter 2010, up 21% from $0.48 in the prior year period. Second quarter EPS of $0.58 were also above our forecast range of $0.45 to $0.50. Total revenue for the Company was up by 6% from the prior year. Total revenue reflects higher fuel cost past throughs, favorable foreign exchange rate movements and higher operating revenue.

Operating revenue, which excludes FMS fuel and all sub contracted transportation revenue, was up by 2% from the prior year. Operating revenue increased due to higher commercial rental revenue, favorable foreign exchange rates, and fuel cost pass throughs and dedicated contract carriage. The increases were partially offset by lower full service lease revenue.

On page five in fleet management, total revenue increased 4% versus the prior year. Total FMS revenue included a 24% increase in fuel services revenue, reflecting higher fuel cost pass throughs. FMS operating revenue, which excludes fuel, declined by 1% due to lower contractual revenue. Contractual revenue, which includes both full service lease and contract maintenance, was down 5% due to fewer contracted units in the fleet. Lease revenue was down 4% consistent with the decline we saw in the first quarter excluding foreign exchange.

Commercial rental revenue was up by 20%, rental revenue benefited from improving global demand and higher pricing. Net before tax earnings and fleet management were up by 12%. Fleet management earnings as a percent of operating revenue increased by 70 basis points to 6.5%. FMS earnings were positively impacted by improved commercial rental performance, better used vehicle results, and lower expenses in our retirement plans. These improvements were partially offset by lower full service lease performance due to fewer vehicles in the fleet and higher maintenance costs on an older fleet as well as increased compensation expense and higher depreciation expense per unit.

Turning to the supply chain solutions segment on page six, total revenue was up 12%, due to higher sub contracted transportation and increased operating revenue. Operating revenue grew by 7% due to higher automotive volumes and favorable foreign exchange rate movements. These increases were partially offset by the closure of some locations last year as we rationalized underperforming contracts. SCS net before tax earnings doubled to $12.6 million for the quarter. Supply chains net before tax earnings as a percent of operating revenue increased by 230 basis points to 5%. Higher SCS earnings were driven largely by improved automotive volumes, the impact of closing some underperforming locations last year as well as better consumer and high-tech results. These benefits were partially offset by higher compensation expense.

In dedicated contract carriage, total revenue was up by 6%, reflecting increased operating revenue and higher sub-contracted transportation. Operating revenue was up 4% due to higher fuel cost pass throughs and improved freight volumes. Net before tax earnings in DCC decreased by 21%. DCC's net before tax earnings as a percent of operating revenue declined by 230 basis points to 7.1%. The decline reflects higher self insurance costs related to prior year claims development, compensation expense, and investments in new technology initiatives. These items were partially offset by earnings from higher customer volumes.

Page seven highlights key financial statistics for the second quarter. I already highlighted our quarterly revenue results so let me start with EPS. EPS from continuing operations were $0.58 in the current quarter, up by $0.10 or 21% from $0.48 in the prior year. Including discontinued operations, earnings per share for the quarter were $0.56, up $0.15 or 37% from $0.41 last year. The average number of diluted shares outstanding for the quarter declined by 3.1 million shares versus last year to 52.3 million.

In December, 2009, we announced a two million share anti-dilutive repurchase program and in February 2010 we announced a separate $100 million repurchase program. These programs run simultaneously and were both authorized for two-year periods. Under the $100 million program, we repurchased 585,000 shares at an average price of $44.71 per share during the second quarter. At the end of the quarter $54.5 million remain authorized under this program. Under the two million share anti-dilutive program, we purchased 138,000 shares at an average price of $46.61 during the second quarter and at the end of the quarter, 1.7 million shares remain authorized under this program. As of June 30 there were 52.4 million shares outstanding of which 52.3 million are currently included in the diluted share calculation.

The second quarter 2010 tax rate was 41.4% versus 40.3% in the prior year. The increase in the tax rate reflects higher contingent tax accruals partially offset by the benefit of higher earnings. The tax rates in both years are somewhat above our normalized rate due to a higher proportion of non-deductible charges on a smaller earnings base.

Page eight highlights key financial statistics if the year to date period. Operating revenue was up by 1%. Comparable EPS from continuing operations were $0.82, up from $0.78 in the prior year. Including discontinued operations, earnings per share were $0.79, up from $0.53 last year. The tax rate was 41.8% versus 43.9% last 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 41.8% in 2010 versus 41.2% last year. Adjusted return on capital, which is calculated on a rolling 12-month basis was 4.2% versus 5.9% in the prior year, reflecting lower earnings in late 2009 and Q1 of 2010.

I will now turn to page nine to discuss some of the key trends we saw during the second quarter in each of the business segments. In fleet management solutions, full service lease revenue was 4% lower consistent with the decline in the Q1 excluding foreign exchange impacts. The average fleet size was down 7%, from the prior year second quarter and down 2% versus the first quarter of 2010. Contract maintenance revenue was down 6% reflecting a reduction in this product line's average fleet count of 5% versus the prior year and 1% versus the Q1. New sales are up significantly over the prior year, but this improvement was more than offset by customer nonrenewals primarily at the end of the lease term. As a result, there was a net reduction in the lease and contract maintenance fleets. This reduction reflects the cumulative effect of customer nonrenewals of expiring leases resulting from the long-term economic decline.

Contracted fleet renewal rates are also being affected by uncertainty regarding the economic recovery. However, we continue to effectively use our centralized asset management process to extend lease terms and redeploy vehicles with customers. I will cover this in more detail shortly. Lease pricing on new units has been and remains firm as we are focused on realizing appropriate long-term returns for investments made in this asset based contractual product line. Following declines in 2008 and 2009, for the second consecutive quarter, miles driven per vehicle per day on US lease power units increased over the prior year. Miles per unit were up by 3.7% versus the second quarter 2009, an improvement over the 1.4% increase we saw in the first quarter. Commercial rental revenue was up strongly by 20% from the prior year on a 1% larger average fleet. With market demand increasing, and a relatively stable fleet size, we rented each vehicle for a greater number of days during the quarter resulting in higher utilization.

Global commercial rental utilization on power units was 77.7%, up 920 basis points from 68.5% last year. This is a strong absolute utilization rate and it was seen in all vehicle classes. Global pricing on power units was up 5% which represents an improvement from the flat pricing we saw last quarter and improved rental in demand and pricing has continued in to this month of July. As you may recall, our initial business plan called for our rental fleet to seasonally increase but remained flat at year end with the prior year. Given the strengthening market, we now expect to increase our rental fleet size by mid single digits at year end. As always, we will continue to monitor market demand and adjust our rental fleet plans as conditions merit.

Also in FMS we saw stronger used vehicle sales results, reflecting both our initiatives and improved environment. I will discuss those results separately also in a few minutes. FM s also benefited from lower retirement plans expense due to improved investment performance in 2009. 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. As we experienced some recovery and performance improvement, compensation expense is also adjusting and was higher than last year. Finally, depreciation expense per unit was higher due to out lowering of residual values and accelerated depreciation on some units this year.

In supply chain solutions, operating revenue was up by a better than expected 7% in the quarter. Automotive volumes with plants we serve were higher as compared to the very weak first half of 2009. Revenue increases from higher 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 contracts. SCS earnings of $12.6 million for the quarter doubled from last year driven by higher automotive volumes and improved results in the consumer and high-tech verticals. Supply chains net before tax operating margin of 5% also reflects the benefits of closing certain underperforming international markets and US locations last year, and these benefits were partially offset by higher compensation expense.

In dedicated contract carriage, operating revenue grew 4% due to higher fuel cost pass throughs and increased customer volumes. DCC's net before tax earnings fell by $2.3 million due to higher self-insurance costs related to unfavorable development of prior year's claims, compensation expense, and investments related to new technology initiatives. As shown in the appendix, total central support service costs were up by approximately $5.5 million reflecting increased compensation expense, technology investments and professional services. Technology investments include mainframe, shop maintenance, and purchasing systems which we expect to result in cost and productivity benefit in future years. The portion of central support costs allocated to the business segments and included in segment net earnings was up by $4 million. The unallocated share which is shown separately on the P&L was up by $1.5 million due primarily to higher professional fees and compensation expense.

Page 10 highlights year to date results by business segment and in the interest of time I won't review in full detail but highlight the bottom line results. Comparable year to date earnings from continuing operations were $43.5 million, largely unchanged from $43.7 million in the prior year. However, net earnings including discontinued operations were $42.2 million, up by 42% from $29.7 million last year. At this point I will 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 $630 million up by $288 million from the prior year. Year to date spending on lease vehicles was largely unchanged from the prior year after being down $85 million in the first quarter. Lease capital continues to benefit from the 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.

Capital spending and commercial rental vehicles was $294 million year to date, primarily due to the refreshment of the rental fleet as well as some modest growth spending. This was an increase of $289 million over last year where we spent virtually no capital on rental vehicles for the full year in 2009 due to the soft economy. We expect full year gross capital spending to be in line with our initial forecast range we provided in February of approximately $1.1 billion to $1.2 billion. However, the breakout of our spending between lease and rental will be somewhat different that originally forecast.

While our lease sales remain on track with plan, we anticipate lease capital to come in below plan due to increased redeployment of surplus vehicles, to fulfill new lease sales as well as higher term extensions. For rental, we anticipate increased capital due to the greater than planned spending to replace more of the older units and some modest growth spending. As such, full year rental capital is now expected to be approximately $370 million. We realized proceeds primarily from the sale of revenue earning equipment of $103 million year to date up by $4 million from the prior year. The increased reflects higher used vehicle pricing partially offset by fewer units sold. Increased proceeds from sales year to date net capital expenditures were $527 million, up by $284 million from the prior year.

Turning to the next page, we generated cash from operating activities of $531 million year to date, up by $19 million from the prior year. Depreciation decreased by $27 million due to a smaller fleet lower adjustments in carrying value of used vehicles and prior year supply chain solutions facility impairment charges. These items more than offset higher depreciation costs per vehicle resulting from higher average vehicle investment, lower residual values and accelerated depreciation rates on certain vehicles. Including the impact of used vehicle sales, we generated $668 million of total cash year to date, up by $19 million from the prior year. Cash payments for capital expenditures were $544 million, up by $153 million from the prior year, reflecting vehicle -- higher vehicle purchases, and timing of vehicle received from OEM's.

Including our cash capital spending, the Company generated $123 million of positive free cash flow in the current year. As planned, free cash flow is down $134 million from the prior year due primarily to higher capital spending on vehicles. We expect our full year free cash flow to be at or near our original forecast range of $225 to $275 million. On page 13, total obligations of approximately $2.6 billion are down by $32 million as compared to the year end 2009. The decrease debt level is largely due to use of positive free cash flow to pay down debt. Balance sheet debt to equity was 130% as compared to 175% at the end of the prior year. Total obligation as a percent to equity at the end of the quarter were 188% versus 183% at the end of 2009.

Including share repurchase activities, we now expect total obligations to equity ratio to be approximately 190% at the end of 2010, below the target range of 250% to 300%. Or equity balance at the end of the quarter was approximately $1.4 billion, down by $52 million versus the year end 2009. The equity decline was driven by net share repurchases of $51 million, foreign currency translations adjustments of $30 million, and dividends of $27 million partially offset by earnings of $42 million. At this point I will hand the call back over to Greg to provide an asset management update.

Thanks, Robert. Page 15 summarizes key results for our asset management area globally. At the end of the quarter, our global used vehicle inventory for sale was 5900 vehicles, down by 3100 units from the second quarter 2009 and down by 900 units sequentially from the end of the first quarter 2010. We sold 4700 vehicles during the first quarter, down 17% from the prior year, due to our smaller inventory available for sale but consistent with our first quarter 2010 sales. We saw continued strengthening in used vehicle demand and pricing in the second quarter and this strength has continued in to July. Improved demand is result of both better economic conditions and the desire of some truck buyers to obtain pre-2010 engines. Stronger demand combined with lower inventory level has allowed us to increase the proportion of retail sales where we realize better prices as well as to start generally up pricing.

Compared to the second quarter 2009, proceeds per vehicle were up 8% on tractors and up 27% on trucks. From a sequential standpoint, tractor pricing was up 7% and truck pricing up 14% versus the first quarter this year. At the end of the quarter, approximately 8000 vehicles were classified as no longer earning revenue. This was down by 4500 units, or 36% from the prior year, and down 19% from the first quarter 2010. The decrease reflects fewer units held for sale and 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 half, the number of these lease extensions in the US was up by over 1000 units or 30% 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 expenditures requirements.

We also successfully redeployed over 900 more units than in the prior year to date of 45% increase as we continue to focus on driving return from vehicles already in the fleet. Early terminations of leased vehicles declined by approximately 1200 units, and returned to a more normalized level. These are all positive indicators and results from our asset management area. Our average global commercial rental fleet during the second quarter was up by 1% from the second quarter last year. At the end of the quarter, the ending fleet count was up by 7% from last year's second quarter.

Finally, let me turn to page 17 to cover our outlook and forecast. During the first quarter, we saw improving trends emerge in all of the key leading indicators for our business that we identified in our business plan. During the second quarter, we saw continued strengthening of these early indicators. While there remains much uncertainty regarding the strength of a overall economic recovery, we anticipate improved transportation conditions to continue to benefit our business in the near term. In FMS, we expect to see higher demand and lower available capacity continue to benefit our transactional commercial rental business which should result in higher year-over-year utilization rates and improving pricing and rental. In used vehicle sales, we expect improved demand lower inventories and a desire among some buyers for pre 2010 vehicles to benefit used vehicle pricing.

Overall, net lease sales are significantly improved from last year and sales to new customers have grown nicely. Given the long-term nature of Contractual lease commitments however, existing customers remain cautious about fully renewing their contracted lease fleets which has resulted in continued fleet contraction. Until the existing customer base stabilizes, we will continue to see pressure on lease revenue and on maintenance costs due to an aging fleet. Despite this, lease should benefit from new business sold and the potential stabilization of existing customer fleets by year end.

In supply chain, we expect continued solid volumes within the automotive sector, although year-over-year comparisons will become more challenging due to relatively better activity levels in the second half of 2009, as compared to the first half last year. We anticipate supply chains earnings to remain strong, given the improved freight environment, and the impact of the actions we have taken to improve results in the segment. Given all of these factors, we are increasing our full year 2010 EPS forecast by $0.15 from our prior range of $1.85 to $1.95 to a new range of $2.00 to $2.10. Our new 2010 forecast represents an increase of $0.30 to $0.40 or 18% to 24% improvement from a comparable $1.70 in the prior year.

We are providing a third quarter EPS forecast of $0.62 to $0.67 up from a comparable EPS of $0.51 in the prior year. This represents an increase in the third quarter earnings of $0.11 to $0.16 or 22% to 31%. That does conclude our prepared remarks this morning and we will move to q-and-a.

Due to number of callers in queue, I would ask that you limit yourself to no more than two or three questions each and then if you have additional questions, you are welcome to get back in the queue and we will take as many call as we can. I might also mention that if you watched the weather news, tropical storm Bonnie is passing over us and if inadvertently we have a power surge or someone gets caught off, we didn't do that intentionally. Be just be warned that we have a bit of a storm over us at the moment. At this time, I will turn it over to the operator to open up the line for questions.

Thank you. (Operator Instructions). Our first question today is from Alex Brand with Stephens. Your line is now open.

Thanks. Good morning, guys.

Good morning.

Greg, I guess my main focus is trying to get a feel for where you think you are in the cycle. So for example, rental utilization's very good, is there a level of utilization that historically starts to lead to conversions to long-term leases?

If you go back historically, we are at that level when you look at rental utilization. The reason that I wouldn't say there is a perfect correlation to the past, because of where we are now, is because of I think continued uncertainty, this threat of what you might call the dreaded double dip in recession and all of the economic fundamentals. So this may not quite play out as maybe has in the past because of the severe economic uncertainty threat. Hopefully that won't happen but because I think it's on so many customers' minds, and they seem to be more willing I think in all transport modes to perhaps pay a premium for shorter term transactional activity, than even doing something contractual in our case. I'm not sure that it's a pure correlation to what may have occurred in the past.

Okay, and just along the same lines, if you look at the improvements that you have seen, the high utilization, I wonder if you would just characterize for us, in terms of where you think your business is headed in whatever you want to call this modest recovery. Is this about the time in a normal cycle, which granted I know you don't feel like we are in a normal cycle, that we should be looking for customers to start to want new trucks, and that you begin to really recover as you get that growth in 2011, and then 2012 would start to look more like your prior peak earnings. Is that a fair way to think about it, and are you kind of saying, we might not be quite on that normal track, it might be a little slower than that?

Yes. I think that we feel that we have fairly good visibility in the next couple of quarters, which is reflective of what we've provided in the way of our forecast and guidance. If things continue to not considerably get worse, I would say that you are right, that by mid 2011 into 2012 you might expect more logical recovery. Units are going to be getting older, they are going to have to be replaced, then you add the new complexity in engines. I think all of those things will culminate and may be more of a positive perfect storm for growth and contracts and contracting with maintenance and lease units.

Okay. I appreciate the color. I will turn it over to someone else.

Okay, thank you.

Thank you. Our next question is from Jon Langenfeld with Baird. Your line is now open.

Hi, good morning, this is Ben Hartford in for Jon. To that end, the moderating declines in the lease fleet is encouraging, certainly we are seeing positive early signs here of recovery. When should we expect to see that decline level off and stay flat, even before we start to think about sequential growth in that fleet?

Unless something else unforeseen happens, we are close, I think we are close to the leveling off period. I wouldn't say we've quite bottomed yet, but the rate of decline has improved to such a degree that I think we are to that leveling period. And as we said I think in the press release and my remarks, that we may have and we'd look forward to have stabilization of the lease fleet by the end of this year.

Okay. Great. Then just a couple of numerical questions. The gains or losses in the depreciation line, can I get that number?

I'm sorry, I didn't hear the last part of that. Can you repeat the question?

Yes. Can I get the gains or losses embedded in the depreciation expense this quarter?

Sure, I'll ask Robert to answer.

Okay.

Yes, it's about $8 million to $9 million.

$8 million to $9 million?

Right. That's the amount of write downs that we have in the depreciation line.

Right, exactly. And then do you have a not yet earning number for the global fleet in the quarter?

That is 1,400.

1,400. Consistent with the first quarter.

Correct.

Okay, great, thank you.

You're welcome.

Thank you. Our next question is from Ed Wolfe with Wolfe Trahan. Your line is now open.

Good morning.

Good morning, Ed.

Just want to get more flavor on kind of depreciation versus used truck gains, as you look at the residual values, the last couple of years you've been having to write those down, now they are starting to go up again. How do we think about depreciation going forward, and how do you think about gains on sales going forward based on current trends?

Sure, I will ask Robert to comment.

Yes, I think depreciation going forward, even though you are going to see some benefit from less write downs, I think certainly relative to where we are in the second quarter, depreciation should pick up a little bit because of the refreshing of the rental fleet and the higher investment that's required. You look at in the second quarter we were at about $206 million, $207 million of depreciation expense. I expect that to be a little bit higher going into the second half of the year.

And then the gains, relatively close to what we saw in the second quarter, is about $6.5 million I think for each of the quarters that we have in front of us.

Okay. That's helpful. And how do I think about pension expense, which seems to have come down a little bit relative to what you thought going forward?

We had a little bit of a pick up in pension expense in the quarter, it helped us about $5 million, $6 million year-over-year. I think what you would expect in the second half of the year is about $5 million a quarter.

$5 million a quarter, year-over-year change?

Correct. If you remember at the beginning of the year, we talked about $18 million for the year. We got a little bit of a pick up from that. So now you are looking at about $20 million, $21 million.

Okay. And when I think about central support, up at $9.9 million, and it talked a bit about compensation rising, I'm guessing there's some bonuses being paid again, how do we think about that number going forward?

You can expect that both for front line employees, who we've held compensation and indicated we would until we are in better shape, that they receive compensation adjustments, and that people who are on performance based plans compared to last year when we were paying nothing, obviously they will be receiving something. There won't be huge increases compared to last year, but I think that they will be reflective of what we have done recently, so it's not a material drag on future earnings. But we are now able to react to improving market environment, improving performance and, therefore, want to be able to restore compensation that our employees either lost or rightfully would expect as things pick up, but not materially impactful to the second half.

So assuming you're in your guidance range about $10 million a quarter for central support is a good number?

Yes. $9 million, $10 million is a good number.

Okay, then in your release you talked about an increase in maintenance costs as a result of clients holding vehicles longer and them getting older. Is that a negative or a positive for you? I would think that allows you to do some maintenance business, what is the pros and cons of that?

The part that affects us negatively is that the fleet that we are taking care of on behalf of our customers are getting older, so that's where the cost is going up. Separately, for customers who may not yet be customers or potential clients, if they have been holding units longer, then we see that as a selling opportunity. I think both because of aging equipment and complexity, I think those are marketing and selling opportunities that our sales organization looks to take advantage of.

But for an existing lease client, if they have more maintenance on the truck, isn't that a opportunity for you to sell the maintenance to them, or unless they have a special package that comes out of somehow the residual value of the truck. What's the negative, I guess is what I'm saying?

Tony, would you like to add a little detail?

Actually, Ed, I think with what you are seeing on the maintenance side is really the impact of our extension strategy and our redeployment strategy. And we go for returns when we look at assets that are already on the balance sheet.

So basically, if you look at the fulfillment rate that we have on new sales from existing equipment, it's much higher this year than it has been in previous years because of that redeployment strategy and that extension strategy. We get excellent returns from redeploys, we get excellent returns when we do the extension strategy. The customers like it very much because, as Greg mentioned, the uncertainty in the environment. And the other side of that coin is, a bit higher maintenance cost because some of those units are a bit older.

But overall, the Company from a return point of view is much better off for that strategy. You keep the customer, keep the revenue stream going, save capital, get a good return, but the other side of the coin is there a bit more maintenance cost associated to those aging units.

Okay. Thanks for the time. I will get back in line, thank you.

Thank you. Our next question is from Kevin Sterling with BB&T. Your line is now open.

Thank you, good morning.

Good morning.

Greg, I jumped on late so you may have already talked about it and I apologize. Can you talk about how the lease miles driven per unit progressed throughout the quarter and each month?

We stated it was 3.7% up year-over-year for the quarter versus 1.4% in the first quarter. And, Tony, do you have the individual months as we progressed through the quarter?

Yes we do, it was up mid single figures pretty much in April, down a bit in May and June somewhat. But that was really relative to what had happened in the months, April, May and June as we look into 2009. Typically we measure those miles on a broader period of time than just a 30 day period of time. But overall, we are really pleased with the 4% increase that we saw in the quarter compared to the 1% that we saw in the first quarter.

Okay. Thank you. Can you comment how July is looking?

We think we will continue to see that mileage trend as we go throughout the year. The improvement in the lease miles. As you know, in the cycle, the first thing the lease customers do is run the miles up on their existing fleet, so we believe that that will continue throughout the year.

Okay. Right. That's a key metric for you. That's all I had, thank you so much for your time today.

You're welcome.

Thank you. Our next question is from David Ross with Stifel Nicolaus. Your line is now open.

Good morning, gentlemen.

Good morning.

With your sales force trying to get out there and sell the lease product, they've been having some good success. Have you at all changed either the size or the incentives for your sales force in the last couple of quarters?

Go ahead, Tony.

Dave, if you recall, during the recession we made an important strategic decision to maintain the size of our sales force. We wanted to make sure that we nursed those relationships and fertilized them during that bad period of time, so that when customers started to pick up their pens and renew, that we would be there. And we think that was exactly the right strategy to do, and it's really paying off a lot of dividends.

As Greg mentioned earlier, the number of new sales, new customers is up very attractively, and the new sales were up really pretty well. We've held that sales force number constant over the last several years to maintain our position in the marketplace, maintain our presence out there, to be there when the recovery comes, we think we've done exactly the right thing. We really maintained that number. We really did not take any headcount out of employees who have direct face to face contact with our customers, and that strategy is paying great dividends with our new sales that we are seeing right now.

Certainly sounds like the right approach.

We believe so.

Turning to SCS, could you comment a little bit about why high-tech and consumer as a segment was down 5% in the quarter. And also on the international side, operating revenue was up 11%, want to know whether or not that excludes discontinued ops.

I'll turn you over to John Williford.

There were some puts and calls in that. Overall, what we are seeing is our new retail vertical is making pretty good progress, we've landed some new customers there, and we have a pretty strong pipeline in the retail and consumer products vertical. High-tech with some customers is inventory levels have dropped, and it's been flat to maybe slightly down in high-tech. But overall, I think we are making good progress on the retail side.

Internationally, is the operating revenue growing 11% due to any of the comps with discontinued ops being out of there or -- ?

Internationally, the growth is mostly coming from Mexico.

Is that on the auto side?

It's really, it's --some of it is auto but also across the board in Mexico.

Last question on SCS, relates to the patent that you guys got awarded during the quarter. Can you talk a little bit about why you think you needed that patent for logistics release? Is that because it's a web-based system, and what that patent provides you?

That's a good question. We have a pretty exciting service that we offer, we call it Control Tower, where we can help companies manage their logistics more tightly and even take out inventory because of better execution. It's something that we have been doing for several years in automotive, and we really, now we are starting to take it to the other segments, and we think it really gives us something to differentiate ourselves in retail and high-tech and consumer products. So we think it's an exciting new service that, we patented it because we want to protect it, we think it's unique.

Thank you very much.

Thank you. Our next question is from Art Hatfield with Morgan Keegan. Your line is now open.

Thank you, good morning, everybody. Greg, you did comment on strong lease sales. Can you all talk about kind of where that's coming from maybe industry-wise, or also if it's existing customers rolling into new vehicles, or are you seeing some success by converting noncustomers to customers at this point in time.

I'll let Tony comment.

Art, we are seeing that increase in sales coming pretty much across the board on all the industries. We do particularly well right now because of our strength in food and beverage. As Greg mentioned earlier, even though there is some caution, we are seeing a good number of those new customers did convert over from rental, we saw in the quarter which we are very pleased with. And we saw a lot of conversions from private fleet during this period of time as well.

So from an industry point of view, pretty much broad based, we're particularly strong in food and beverage, we saw that show itself as well. But some is coming from rental and also a good bit is coming from conversion as people realize what the investment is in these new units, and they really don't want the burden of maintaining those vehicles as they go on out into the future. So our lease strategy we believe is playing out really very well having kept the sales force there. We're attractive to all industries with certain specialties, and at the same time what we are also seeing happen is people trying to avoid purchasing the 2010 investments, and we are getting some good private fleet conversions as a result.

Excellent. When you -- these days when you sign a new, you sell a new lease, how long before, what's the lead time before revenue generation kicks in?

We are still sticking with about three months or so, something along those lines, delivery of the equipment. If we do have a unit available, of course, it's immediate whether it's a redeploy or whether it's an extension, the revenue will begin immediately. If it is a brand new unit, then for the most part we are holding with about three months or so or something like that. But in the meantime, we will support that lease customer with immediate revenue generation to the Company from the rental fleet as they wait for the unit to be delivered from the OEM.

Okay, and then just finally, a question about that. Once the vehicle's in service, I know there can be some quirks in lease accounting, but when a new vehicle goes in service, do you immediately start to see GAAP earnings or is there a lag because of certain things that need to be amortized up front?

No. As soon as the unit goes into service, we do start to generate incremental NBT from that new entry into the fleet.

Excellent, thank you very much, thanks for your time.

Thank you. Our next question is from Todd Fowler with KeyBanc Capital Markets. Your line is now open.

Thank you. Hi, good morning.

Good morning.

Greg, what's the best way to think about the rental fleet growth in the back half of the year on a per unit basis?

I will let Tony answer.

Okay. Todd, as we said earlier in the year, we were going to wait to see what indicators were in the marketplace before we decided to increase the rental fleet. We stepped out ahead of the marketplace because we felt it was the right thing to do. We didn't want to miss the rise of the rental, and we think we've made exactly the correct investment in rental. You will see the second half of the rental fleet be higher than last year in the second half, higher than the first half of this year, and also greater than the expectations that we had in the original plans which we had expressed to all of you in February. We are pleased with the investment level that we made. We see good improvements in demand for the balance of the year, good improvements in the rate for the balance of the year, and we think we made exactly the right investment level, we will have the units to take advantage of that market.

So maybe, Tony, if we think about it on a percentage basis year-over-year, is the fleet going to be up double digit percentages by the end of the year?

No. We said mid single digits.

Okay. Great. That's helpful. Then thinking about the economics on the rental fleet, the utilization here very strong in the quarter. As you continue to see that strong utilization, how does that impact the economics for the rental fleet, if at all.

It helps a great deal. Having equipment being used and rented is, that's the key to this business. And I think, you think, where does the extra utilization come from. First, there is general demand levels, and in some places when lots get to be a bit tight, some customers are even reluctant to bring it in on a Friday because it just might not be there Monday morning, so that's a sure sign that demand is up, and supply and demands factors are taking affect. So to us, utilization alone is a big, big part of the success in commercial rental.

Okay, great. Then the last one that I have, just a general question. Outside of it sounds like there is some variable compensation coming back in. How does the structure of the business from a headcount perspective and from a fixed cost perspective feel right now kind of across the different business segments?

I think that we haven't done much in the way of moving of headcount up or down one way or another. Our commitment to our employees as we came out of last year and we went into this year is, we thought for customer service reasons, for the stability of the Company, and all we want to do for clients, we were going to try to do all we could to maintain headcount levels, and that's what we have done.

I would say that we still sort of hold on that because there really have not been huge surges in volume. I think the one place where you may see impact even positively in headcount may be when you have a new supply chain or a new dedicated contract carriage account that you are starting up from scratch, and you obviously then have to deploy people. But apart from a significant new contract, there are no general trends that are caused by large volume increases that would cause that to occur. As you can see, things are better than last year, but we are a long way from where we were in the volume we had a couple of years ago.

Okay. Got it. Congratulations on the quarter, thanks a lot.

Thank you.

Thank you. Our next question is from Matt Brooklier from Piper Jaffray. Your line is now open.

Thanks. Good morning, guys. I wanted to zero in and get back to the lease side of your business. You guys are signing more contracts for new equipment but indicated that on the renewal side, that's working against you. We saw a step down from first quarter into second quarter with respect to the lease business. Can you talk a little bit more about the kind of the pace of nonrenewals, and I don't know how you measure it, if it's on a year-over-year basis or on a sequential basis, but just provide a little bit more color in terms of the direction of nonrenewals on the lease equipment business through second quarter and into July if you can.

Before I turn it over to Tony to make a comment, let me make one statement about something you said about a step down in the second quarter. If you adjust for foreign exchange, we are pretty much flat first quarter to second quarter relative to that revenue. Now the other part of the question I will turn over to Tony.

Matt, we have noticed that, clearly that our renewal rate is slightly less than we would like it to be. The aspect there, which is unusual, is a lot of those decisions were actually made late last year and early this year, and then the units are actually terming out now. Some of those customers are rethinking what their fleet plans really are.

A lot of our new business is coming from existing customers, as well as they now begin to increase the size of their fleet. Even though we have seen the renewal rate down from where we really like it to be, we are also focusing in which period of time during the economic cycle those decisions were really made. They were made end of last year and early this year, and a number of those customers are rethinking some of those fleet decisions. So we believe that as we go on out into the future, that there will be improvements in the retention rate throughout the year.

Now our lots business down, lots business year-over-year is down I'm very pleased to say. I believe, as Greg had mentioned, as the fleet begins to abate in its decline, we will see the fleet begin to rise mid year next year, and that will show the benefit of those renewals getting back on track.

Okay. I guess that is in line with your comments regarding kind of the stabilization of the fleet in the second half of this year. Moving onto the miles driven on leased equipment. You guys have seen improvement, in the second quarter it stepped up from the first quarter.

If we look back at prior cycles, and again, not every cycle is the same but prior cycles from a timing perspective, historically how long have you seen or needed kind of an improvement in terms of the miles driven on that equipment before your customers have conviction in terms of either upping the renewals or signing new contracts. I guess this is again, this is a cycle question, trying to get a feel for how long you need to see improvement in miles driven on the leased equipment before you start to see growth within the business.

Every -- as we said earlier, this is different than many in the past, and probably as you analyze it, each period of recovery may be slightly different. I would guess probably a couple of quarters, multiple quarters of sustained growth. Remember, we had last year from 2008 all the way through 2009, we had significant reductions in miles per unit driven, so we have a long way to climb up.

I think the accurate answer to your question would be, the bigger the increase in the miles driven per unit, the fewer quarters will be needed before customers will add to the fleet. If it's a slow incline, then it will take longer. If it's a fast incline, we will speed it up. And if it's pretty much flat then we are sort of in limbo for a period of time, so it's going to depend on the freight to be moved, the general state of the economy, consumer spending, unemployment, all of those things that are going to suggest what the freight demand will be, and what kind of miles our customers therefore, will put on the units to deliver that freight.

Okay. Those are my questions, thanks.

Sure.

Thank you. Our final question today is from David Campbell with Thompson Davis and Company. Your line is now open.

Good morning, thanks for taking my question. I just want to try to understand the stabilization of this lease fleet by the end of the year. That includes I guess from your comments, a 5% to 6% increase in the commercial fleet offset by a decrease in the full service lease fleet. Is that the way to look at it?

No. We look at them separately. We indicated that we'd be up mid single digits in the commercial rental fleet, and the comments about the stabilization refer only to the lease fleet.

Only to the -- okay, so that will be roughly the same year to year by the end of the year.

By the end of the year, the decline will stabilize but it will, therefore, still be fewer units than it was last year at the end of the year.

Yes. Stable versus now, but still down year to year.

Correct.

Okay. So okay, so generally speaking, you will have an increase in, of some percentage in the total fleet, commercial fleet and lease fleet. There will be some increase. You mentioned that June was up 7% at the end of June in the commercial fleet, is that right?

In commercial rental compared to the start of the year and compared to last year would be up 7%, yes.

Up 7%. And that increase is going to be, not going to change from now until the end of the year it sounds like.

That's correct and that's a change in our assumption. When we put the business plan together and we reported in February, we said that we would move it up, we would move the size of the commercial rental fleet to handle the peak time of the year, and then would decline naturally and we'd probably move those units out and sell them, so that we'd end the year about flat. Instead of saying now that we are ending the year flat, we said it's going to be up mid to single digits.

Yes. Yes.

There's just more demand. There is a lot more demand for rental than we would have forecasted back in February.

Right, right, right, right. Well, that's -- the visibility of that is not all that great. I can understand that. Thanks. I think all of my other questions have been answered. I wanted to get a general feel for comments about stabilization. Okay.

All right?

Thank you.

You're welcome.

Thank you. This does conclude the question-and-answer session. I would now like to turn the call back over to Mr. Swienton for closing remarks.

Thank you all for joining us. We are concluded. Have a safe day, and we'll talk to you all next time, bye now.

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