萊德系統 (R) 2010 Q4 法說會逐字稿

Good morning and welcome to Ryder System Incorporated Fourth Quarter 2010 Earnings Release conference call. All lines are in a listen-only mode until after the presentation. As a reminder if you are using a headset or speakerphone, please pick up your hand set before asking your question. Today's call is being recorded; if you have any objections please disconnect at this time. I would like to introduce, 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 Fourth Quarter 2010 Earnings and 2011 Forecast conference call. I would like to begin with a reminder that in this presentation you will hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations, and are subject to uncertainty and changes in circumstances. Actual results may 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 Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Robert Sanchez, President of Global Fleet Management Solutions, and John Williford, President of Global Supply Chain Solutions are on the call today and available for questions following the presentation.

With that let me turn it over to Greg.

Thank you, Bob and good morning everyone. This morning, we will recap our fourth quarter 2010 results, review our asset management area, and discuss our outlook and forecast for 2011. After our initial remarks, we will open up the call for questions. So, let me get right in to an overview of our fourth quarter results, beginning on page four for those of you following on the PowerPoint.

Net earnings per diluted share from continuing operations were $0.80 for the fourth quarter 2010, up from $0.43 in the prior year period. Both periods included income tax benefits, partially offset by restructuring and other items.

Excluding these, comparable EPS, was $0.65 in the fourth quarter 2010, up from $0.41 in the prior year. Fourth quarter EPS was also above our forecast range of $0.58 to $0.63. Total revenue was up by 5% from the prior year reflecting a 4% increase in operating revenue and higher fuel services revenue.

Operating revenue, which excludes FMS fuel and all sub-contracted transportation revenue, increased due to higher commercial rental, and supply chain solutions revenue, partially offset by lower full service lease revenue.

On page five in Fleet Management, total revenue increased 5% versus the prior year, total FMS revenue includes a 10% increase in fuel services revenue reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes fuel, increased by 4% due to higher commercial rental revenue.

Contractual revenue which includes full service lease and contract maintenance was down 2%, due to fewer contracted units in the fleet as compared to the prior year. Commercial rental revenue was up by 31%. Rental revenue benefited from improving global demand, higher pricing, and an increase in the fleet size.

Net before tax earnings and Fleet Management were up by 55%. Fleet Management earnings as a percent of operating revenue increased by 220 basis points to 6.8%. 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 higher maintenance costs on an older leased fleet, fewer vehicles in the lease fleet, increased compensation expense, and investments in sales and information technology initiatives.

Turning to Supply Chain Solutions segment on page six, total revenue was up 8% and operating revenue grew by 4% due to increased volumes and new business in the high-tech and automotive sectors. SCS net before tax earnings were up by 5%. Supply Chain's net before tax earnings as a percent of operating revenue increased by 10 basis points to 4.8%.

Higher SCS earnings resulted from improved operating results, particularly in the high-tech sector, partially offset by increased compensation and pension costs. In dedicated contract carriage, total revenue was up by 2%, operating revenue was up by 5% reflecting higher fuel cost pass-throughs in new business.

DCC's net before tax earnings decreased by 6%, while earnings as a percent of operating revenue were down by 60 basis points to 5.5%, reflecting higher driver costs.

Page seven highlights key financial statistics for the fourth quarter. I already discussed our quarterly revenue results so let me start with EPS. Comparable EPS from continuing operations were $0.65 in the current quarter, up by $0.24 or 59% from $0.41 in the prior year.

Including discontinued operations, earnings per share for the quarter were $0.72, up $0.57 or 380%, from $0.15 last year. The average number of diluted shares outstanding for the quarter declined by 3.2 million shares to 51 million. During the fourth quarter, we completed $100 million share repurchase program, purchasing approximately 565,000 shares, at an average price of $44.01 per share. We also purchased approximately 145,000 shares at an average price of $43.88 under the separate 2 million share anti-dilutive program during the fourth quarter.

This program remains active with a little over 1.4 million shares available under the program at year end. As of December 31st, there were 51.2 million shares outstanding of which 51 million are currently included in the diluted share calculation.

The fourth quarter 2010 tax rate was 16.4%. Tax rate was below a normalized rate due to the favorable settlement of prior tax years, as well as an expired statute of limitations. The fourth quarter 2009 tax rate was 25.6% reflecting income tax rate changes in Canada. These tax benefits were excluded from our comparable EPS in each year.

Page eight highlights key financial statistics for the full year. Operating revenue was up by 2%. Comparable EPS from continuing operations were $2.22, up 31% from $1.70 in the prior year. Including discontinued operations, earnings per share were $2 .25, up 103% from $1.11 in the prior year. Adjusted return on capital was 4.8%, up from 4.1% in the prior year. This increase represents a turn-around from negative ROC comparisons we saw earlier in 2010.

I would like to now turn to page nine to discuss some of the key trends we saw during the fourth quarter in each of the business segments. Some of the key statistics I'll discuss here are also included in a key performance indicators page in the earnings press release tables.

In Fleet Management Solutions, full service lease revenue declined 2%. The average lease fleet was 4% smaller from the prior year's fourth quarter, but only down 1% sequentially from the third quarter 2010. Contract maintenance revenue decreased 5%, reflecting a reduction in the average fleet count of 3% versus the prior year, but only down 1% sequentially from the third quarter.

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 contractual product line. Following declines in 2008 and 2009, miles driven per vehicle per day on US lease power units increased over the prior year for the fourth consecutive quarter. Miles per unit were up by 4%, versus the fourth quarter 2009.

Commercial rental revenue was up very strongly by 31% from the prior year on a 9% larger average fleet. We are seeing benefits from improved demand and greater usage of rental trucks due in part to the higher cost of new vehicles. Given these factors, 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 77.9%, up 550 basis points from the 72.4% last year. Global pricing on power units was up 10%, accelerating from the 8% increase we saw in the third quarter. In Fleet Management, we also saw stronger used vehicle results during the quarter reflecting an improved environment. I will discuss those results separately in a few minutes.

The trend of higher maintenance costs on our older lease fleet continued during the fourth quarter. Since customers have been replacing lease units at a lower than normal rate, the fleets become relatively older during the year. I

In Supply Chain Solutions, operating revenue was up by 4% in the quarter. We had some nice new sales wins, and we also benefited from higher volumes, particularly with some of our automotive and high-tech customers.

Please note in our segment reporting in the appendix, that we've gone to a global reporting format for Supply Chain. Our results are now presented globally for our four key industry verticals, Automotive, High-tech, Retail CPG, and Industrial and Other.

In Dedicated Contract Carriage, operating revenue grew 5%, due to higher fuel cost pass-throughs and new business. DCC's net before tax earnings were down by $400,000 due to higher driver costs of approximately that same amount in the quarter. We've seen more driver job openings and longer hiring lead times which resulted in more costly use of temporary outside drivers. We focused on addressing this issue, and the number of open driver positions declined throughout the quarter.

Page 10 highlights our full-year results by business segment. In the interest of time, I won't review these results in detail but just highlight the bottom line results. Comparable full year earnings from continuing operations were $117 million, up by 24%, from $94.6 million in the prior year. Net earnings, including discontinued operations, were $118.2 million, up by 91%, from $61.9 million last year. At this point, I will turn the call over to our Chief Financial Officer, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Greg. Turning to page 11, full year gross capital expenditures totaled almost $1.1 billion, which is up $476 million from the prior year, and in line with our initial forecast. Full year spending on lease vehicles increased $99 million from the prior year, reflecting improvements in both new lease sales and lease renewals, as well as higher per vehicle investment costs.

Capital spending on commercial rental vehicles was $379 million, due to refreshment and growth of the rental fleet. This was an increase of $371 million over the prior year, since in 2009 we spent very little capital on rental vehicles due to the weak economy.

We realize proceeds primarily from sales of revenue earning equipment of $235 million, that's up $19 million from the prior year. The increase reflects higher used vehicle pricing, partially offset by fewer units sold. Including proceeds from sales, full year net capital expenditures increased by $457 million, to $853 million.

We also spent $212 million on acquisitions, primarily for the purchase of Total Logistic Control on December 31. As additional information on this deal, we paid eight to nine times EBITDA for TLC. So we are very comfortable with the price paid for this strategic and accretive acquisition.

Turning to the next page, we generated full year cash from operating activities of about $1 billion. That's up $43 million from the prior year. Depreciation decreased $47 million in 2010, due to a smaller fleet as well as lower adjustments in the carrying values of used vehicles. These items more than offset higher depreciation costs per vehicle, resulting from higher average vehicle investments, lower residual values and accelerated depreciation rates on certain vehicles.

Including the impact of used vehicle sales, we generated over $1.3 billion of total cash for the year. That's up $62 million from the prior year. Cash payments for capital expenditures increased about $400 million, to $1.1 billion, reflecting increased vehicle purchases, and the timing of vehicles received from OEMs.

We generated $258 million of positive free cash flow for the year, and this is right in line with our initial forecast. Free cash flow was down $356 million, from the prior year's record free cash flow due primarily to higher capital spending on vehicles.

On page 13, total obligations of approximately $2.8 billion, are up $230 million, as compared to year end 2009. The increased debt level is largely due to higher vehicle capital spending, and the closure of the TLC acquisition on December 31. Balance sheet debt to equity was 196%, as compared to 175% at the end of the prior year. Total obligations as a percent to equity at the end of the quarter were 203%, versus 183% at the end of 2009, and below our target range of 250% to 300%.

Our equity balance at the end of the quarter was approximately $1.4 billion, that's down $23 million versus year end 2009. The equity decline was driven by net share repurchases of $123 million, and dividends of $54 million, partially offset by earnings of $118 million, and currency translation adjustments. At this point, I will hand the call back over to Greg to provide a asset management update.

Thanks, Art. On page 15, we summarized key results for asset management area globally. At the end of the quarter, our global used vehicle inventory for sale was 5,200 vehicles, down by 1,700 units from the fourth quarter 2009. The used vehicle inventory is up 500 units sequentially from the end of the third quarter 2010, but still below our target level. We sold 4,000 vehicles during the quarter, 23% fewer than the prior year, due to our smaller inventory available for sale.

We saw continued strength in used vehicle demand and pricing in the fourth quarter. Improved demand is a result of relatively better market conditions and the desire of some truck buyers to obtain pre-2010 engines. Stronger demand, combined with less available inventory in the market, has allowed us to up-price generally and to increase the proportion of retail sales where we realize better prices.

Compared to the fourth quarter 2009, proceeds per vehicle were up 39% on tractors, and 56% up on trucks. From a sequential standpoint, tractor pricing was up 13%, and truck pricing up 4% versus the third quarter 2010. At the end of the quarter approximately 7,200 vehicles were classified as no longer earning revenue. This was down by 2,600 units or 27% from the prior year. The decrease 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. The number of these lease extensions in the US for the full year was up by approximately 1,500 units, or 20% 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 anticipate strong continued lease extension activity, particularly due to the increased cost of the new 2010 engines.

Early terminations of leased vehicles declined by almost 2,500 units, and were at the lowest level in at least five years. This is a very positive indicator of improved lease demand. Our average global commercial rental fleet during the fourth quarter was up by 9%, from the prior year period.

Let me move now in to a discussion of our 2011 outlook. Pages 17 and 18 highlight some of the key assumptions in the development of the 2011 earnings forecast that I'll review shortly. Our 2011 plan anticipates a moderately stronger overall economic and freight environment.

We assume that the overall interest rate environment will remain stable, however Ryder's average interest rate will decline due to the maturity and roll over of higher rate debt. We forecast foreign exchange rates to be stable. If the US dollar were to be stronger than we forecast, there would be a negative impact primarily on reported revenue but it generally would not materially impact earnings.

In the Fleet Management area, we expect stronger new contractual sales and improving customer retention levels. This should lead to organic growth in the lease and contract maintenance lease beginning in the second half of this year. We have a somewhat higher than normal proportion of leases expiring this year, due to our strong sales years back in 2005 and 2006. Therefore our focus on good customer retention is important this year.

Closing the Scully and Carmenita acquisitions in January should help us realize a small increase in the total contracted fleet in first half of the year, and will benefit earnings mainly in the second half. In addition, we expect to see continued modest growth and miles driven per unit on our lease fleet.

In Commercial Rental, we anticipate higher rental demand and continued strong utilization with further pricing improvement during the year on a larger fleet. In the used vehicle area, we expect that the number of vehicles sold will increase due to higher lease replacement activity this year. We anticipate pricing to continue to improve due to a modestly better economy, and the desire of some buyers to avoid the more expensive new engines.

Turning to page 18 in Supply Chain and Dedicated, we expect revenue and earnings growth due to both organic new sales and recent acquisitions. We also anticipate higher volumes in several industry verticals we serve in Supply Chain. In Dedicated, we expect higher costs due to increased driver wages and equipment costs. We anticipate offsetting these cost increases however through rate increases and productivity improvement.

Page 19 provides a summary of some of the key financial statistics in our 2011 forecast. Based on the assumptions I just outlined, we expect operating revenue to grow by 11% to 12% this year. Comparable earnings from continuing operations are forecast to increase by 23% to 27%, showing strong operating leverage on our revenue growth. Comparable earnings per share are expected to increase by 26% to 30%, to a range of $2.80, to $2.90 in 2011, as compared to our $2.22 in the prior year.

Our average diluted share count is forecast to decline by 1.1 million, to 50.8 million shares outstanding. The share count decline results from the share repurchases made during 2010, under the recently completed $100 million program.

We project a 2011 comparable tax rate of 38.6%, largely in line with the prior year. Our return on capital is forecast to increase from 4.8% in 2010, to 5.2% this year, driven by higher projected earnings. Please note that we've included a page in the appendix on page 27, which shows our cost of capital versus our return on capital over a multi-year period. These comparisons were negatively impacted in the past couple of years by the severity of the recession, but we are starting to narrow the gap.

Next page, 20, outlines our revenue expectations by business segment. In Fleet Management, contractual revenue and lease and contract maintenance is forecasted to be up by 2%. This largely reflects the impact of acquisitions, higher rates on new sales resulting from increased vehicle investment costs and CPI rate increases.

In Commercial Rental we are forecasting revenue growth of 19%. This is driven by a modestly improved economic environment, and demand from customers who are delaying purchases of the more expensive new engine technology for their own private fleets.

Supply Chain operating revenue is expected to grow by 29%. Driven by the acquisition of TLC, organic sales, and volume improvements. Dedicated operating revenue is forecast to be up by 12%. This forecast reflects Dedicated revenue from the Scully acquisition and to a lesser extent, organic new sales.

Page 21, provides a water fall chart outlining the key changes in our comparable EPS forecast from 2010 to 2011. We continue to face head winds from the impact of fleet downsizing by our lease and contract maintenance customers over the past several years. While the rate of decline has slowed and we anticipate the fleet to start growing organically by mid year, the fleet is now older by eight months compared to last year, this means our maintenance costs are up.

While we are implementing significant initiatives to address this, we still expect the older fleet to negatively impact FMS contractual earnings by $0.28 to $0.32 per share. We plan to make several strategic investments to support the long-term growth and profitability of our business. These investments mainly fall in to the areas of enhancing the maintenance technology and processes in our shops, and in sales and marketing. These strategic investments are expected to cost $0.20 this year.

In 2010, we partially restored some compensation that was eliminated or lowered during the recession. This year we expect to restore the remaining portion of compensation to return to more normalized levels, and this will negatively impact EPS by $0.11. We expect improvements in numerous areas to more than offset these head winds. We will benefit by $0.06 from the share repurchases we made during 2010. As is our normal forecasting approach we are not factoring in any potential new share repurchases into our forecast.

The three acquisitions we recently closed are expected to add $0.15 to $0.17 to EPS this year. This benefit is already net of the negative impact from the amortization of intangibles. We have the balance sheet capacity to complete additional accretive acquisitions, and continue to look for appropriate opportunities as a supplement to organic growth. Again, as is our normal forecasting approach, we are not factoring in any potential new acquisitions into this forecast.

In 2010 we expect a net $0.11 benefit from our pension plans driven largely by the increase in asset values in our plans, all of which are frozen. As a reminder back in 2009, we had a negative year-over-year impact of $0.75 per share from our pension plans. In 2010 and 2011, we will see a combined $0.40 benefit, so we are recovering some, but not all, of the 2009 expense increase.

We expect improved results in Supply Chain and Dedicated totaling $0.16 due to new sales, improved volumes, and productivity initiatives partially offset by higher driver and vehicle costs in DCC. In FMS, stronger used vehicle prices as well as increase in the number of used trucks sold, will benefit our results through lower depreciation expense and higher gains on sale. As we do at least annually, we reviewed and modified our residual value estimates to reflect the impact of recently higher used vehicle prices. Combined benefit from lower depreciation and improved use vehicle sales is expected to be $0.10.

Finally, a larger commercial rental fleet and higher pricing is forecast to improve EPS by $0.63 to $0.67 for the year. In total, these items are expected to result in comparable EPS of $2.80 to $2.90 in 2011. I will turn it over to Art now to cover capital spending and cash flow.

Okay. Turning to page 22, we are forecasting gross capital spending in a range of $1.7 billion to $1.8 billion. That's up approximately $600 million to $725 million, from 2010. Lease capital is projected to increase by $350 million to $475 million.

Approximately $70 million of this increase is a result of higher purchase cost per vehicle. Of course we expect to earn an appropriate return on this up front capital investment over the contracted lease term. The remainder of the increase largely stems from a higher than normal replacement cycle, and improving retention rates on expiring leases this year. Since this capital spending is spread throughout year, a significant portion of this increased investment will benefit revenue and earnings primarily in 2012.

We plan to spend $575 million on commercial rental vehicles. As a reminder, in 2009, we spent virtually no capital on rental trucks. So part of the higher rental capital in 2010 and 2011 is making up for deferred fleet replacement. Of the total spend, we plan to invest approximately $200 million to grow the rental fleet by 10% this year.

Lastly the higher cost of new engine technology will require an additional $50 million for rental, and again we expect to realize an appropriate return on this capital cost increase over the life of the trucks. As always, please note that the split of capital between lease and rental could be revised during the year based upon movement of trucks between product lines.

Proceeds from sales of primarily revenue earning equipment, are forecast to improve by $45 million, to $280 million. Reflecting higher prices, and an increase in the number of used vehicles sold. As a result, net capital expenditures are forecast at roughly $1.4 billion to $1.5 billion, that's up approximately $560 million to $680 million from the prior year.

Free cash flow forecast at negative $240 million to $290 million, due to higher capital expenditures. This reflects the vehicle replacement cycle, and our up front investment in a greater number of vehicles purchased, as well as higher investment costs per vehicle. Which again, should lead to revenue and earnings improvements in future years. Based on these projections total obligations to equity are forecast at 202% to 212%, including the recently completed acquisitions of Scully and Carmenita.

This forecast leverage is flat-to-up from 203%, at the prior year end, and well below our target leverage of 250% to 300%. As we communicated before, at this leverage we have capacity to support additional organic growth, acquisitions, and/or share repurchases over time. At this point let me turn the call back over to Greg to review our EPS forecast.

Going on to page 23, as I previously outlined in the water fall chart, our full year 2011 EPS forecast is for a range of $2.80 to $2.90, up $0.58 to $0.68 from a comparable $2.22 in the prior year. We are also providing a first quarter EPS forecast of $0.40 to $0.44 per share, versus a comparable prior year EPS of $0.24. This represents first quarter EPS growth of $0.16 to $0.20, or 67% to 83% improvement.

Turning to page 24, in closing, let me briefly summarize the key points in our 2011 plan. We are working to manage through the cumulative impacts of the prolonged freight recession on our lease business, which has resulted in the aging of our lease fleet. We expect improved new sales and renewal levels as the economy modestly improves and as we execute on our sales and marketing initiatives.

Over time, we expect lease sales to benefit from pent up demands for private fleet replacement and growth, more expensive and complex engine technology, and more limited credited availability for private fleets. We expect continuing significant benefits from improved demand in our commercial rental and used vehicle businesses. We managed these assets very well during the recession, and anticipate leveraging their return to more normalized level this year.

We expect much stronger growth rates in Supply Chain and Dedicated, due to improved organic sales, acquisitions and improving volumes. We are very focused on implementing cost management and productivity initiatives to address cost pressures, especially due to higher maintenance and driver related expenses.

Finally, we are making both capital investments in vehicles and P&L investments in strategic initiatives which we expect to propel additional revenue and earnings growth in future years.

That does conclude our prepared remarks this morning, and we will move on to questions and answers. Due to the expected number of callers to queue up, I will ask that you limit yourself to two questions each. If you do have additional questions, you are welcome to get back in the queue and we will take as many calls as we can. At this time, I will turn it over to the operator to open up the line for questions.

Thank you. (Operator Instructions)As a reminder, if you are using a headset or speakerphone, please pick up your hand set before asking your question. Our first question today is from John Barnes with RBC Capital Markets. Your line is now open.

Yes, thank you, good morning, guys. Couple of quick ones here, could you talk a little bit about what percentage of your leases, your lease business, is up for renewal in 2011and 2012, and is it more than you would normally see?

Yes, they will be up more because of the heavy sales in 2005 and 2006 and I will ask Robert Sanchez to give you more precise answer.

Yes, as we always say, on any given year there is 15% to 20% of fleet that is up for renewal. What we are expecting in 2011 and 2012 is on the high end of that. To be about 20% in 2011, and 20% in 2012.

Very good. And then, Greg, can you just talk a little bit about when do you think your CapEx catches you up enough that you can -- the fleet age starts to trend down and you can get ahead of these rising maintenance costs?

Well, since it's an accumulative factor that grows slowly over time, you have the same recovery slowly over time. So, I would say if it took a couple of years to cause the maintenance cost to go up on an aging fleet, it will take another couple of years to get the average fleet age down. So, about the same time for improvement as on the down turn.

All right. Thanks for your time, guys.

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

Good morning, gentlemen.

Good morning.

Question about the TLC acquisition. I saw that Peter Westermann and his team came over, and it said that Peter was assuming the same role, I guess heading up the Consumer Packaged Good sector of -- or segment of your SCS operation. Are you folding other customers and business in under him so he is running a bigger unit? Were there any technologies that TLC had that are either improving Ryder SCS operations, or are Ryder SCS technologies improving TLC's operations.

Yes, I will let John Williford talk about that organization design in TLC and CPG.

Yes, right now the focus is to bring this unit on, as you mentioned, to become our CPG vertical industry group. And at first we are going to be focused on bringing the other strengths we have to that industry group so we can grow it. So, we think we add more geographic presence, stronger TM and DCC products, and more resources in engineering and continuous improvement.

So, we are putting all those things in to the old TLC as our CPG industry group, so we can organically grow that industry group faster than it was growing on its own. We have some CPG business, it's not a lot, you can see it reported in our Retail/CPG industry group and eventually probably some of that will move over, but that's not our priority right now.

Okay, and then one follow up on the technology and sales initiatives that you mentioned investing for the future, FMS technology sounded like mostly for maintenance. Can you talk about the sales initiative going on?

Sure, Robert?

Yes David, one of the key initiative there is we are spending some money on some of our front -- customer facing technology in terms of being able the communicate through the web and being able to have more interaction with customers. It's going to take us a few months to really get that going, but we are spending some money there. We are also investing in adding additional some sales people to the organization, which I think is important as we get in to the next couple of years where we expect to have more activity around replacement, and also more activity around growth.

Excellent. Thank you very much.

You are welcome.

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

Good morning. On the commercial rental side, I understand the cost of the assets are going up, but your revenue per unit is approaching an all time high, not adjusting for mix. I guess I'm curious as you think about that fleet, are you interested in growing it meaningfully further -- you talked about the 10% this year. But how do you think about it over the course of the cycle, knowing that this is the most cyclical part of the business?

Yes, I think the term I would like to use is we would like to grow it appropriately, based on what we are experiencing in the marketplace. So, we put this first stake in the ground, based on what we see, that's the anticipated size. Depending on customer confidence, strength in the economy ,and the willingness to have enough confidence in their own business they might be spending more on lease, that could shift a little bit.

But that's our best guess on what we think appropriately seems to make sense. And you are right, we are approaching the higher side. But as long as customers are more willing to pay a premium, without having to make longer term commitments, and until maybe they got more confidence in their business and the economy, then that's the way this is playing out for a while.

Then how do you think about the lease product. We live in more uncertain times today, than we have in the past. Customers willingness to sign up for five or six year type contracts may have permanently taken a hit. So is there anything in the lease product you can do, or the structure of the product you can do, to maybe make that less onerous to the customer in terms of having to commit over a long duration?

Yes. We don't think that in the long-term any of the fundamental value proposition changes or is harmed. But, I think in a period of uncertainty, customers make decisions more cautiously. The fact is that I think that the team, especially in Sales and Marketing in conjunction with Finance and Returns, have thought about additional options and flexibility for used equipment that give customers more options than they have in the past.

We are very much open to innovation in that area, as well as innovation for enabling customers to take advantage of maintenance if they would like. So, our mind set and our approach is to try to be appropriately creative, yet in the context of wanting to make sure we always get the right return on the capital. One of things Robert mentioned earlier about our desires for interfacing with customers, is stay close to them and give them what they need right now in this still somewhat tenuous environment.

Great. Thank you.

You are welcome.

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

Good morning, guys.

Good Morning.

Can we get -- if you go slide 20 where you breakout the revenue by segment, can you talk a little bit to when you combine the acquisitions and we look to a portion in our model going forward, where the revenue is pre-tax is going to fallout among the divisions?

We can probably give you a fairly good idea on the revenue. Of the amounts you see there for total operating revenue in FMS, about 1% of the total operating comes from acquisitions. So, about half of the contractual, a very tiny piece of the rental, and about one fifth of the total operating.

In SCS, about 22 of the 29, maybe about five to six percentage points comes from organic growth, the rest comes largely comes from acquisition and DCC. The vast proportion comes from acquisition and a little bit from organic growth. Now, for modeling, think I you can make some estimates about flow-through, but that will give you an idea of what drives the revenue, if that would be helpful.

That is. And just directionally on the pre-tax, because in your flowchart on the next page you've got $0.15 to $0.17. If you add a point to it, say where the bulk of that $0.15 or $0.17 coming from, where should we look at that.

You could roughly say -- you could probably do about a 50% to 50% split. Now, as it plays out you, might say 40% to 60% from one side or the other, but for ballpark purposes about half in each segment.

So half in FMS, and half then combined Supply Chain and Dedicated?

Yes.

Okay.

Art, do you want the clarify anything there?

Yes, I think in total, some of it will depend on the way we handle the interest allocation across the segment. Some of the interest costs -- a higher proportion will appear in the FMS side. So, if you look at the deals including all in with the financing element, it's to what Greg said, the 50% to 50% split approximately.

Okay, and then one more I will get back on line. When you think about cash, using the cash for the business this year, and CapEx going up, and the acquisitions you made at the end of the year, what do we think in terms of what's the intention for share buy backs, further acquisitions, and leveraging the balance sheet further?

Yes. Well the right target for the model of our Company is get the leverage right and to keep moving towards that. I think first call will be on how do things look for additional acquisitions. Clearly, as you indicated, we are having to step up capital expenditures, so that's a part of it. If we have acquisition, good continuous accretive acquisition opportunities, that's what we want to go for.

We think that's good for long-term growth and share and development of the organization for our owners. If those should not play out, then we reevaluate and decide do you want to do something with share repurchase. But it would be too early in the year to conclude that yet.

So, the authority that's still out there on the share repurchase, we shouldn't assume you are going to do that all this year, or we should.

Well, the only authority that's still open is the anti-dilutive. So, we will always do the anti-dilutive that offsets employee share purchase plan, and any options exercises. I'm talking about a new -- like the 100 million one that we just finished that would actually impact the leverage.

Okay. Thanks, that's real helpful. I will get back on line.

You are welcome.

Thank you. Our next question is from Jeff Kauffman with Sterne, Agee. Your line is now open.

Thank you very much. Congratulations on a solid year. Real quick questions. First of all regarding free cash, since you are going to be in a deficit situation this year. I notice your share guidance was based on just the current plan. Is this basically saying until you get back to a positive free cash situation, you wouldn't use leverage to install a new share repurchase plan, you want that for acquisitions, or is that just you are not making assumptions about share repurchase.

We are not making assumptions yet. We really want to see how additional potential acquisition opportunities play out. The state of positive, or slightly negative free cash flow will play a secondary element. But the issue is to get the right leverage for our model. I mean, that's important as we try to get the right amount of the right quantity of cost of capital versus return on capital, that's significant. But at this point, first priority is to assess additional good accretive acquisitions, and then we will make the call on any share repurchase as appropriate.

Okay, Thank you. Last question. You mentioned the large number of full service lease renewals and this has to do with the '05, '06 coming off. When you talk about the negative impact in terms of next year's earnings, is that more based on the idea that there is a certain amount of that business that doesn't renew, or is that based on the idea that maybe the spread at which that business was signed in '05 and '06 is going to be a little bit different as you resign it today?

No, actually neither. The bar chart on that waterfall that shows the $0.28 to $0.32, is really largely proportionately from the fact that the fleet is on average eight months older. And therefore has heavier cost to it. That is, I think really the way you want to interpret that, and Robert if you want to add anything please.

Yes, the only think I'd add to that is, as you know Jeff, there is a lag between when we signed the business, and the units actually start to come in and really impact the P&L. And as a lot of what we are expecting is towards the second half of the year, you don't see the benefit of that until 2012 in this case. And that's why you are still seeing some of that lag. As Greg mentioned, getting the fleet age back in line with where we would like it to be is probably going to be a couple year endeavor.

Okay guys, congratulations and thank you.

Thank you.

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

Good morning everybody.

Good morning.

Just real quick. Just a couple of questions here. I noticed in the slides on the CapEx guidance side you had mentioned in the footnote that you have an assumption of $99 million spent on acquisitions this year. Can we assume a portion was for the Scully companies, or all of that, or --

Yes. Yes. That would be our estimate for both those acquisitions, Carmenita and Scully combined.

Okay, so that has no further acquisition assumption built in for the year?

Yes, correct.

Correct.

But, that's not the say that couldn't change if the right opportunity came up?

Exactly.

Okay. Secondarily, looking at the waterfall chart, the biggest drag as you mentioned, Greg, is the full service lease business and the biggest tail wind is the commercial rental business. As you move forward and you sign new customers to full service leases, is there a way to think about how those two segments impact the income statement? Is there a way that -- is, as the FMS gets better, commercial rental goes down, or do you think both of those can down be positive contributors to the overall business?

They will sure be positive contributors. If you are asking for future waterfall charts, what that might look like, they would over the multi-year period inversely move opposite. So, the size of the positive on the commercial rentals will get smaller, but the lease will turn from negative to positive. So I think you've got a net gain over time, and that's kind of what we would expect to happen.

Okay. Thank you.That's very helpful, thanks for your time.

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

Hey, Thanks. Good morning, guys. If I listen to your comments regarding the core lease business, it sounds like there are going to be a greater number of overall renewals going forward which is a good thing. Yet, the fleet has aged and it sounds like a decent portion of our CapEx is going to go to, I guess, refreshing versus growth. If I add those two components together it would sound like the fleet -- the overall fleet -- and you may have already alluded to it -- the over all fleet in '11 is going to be smaller versus '10. I was just wondering if you guys wanted to provide some guidance in terms of the size of the fleet in '11 versus '10.

First point, the capital is there representing both refreshing or replacing existing units, and some growth. I believe the actual expectation is that the 2011 fleet size by the end of the year, will be higher than the end of the fleet size in 2010. And Robert, if you have specifics you can share those.

Yes I think, Matt, I think the what Greg said right now is right on. We are expecting to be slightly higher at the end of 2011 versus the end of 2010. Now granted, that includes the acquisition. So, if you were to draw out what we expect the year to look like, we expect the fleet to continue to do what it did in the fourth quarter, which is maybe slightly down, kind of bumping along the bottom through about the middle of the year. And then begin to pick up more towards the second half of the year and then end up slightly up at the second half of the year.

It sounds similar to your thoughts on the fleet I think when you hosted your third quarter earnings call.

That's correct.

And again you need to strip out the acquisitions from the total fleet count, I mean if you strip out the acquisitions, does that mean you are going to be organically, if you will, flattish or up a little.

That's correct. Organically flattish if you strip out the acquisition. Flattish, end-point to end-point, knowing that it actually dipped down a little bit towards the middle of the year.

Okay. Understood. And my last question, you quoted that miles unleased equipment up 4% year-over-year. Yet the fleet is smaller if you will, is that adjusted for a smaller fleet size?

Yes. That is. Based on the fleet size that we have at that point.

Okay. So, it's apples-to-apples is the comparison number.

It is. It's per unit. If you look at what happened throughout the year, in the first quarter we were up 1%, in the second quarter up 4%, third quarter up 3%, now fourth quarter up 4% again. So, we ended the fourth quarter pretty strong in terms of year-over-year comps. Even throughout the quarter we saw miles per unit grow in the fourth quarter. So, I think that was a positive trend that we saw in the fourth.

And that calculation always does a per unit by power unit.

Okay. So there is -- the overall adjustment for the total size of the fleet and any change in the fleet count.

Right.

Okay. Sounds good, thank you.

You're welcome.

Thank you. Our next question is from George Pickral with Stephens.Your line is now open.

Hey, Good morning, guys.

Good morning.

I just want the make sure on the lease renewals in 2011 that 20% of the fleet that's renewing, do you think everyone renews the same amount of trucks are we going to see this continued trend where the client might reduce fleet size by one to two trucks given the --.

Robert --

Well, George I think we are going to continue to see a little bit of that. Certainly, just from what we've seen in the last few quarters, we are seeing less of it than we saw at the beginning of 2010. So, we expect that trend to continue where you'll see more and more units being replaced versus down-sized. And we expect year-over-year retention to improve as a result of that because certainly customers will want to renew their fleets at a higher clip than what they were last year.

Got you. So then the follow-up question would be on the utilization. When do we reach that tipping point for the increase in miles per tractor per day, where people need to start either releasing the same amount of trucks, or growing the number of trucks they lease.

Yes, as I mention we expect that to really begin to show in the second half of the year. But it's not a perfect science, because it's not only a matter of how many miles per unit they are running, but what their confidence is in the sustainability of the business they are seeing. And that's kind of the unknown, that's the one that makes it a little bit more difficult to understand when that happens. But we are still, just to put it in perspective, we are still about 3% off the peak miles per unit that we've seen historically. So, there is still some more room for that miles per unit to go up.

Customers clearly are still giving them themselves a cushion. I mean when you look at the strength of rental demand, price, and utilization, clearly a lot of those, the majority of those are probably lease customers who are taking advantage of the rental capacity. So it won't be just an isolated miles per power unit of the existing fleet, they are also drawing on capacity from the commercial rental fleet.

Right. Right. Thanks for the time.

Sure.

Thank you. Our next question is from Peter Nesvold with Jefferies.Your line is now open.

Good morning.

Good morning.

When I look at the waterfall slide, in slide 21, the commercial rental number does really jump out a lot at me. What I was hoping to understands better, commercial rental is 11% of revenue, and I think you said you are growing the fleet 10%. But, if I look just at that one item, that's all your earnings growth for this year. And that alone is driving earnings up about 30% higher.

So, intuitively, it seems like you are trying to raise pricing in that business in order to stimulate more contractual lease demand, push people over to that side of the table.But, it's still a fairly fragmented market. So, what I want to understand is how do you guard yourself against pricing yourself out of this market, or am I looking at it differently. Another way of maybe asking the same question is how you get 30% earnings growth that's from something that's only 10% a year revenue base?

Well, historically as you might expect, you get a lot of bottom line pull through proportionally for every dollar of revenue. And that's always the case. And on the way down, it pulls it down that way and on the way up, you get the same advantage. This is not different than what happened in 2010. This is the first sign of a recovering economy, and customers move to the product because they got additional capacity even if they're uncertain about it in the long-term.

The assumption that we only move the prices up to try to move people towards lease wouldn't be totally true. The reality is that we would never want to price ourselves out of the market. We not only manage the asset centrally, but we are in tune to every rental desk in the country about supply and demand by every vehicle class. And when the lots are empty, you just basically are doing supply and demand and those prices move up to allocate the resources. So that really has as much or more to do with it than anything. And that's what we are really attune to on a daily basis on what goes on in those rental counters and the lots. Okay. And as my follow up, you mentioned earlier in the call that your average cost of funds will decline as you are rolling over your debt structure. I don't see that on the waterfall chart. Is there a way of quantifying what the lower average expense will contribute to EPS growth this year?

I guess directionally we're looking at probably a 30 to 40 basis point drop in our effective rate.

Great.

Versus 2010. That's probably the easiest way to look at it.

Okay, Great, thank you.

Thank you. Our next question is from David Campbell with Thompson Davis & Company. Your line is now open.

Yes. Thank you. Can you estimate what your gains from equipment sales maybe this year, what your depreciation might be and your interest expense?

Okay. Art. I will let you dig in to that a bit. We are making, on the waterfall, one estimate about both gains and lower depreciation about $0.10, but I will let Art give you a little bit more detail.

Okay, you want to talk gains first. I mean directionally we expect gains to be up from the 2010 levels and that's a function of, we see increased volume as well as improved pricing. Around depreciation, to Greg's point, we talked about there is a slight benefit we are getting from our annual depreciation evaluation we did, in that we are increasing residuals which does benefit us. I think the way to focus around depreciation is that with the amount of CapEx we talked about, you will see depreciation growing in 2011 versus 2010 obviously.

And then finally, on interest, covered a little bit of it in that we expect a lower effective rate. You've got to keep in mind with the negative free cash flow for 2011 in the forecast, along with where we ended the year from a debt level, you should see interest moving up because of that. So you'll have higher debt levels, average debt levels in 2011 versus 2010. Partially offset by a lower affective rate.

Okay. And second question is, can you explain the fourth quarter increase in salaries and benefits compared to the third quarter, a quarter in which you had less revenues but higher jobs and expenses. Was that a reflection of maintenance expense?

There is a little bit, some of it is just overall compensation, medical costs were up sequentially. And then also, we talked about in the press release, we had a pension settlement charge that we took in Canada that was about a $1.5 million. So those are kind of the bigger items that drive it.

Okay. Thank you.

You're welcome.

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

Hi guys. Good afternoon.

Good afternoon.

Yes I guess one question I just want to go back to. The commercial rental and revenue per unit trend that you seen there recently obviously have improved pretty nicely the last couple of quarters. I just wanted to get a sense, I guess how sticky that is, the pricing within rental towards the back half of this year if you are assuming leasing demand potentially improving.

Well, I think the stickiness is a pure reflection of the supply and demand. So as long as there continues to be additional, as we anticipate, requirements for units and we can continue to sort of feather in and add in a number of units in those areas that need units, because right now we are running a bit short in many areas, as long as those trends continue and you've got still limited supply compared to the past and increasing demand, that's what will cause in your terms the stickiness on the price. It's a about what is going on in the reality of the marketplace. But we think that that's reasonable assumption for us in 2011.

Okay. Thanks, and then for my second question, you mentioned some maintenance initiatives on the leasing fleet in 2011. I'm not sure if you guys given additional detail on that or if I missed it, but just wanted to see if guys can maybe just elaborate on that a little bit.

Yes. Go ahead, Robert.

Sure. This is some we do each year and we always have a list of very tactical cost cutting and productivity improvement initiatives that our organization tackles each year. Things like making sure that we're -- that as much work as can be done in-house is done in-house versus sending out. That we are being as productive as we can with the labor that we have. And there is a series of those types of initiatives that we work on and we will be working on in 2011 to help offset some of this increase in maintenance cost.

If you were also asking about the strategic investments in maintenance, those have to do with technology and productivity initiatives that make the technician's job easier and more focused on the task at hand in working on the equipment, as opposed to slower or less accessible kind of information in order to get the job done. Those would be the kinds of maintenance strategic efforts technologically that we would be doing.

And Greg, on those strategic efforts, when do we start to see the benefit from that? Is that something that is more toward the end of the year, do you start to really see those initiatives come the fruition or is that more maybe a 2012 event?

I think that by the time you get things implemented across the network, people trained, you are looking at benefits more in to next year.

Okay. Thanks, thanks for the time.

Thank you. Our final question today is from Peter Nesvold with Jefferies.Your line is now open.

Great. Just a quick follow up. I don't know if this was asked earlier, if it was I apologize. Seasonally it looks like Q1 versus the full year is little bit lower than we normally would see. I'm trying understand -- I mean it's not a huge delta, but its there. I'm just curious, what color you might be able to offer about that.

Art?

I think, if anything, we have -- some of it's the integration of the acquisitions with Scully, predominantly there are some items in there that is impacting it. And also the TLC business is -- has some of that same seasonality that we seen in our rental business actually. So we have kind of added a chunk of that.

Okay.

I would also say that things are a bit uncertain. I mean we don't even have January results yet. So, it's based on our first forecast. If this call were one week later we might be able to adjust one way or another. But it's our best estimate. We also don't know, and we really never like to talk about weather, but this is brutal and unusual, we also don't know what that might cause. So we think that this is kind of like right down the middle of the fairway. Is a good increase over last year and we will see how it plays out.

Okay. Great, thank you.

You are welcome.

Thank you.I'm currently showing no further questions. I would like to turn the call over to Mr. Greg Swienton for closing comments.

Well, showing no further questions, we went just a few minutes long, but it was more to cover. I think we got everybody's questions in, so thank you for participating. So we are going to sign off and have a safe day.

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