萊德系統 (R) 2011 Q2 法說會逐字稿

Good morning and welcome to Ryder System Incorporated's second-quarter 2011 earnings release conference call.

All lines are in a listen-only mode until after the presentation. (Operator Instructions) Today's conference is being recorded. If you have any objections, please disconnect at this time.

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

Thanks very much. Good morning and welcome to Ryder's second-quarter 2011 earnings conference call.

I would like to remind you that during 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 the 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.

Thanks, Bob, and good morning, everyone. Today we will recap our second-quarter 2011 results; we will review the asset management area and discuss our current outlook for the business. After our initial remarks, we will open up the call for questions. So let me begin with the overview of our second-quarter results, and for those of you following on the PowerPoint we are on page four.

Net earnings per diluted share from continuing operations were $0.79 for the second quarter 2011, up from $0.58 in the prior-year period. The second quarter this year included a $0.10 charge from a tax law change in Michigan and a $0.03 charge for transaction costs related to our recent acquisition of Hill Hire in the UK.

Excluding these charges, comparable EPS was $0.92 in the second quarter 2011, up from $0.58 in the prior year. Second-quarter EPS was also above our forecast range of $0.72 to $0.77. The second-quarter outperformance was driven by better commercial rental and used vehicle sales results.

The Japan disaster impacted the quarter negatively by $0.02. However, this impact was less than our forecasted estimate of $0.04 to $0.05. The Hill Hire acquisition also contributed $0.02 to EPS in the quarter.

Total revenue grew 18% from the prior year. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, increased 15%. The growth in revenue reflects both the benefit of our recent acquisitions and organic revenue growth.

On page five, in Fleet Management total revenue grew 14% versus the prior year. Total FMS revenue includes a 29% increase in fuel services revenue, reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes the fuel, grew 10%, mainly due to higher commercial rental revenue and acquisitions.

Contractual revenue, which includes both full-service lease and contract maintenance, was up by 2%. Full-service lease revenue increased 3% while contract maintenance revenue declined 2%.

Commercial rental revenue grew 38%. Rental revenue benefited from improving global demand, higher pricing, and an increase in the fleet size. Net before tax earnings in Fleet Management were up 46%. Fleet Management earnings as a present of operating revenue increased by 220 basis points to 8.7% in second quarter.

FMS earnings were driven primarily by stronger commercial rental performance, improved used vehicle results, and the benefit of four FMS acquisitions closed in 2011. These improvements were partially offset by higher maintenance costs on an older fleet, increased compensation expense, and planned spending on growth initiatives.

Turning to the Supply Chain Solutions segment on page six, both total and operating revenues were up 26% due to the Total Logistic Control acquisition in December, higher volumes, and new business. SCS net before tax earnings were up by 37%. Supply Chain's net before tax earnings as a percent of operating revenue increased by 50 basis points to 5.5%.

Higher SCS earnings resulted from the TLC acquisition, higher volumes, new business, and favorable insurance claims development. These improvements were partially offset by impacts from the disasters in Japan.

In Dedicated Contract Carriage total revenue was up by 22% and operating revenue was up by 19%. This growth reflects the Scully acquisition and higher fuel cost pass-throughs. DCC's net before-tax earnings increased 16%. The earnings benefits from the Scully acquisition and lower insurance costs were partially offset by some lower operating performance.

DCC's earnings as a percent of operating revenue were down by 20 basis points to 6.9% due to the inclusion of fuel costs in the operating margin calculation for the dedicated segment. Excluding fuel costs, dedicated margins would be up by 30 basis points.

Page seven highlights key financial statistics for the second quarter. I already discussed our quarterly revenue results, so let me begin with EPS.

Again, comparable EPS from continuing operations were $0.92 in the current quarter, up by $0.34 or 59% from the $0.58 in the prior year. The average number of diluted shares outstanding for the quarter declined by 1.3 million shares to 51 million.

During the second quarter we purchased 570,000 shares at an average price of $52.43 under our 2 million share anti-dilutive program. This program remains active with 618,000 shares available at quarter end. As of June 30 there were 51.1 million shares outstanding, of which 51 million are currently included in the diluted share calculation.

The second-quarter 2011 tax rate was 45.5%. The tax rate was negatively impacted by a tax law change in Michigan which resulted in a $5.4 million catch-up charge related to prior periods. Excluding this item, the comparable tax rate would be 37.7% in the second quarter of 2011 versus 41.4% for the prior year. The decline in the comparable tax rate versus the prior year is due to a higher proportionate amount of earnings in lower tax jurisdictions and lower contingent tax accruals.

Page eight highlights key financial statistics for the year-to-date period. Operating revenue increased 15%. Comparable EPS from continuing operations were $1.43, improving by 74% from $0.82 in the prior year. Excluding the Michigan tax law change I discussed earlier, the comparable tax rate was 38.8% in 2011 versus 41.8% last year.

Adjusted return on capital, which is calculated on a rolling 12-month basis, was 5.3% versus 4.2% in the prior year as growth in earnings outpaced growth in capital. We are now forecasting full-year adjusted ROC of 5.6%, a 40 basis point improvement over our prior forecast.

I would like to turn now 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 grew 3%. The average lease fleet size grew 0.6% from the prior year's second quarter and was up 1.3% on a sequential basis versus the first quarter 2011 reflecting recent acquisitions.

We acquired 1,900 power units and 6,100 trailers in the lease product line as part of the Hill Hire acquisition that closed on June 8. Including these units acquired late in the quarter, the ending lease fleet was up 7% versus the second quarter last year and also up 7% sequentially from the first quarter 2011.

Financial returns on new lease contracts signed remain firm as we are passing along higher vehicle investment costs in lease rates. Miles driven per vehicle per day on US leased power units were unchanged from the prior year but seasonally increased by 3% from the first quarter this year.

Contract maintenance revenue declined 2%. This reflects a 2% reduction in the average fleet count versus the prior year; however, it's sequentially unchanged from the first quarter's fleet count.

We realized very strong growth in commercial rental revenue of 38% from the prior year. The average rental fleet increased 16% excluding acquisitions and was up by 19% including the 5,500 rental units acquired from Hill Hire late in the quarter. The Hill Hire rental fleet included 2,100 power units and 3,400 trailers. Even with the increase in the rental fleet size during the second quarter, global utilization on rental power units continued to improve and was at 78.7%, up 100 basis points from the 77.7% last year.

Global pricing on power units was up 11% this quarter. In Fleet Management we also saw stronger used vehicle results during the quarter, reflecting a continued strong demand environment. I will discuss those results separately in a few moments.

The trend of higher maintenance costs on our older lease fleet continued during the second quarter. Since customers replaced lease units at a slower than normal rate during the past couple of years, the fleet has aged and therefore our maintenance costs are up. As outlined in our business plan, we expect this trend to continue throughout the year.

In Supply Chain Solutions, operating revenue was up 26% in the quarter, primarily due to the TLC acquisition as well as higher volumes and across all industry sectors and new business. These benefits were partially offset by the impact from the natural disasters in Japan.

In Dedicated Contract Carriage operating revenue grew 19% due to the Scully acquisition and higher fuel cost pass-throughs. Earnings benefited from the acquisition and favorable insurance claims development, but were partially offset by lower operating performance. We have seen a reduced impact from driver wages which was more of an issue in the second half last year.

Overall, we have had fewer open driver positions both because driver availability has improved somewhat in the market and we have successfully implemented some internal initiatives in this area.

Page 10 highlights our year-to-date results by business segment. In the interest of time I won't review these results in full detail, but will just highlight the bottom-line results. Comparable year-to-date earnings from continuing operations were $74.2 million, up by 71% from $43.5 million in the prior 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 year-to-date gross capital expenditures totaled $880 million, which is up $250 million from the prior year. Spending on lease vehicles was up $25 million from the prior year, reflecting improved sales and higher investment costs on new vehicles. We expect lease capital spending comparisons to ramp up over the balance of the year.

Capital spending on commercial rental vehicles was $518 million, reflecting both refreshment and planned growth of the rental fleet. This was an increase of $224 million over the prior year.

Our total full-year capital spending forecast remains on track with previously expected levels. As compared to our original forecast, we anticipate some movement of reported lease capital into rental capital. This reflects our asset management strategy of using midlife rental trucks to fulfill new lease contracts.

The activity under this program will be at a somewhat higher rate than planned, and reported rental capital will reflect the new trucks we are ordering to backfill the vehicles used for lease sales.

We realized proceeds primarily from sales of revenue earning equipment of $143 million; that is up $39 million from the prior year. The increase reflects higher used vehicle pricing partially offset by fewer units sold.

Including proceeds from sales, net capital expenditures increased by $211 million to $737 million. We also spent $349 million year to date on acquisitions primarily related to purchases of Hill Hire and Scully. We expect acquisition holdbacks of $16 million on these deals to be paid later this year.

We closed the acquisition of Hill Hire in the UK on June 8. We paid approximately $252 million for this deal, which added around $147 million in annual revenue and expands our fleet offering in the heavy-duty fleet market. This transaction has nice synergies for us and we anticipate good earnings accretion as Greg will comment on later. We are also pleased with the pricing on this transaction which resulted in no goodwill recorded for Ryder.

Turning to the next page, we generated cash from operating activities of $473 million year to date, down by $58 million from the prior year. The reduction is primarily due to changes in working capital, reflecting increased receivables on higher revenue and a decline in accrued liabilities compared to the prior year.

We generated $646 million of total cash year to date, that is down by $22 million from the prior year. Increased used vehicle sales proceeds partially offset the reduction in cash from operations.

Cash payments for CapEx increased by $273 million to $817 million, primarily reflecting increased rental vehicle purchases. The Company had year-to-date negative free cash flow of $172 million. Free cash flow was down $295 million from the prior year's positive free cash flow, due mainly to higher planned capital spending on vehicles.

At the midpoint of our full-year forecast we now expect free cash flow of negative $215 million as compared to our prior forecast of negative $265 million. The improvement in our free cash flow expectation reflects increased earnings and higher prices on used vehicle sales.

On page 13 total obligations of approximately $3.3 billion are up $480 million as compared to year-end 2010. The increased debt level is largely due to recent acquisitions and higher vehicle capital spending. Balance sheet debt to equity was 222% as compared to 196% at the end of the prior year.

Total obligations as a percent to equity at the end of the quarter were 228%, up from 203% at the end of 2010. We now anticipate our total leverage ratio to be 220% at year-end, up from our prior forecast of 207%. This increase is driven by the impact of the Hill Hire acquisition. Including acquisitions completed to date, our forecasted leverage remains below our target range of 250% to 300%.

Our equity balance at the end of the quarter was almost $1.5 billion; that is up by $55 million from year-end 2010. The equity increase was driven by earnings and, to a lesser extent, currency translation adjustments. These were partially offset by dividends and net share repurchases.

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

Thanks, Art. Page 15 summarizes the key results for our asset management area globally.

At the end of the quarter our global used vehicle inventory for sale was 5,000 vehicles, down by 900 units from the second quarter 2010. The used vehicle inventory is unchanged sequentially from the end of the first quarter of 2011 and does remain below our target level.

We sold 4,400 vehicles during the quarter, down 6% from the prior year, due to our smaller inventory available for sale. However, sales were up 7% sequentially from the prior quarter. We expect the number of vehicles sold in the second half to be consistent with our first-half sales levels.

We saw continued strength in used vehicle demand and pricing in the second quarter. Improved demand is a result of both 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 second quarter 2010, proceeds per vehicle were up 41% on tractors and up 31% on trucks. From a sequential standpoint, tractor pricing increased 6% and truck pricing was 3% higher versus the first quarter 2011. Going forward we expect strong, continued used vehicle pricing in all classes.

At the end of the quarter, approximately 7,100 vehicles were classified as no longer earning revenue. This was down by 900 units or 11% from the prior year. The decrease reflects fewer vehicles held for sale.

As expected, the number of lease contracts on existing vehicles that were extended beyond their original lease term declined versus last year. And although it's still running somewhat above normalized levels, the number of these lease extensions in the US for the quarter was down by almost 700 units or 16% versus the prior year. This decline reflects an increase in new, full-term lease contract sales instead of lease extensions by customers.

Early terminations of lease vehicles declined by 600 units or 26%. Early terminations where less than half what they were two years ago and were at the lowest level in at least six years. This is a very positive indicator of improved lease demand.

Finally, let me turn to page 17 to cover our outlook and forecast. In Fleet Management we expect organic strength in commercial rental and used vehicle sales to continue this year. In full-service lease our sales results have improved so far this year for both new business and fleet rentals.

We remain on track with our prior expectation that the number of leased vehicles on an organic basis will inflect and turn up in the second half. Including vehicles from recent acquisitions, our lease fleet has already significantly grown.

In Supply Chain, we anticipate continued benefits from the TLC acquisition and from organic new sales versus the prior year. The impact of the Japan disasters will be negative to SCS earnings, but to a lesser extent than previously anticipated. In the second quarter we saw a $0.02 impact from the Japan tsunami compared to our prior forecast of $0.04 to $0.05.

Given current production estimates, we now expect a full-year negative impact of $0.04 to $0.05 in EPS as compared to our prior estimate of $0.10 to $0.15. The Hill Hire deal, which was closed in early June, added around $0.02 to second-quarter EPS. For the full year 2011 this acquisition is forecasted to add approximately $0.12 to $0.17 to EPS for the almost seven-month period of operations with Ryder.

We have seen continuing strength in commercial rental and used vehicle sales into early July and are expecting improved results in these areas relative to our prior outlook. We also expect a modest improvement in lease results as the impact of fleet aging is somewhat less than previously forecast.

Given the benefits of Hill Hire, a lower impact from the Japan disaster, and improvements in our transactional businesses, we are increasing our full-year 2011 comparable EPS forecast from a previous range of $2.90 to $3.00 to a new range of $3.33 to $3.43, which represents an increase of $0.43 over our prior forecast. Our new full-year EPS forecast range represents a 50% to 55% improvement above last year's comparable EPS of $2.22.

We are also providing a third-quarter EPS forecast of $0.98 to $1.03 versus a comparable prior-year EPS of $0.76. This represents third-quarter EPS improvement of $0.22 to $0.27 or a 29% to 36% increase.

That does conclude our prepared remarks this morning. We are going to now move to questions and answers. Due to the number of callers always in the queue, I will ask that you limit yourself to two questions each. If you do then have additional questions, you are welcome to get back in the queue and we will take as many calls as we can.

So at this time I will turn it over to the operator to open up the line for questions.

(Operator Instructions) John Barnes, RBC Capital Markets.

Good morning, guys. Greg, in looking through your presentation you had your normal bar chart in here that showed extensions and terminations and that type of thing. It looked like your early terminations and some things like that had really reached kind of the lowest level in several years.

And I am just curious is this the inflection point you have been looking for on the lease side? Should we expect to start seeing growth in the number of vehicles under lease on a go-forward basis from here?

Thanks for your question and your comment, John. In fact, for those of you who got the PowerPoint, you are referring to the appendix on page 29, which, among other things, does show the early terminations and the extensions. I would say the early terminations may be a reflection of an improved economy, but I think it makes your point.

What also makes your point is the reduction in the extensions. That means that rather than extending units I think we are seeing more customers who now our committing for new leased equipment. So I would say your comment is right, but I would add both of those bar charts on early terminations and extensions.

So what you are saying is we should anticipate -- that is the indication that we have kind of hit that inflection point on the number of vehicles in the lease fleet?

Yes, I think it's a matter of degree. I think it's a matter of timing and ramp up. So unless impacted by other external forces, like what is going on in Washington and confidence level and freight to move, all other things being equal, yes, I think we are seeing the point that we predicted in the business plan for the second half of this year.

Okay. And then in terms of -- along those same lines, now that we are starting to see the extensions come down and things like that, is this the point where we should start to see more new equipment showing up in the lease fleet and, as a result, we should begin to see maintenance costs moderate from here?

Right, that is correct. Now, of course, that takes time to feather in but directionally that is exactly what you should expect to happen.

All right, very good. Nice quarter, guys. Thank you for your time.

Alex Brand, SunTrust Robinson Humphrey.

Thanks, good morning guys. So, Greg, I just want to follow up on John's question. If we are going where we need to go and we are going to get more full-term lease contract business, how should we think about -- as we move into maybe next year and if the pattern is what we hope, isn't the margin on the rental fleet a little higher? So as you shift into the longer-term contracts is there a transition period there that we need to sort of worry about or is it all incremental as you look out?

Well, the areas of improvement yet that we have begun to see but expect more of -- FMS, NBT as a percent of operating revenue this quarter was 8.7%. You may recall that at our peak it was 12.8% to 13%.

So we have a lot of things -- there are a lot of moving parts in the segment so it's not quite as simple as a rental and lease trade off. But we expect, during a period of still uncertain but improvement in the economy over time, improvement in housing, probably getting to a more reasonable employment level -- all of the things that have to add up over a multi-year, bumpy, erratic period. That all of those factors should move positively in a good direction.

And we believe that when all of those are not only in recovery -- but we are now taking advantage of our strengths, our initiatives, our sales force activity, our technology deployment, as well as our acquisitions, we expect that that all can move in concert positively.

Okay. When I think about where your guidance is going now, it's -- I mean I hear you saying that lease is improving but it looks like most of your guidance doesn't really have anything to do with the core lease business as you raise that guidance. And I also haven't heard you guys talk about really the meaningful step ups in CapEx for the core lease fleet yet either.

Right. Well, the big pickups, the reason that we have raised our forecast, the big items that make a difference -- and we have tried to highlight those so that it's clear -- continuing strength in the transactional commercial rental, used vehicle sales, the acquisition, the less negative impact from things like the Japanese tsunami. But, yes, you can't say that there is robust growth yet that is showing up on the revenue line, the earnings line, and the EPS from lease sales.

That takes time. First you start getting the sales. Then you got to place the orders and then you have got a three-, four-month lag, so that is not going to show up substantially until the end of this year and then ultimately in EPS. But as that becomes a larger portion of the revenue stream and the earnings stream that is solid and that is good for years.

Okay, those are my two. Thanks, guys.

You are welcome.

Kevin Sterling, BB&T Capital Markets.

Good morning. Greg, kind of along Alex's lines, when I look at your guidance raise it seems like, barring an economic collapse, you are in a sweet spot. And maybe what we are seeing this cycle it could elongate the cycle and the timing of a new leasing cycle is uncertain, but commercial rental is carrying the day.

Is that maybe this cycle a little bit different and could actually be elongated compared to past cycles because of the uncertain economic environment?

Yes, it certainly can. That has been our experience on this slow recovery generally in the last couple of years. We are not at any point now ready to say that we are not going to continue the lease sales.

Part of it is economic recovery and part of it is us. Part of us is our value proposition, part of us is making sure that we provide real value to customers who might want to consider full-service lease or stand-alone maintenance. All of those things, in addition to our ability to have been in so strong a financial position and a balance sheet position to do acquisitions, all of that may tilt what your past comparisons may be for our recovery.

So we think we are a little bit different. A lot of it, a lot of this recovery clearly is stronger than others in transports right now, but we think that is because of what we have done during the downturn to improve our business model and improve our position. But there is nothing better than economic recovery.

Okay, thank you. Let me follow up; you are talking about acquisitions and your balance sheet is in great shape. I think you have made five acquisitions since December. How does the M&A pipeline look today? Is it still pretty strong?

Probably the answer is the same that we have given you for the last several years. We continue to have great interest and it's just a matter of timing. You never know when a bunch of them hit. They did right at the end of last year going into this year and that has been a nice pickup.

So we continue to be interested, we continue to be capable, but it all depends on willingness, timing for other parties where we have got a good fit.

Okay. Thanks for your time today and congratulations on how you positioned the Company this cycle.

Thank you.

Peter Nesvold, Jefferies.

Good morning, guys. Terrific results, especially given the macro backdrop that we are all dealing with right now.

I guess my question is I definitely hear you on the late cycle leverage; a lot of that is still ahead of us and it could be very powerful. On the flip side though, I mean most of the strength this cycle to date has been the short cycle businesses -- commercial rent, used truck sales, and now acquisitions.

If we kind of go into an air pocket here in terms of macro growth, how do you guard yourself against losing the momentum in the short-cycle businesses and losing some of that earnings momentum before some of the later cycle leverage kicks in?

Well, I would say one argument is that in our sales proposition, and I will just focus on FMS for the moment, which I think your question is primarily oriented toward. Even in an environment which might be worsening or not really improving, we also have to think about the rest of the parts of the macro environment.

We think that the outsourced value proposition that we offer continues to be more compelling now that even in the recent past. So with increasing costs, increasing complexity of new equipment and new technologies that have to be deployed, we believe that our approach and our value to potential customers actually strengthens.

In addition, whether you have even more of a financial crisis than we have had in the recent past, access to capital is still available from us and many customers, as we have been seeing, even who are healthy now, have been more inclined to put their own capital to use in their own core business as opposed to the tangential activities that they need like in logistics and supply chain and distribution and transportation and utilize outsourced services.

So even though you could try to guess and model out downturns or economies and impacts, I still think that during this period and going forward we have got a value proposition that I think matches what some of the macroeconomic issues are. In addition, when you see us doing things like adding new services that hadn't been provided before that has a lot of customer interest right now, like natural gas heavy-duty vehicles, these are again new sources of opportunity for growth.

So we are going to keep pushing the innovation and growth theme because we think we are in a leadership position. We are going to keep doing it and not just think about some of these negative economic potential issues that obviously we can only react to and not necessarily influence or drive.

And then as my follow-up question, on the balance sheet is there a way of gauging what percent of your funding structure renews over the next three to four quarters or so?

I will ask our Chief Financial Officer if you have got that handy.

We don't have a ton, Peter, of debt maturing over the next year. I want to say it's a couple hundred million dollars. We have a medium-term note renewing then.

If you look at our makeup of our mix of debt, we are about -- now about 40% of our debt is variable rate debt so it reprices relatively on a short-term basis. So that is a little bit higher than we have been and it can drive -- if you get an increase in interest rates it can impact the results. But other than that we are 40% variable now, 60% fixed.

Great, thank you.

Sure.

Jon Langenfeld, Robert W. Baird.

Good morning, Ben Hartford in for John this morning.

First question, Greg, you had talked about the delta between FMS margins today and the previous cycle. Wanted to get your sense on what the drivers are to that. You had talked about maintenance being a key driver; is it anything beyond maintenance?

You look at the book of business, you look at the revenue base; your add level is comparable to 2004, 2005, but you are dealing with a delta of 400 to 500 basis points there on the margin. So as we get to organic lease fleet growth over the course of the next 18 months and the lease fleet age falls is that the key driver? Is that the only driver between margins today and margins at the previous peak?

If you look at the major drivers -- and I will just highlight four of them and if I miss some I will ask Robert Sanchez or Art Garcia to fill in others. If you look at the major differences in the EPS drivers, especially as it relates to FMS when we were at peak in 2008, it came from commercial rental, used vehicle sales, including carrying costs and depreciation and all the rest, from a leasing downturn, as well as non-operating expense of the pension costs. Because even though the pension is grandfathered and/or frozen going forward, we still have a tail there and that was a big impact in EPS at where the market closed in 2008.

So, of those you mentioned, two are largely restoring -- that is commercial rental and used vehicle sales -- but pension and the leasing earnings are not there yet. So I would say those are the big ones. Those are still yet to be restored; why we have confidence that we will get back to the other NBT levels when all four have converted. If I have missed any others, Robert or Art you could comment.

I guess the only thing I would add to that is that the size of the power fleet also needs to come back, because all of the overall fleet, now with the acquisition that includes trailers, has gotten us back up to those levels. The power fleet is still down about 5,000 units so you still have growth in there that we need in order to fully restore and get back to the levels that we were at. So you need the fleet to get newer and you need it to get bigger.

Right. And as a follow-up around pension, pension expense increased about $0.75 from 2008 to 2009 and we are only about halfway back on that. And that is really a function, to Greg's point, about asset returns and where pension assets are.

Okay, great. Thanks for that. Then second, on the acquisition synergies, it looks like they are trending better than expectations. I wanted to get your sense for what is driving that.

Whether it was just conservatism upfront, whether there is something unique about the targets that you have been able to acquire, whether you guys are one of the few actively in the marketplace, it seems, from a publicly traded company standpoint, or is it better integration or maybe all of the above? Can you talk a little bit about why the synergies have trended better than expectations?

Well, there is a lot of those, if not all of the above. I would say that the smaller acquisitions, other than Hill Hire, we have always been able to integrate those well in North America. They have always been somewhat accretive, but you would probably figure a few cents in every one and when we do our waterfall charts that is the way that would show up.

The one that became more substantial this year was Hill Hire. That was really the first one done over in the UK. We had a great buying price and there is no goodwill, as we mentioned earlier in the call. Very attractive returns.

There are logical synergies. We think it's good for customers, good for the large proportion of employees who are working operationally in conjunction with us, and it's going to work well. So that is why we have pointed out that probably beyond most expectations, until we have just spelled it out for this year which is only a little over seven months, for Hill Hire alone is $0.12 to $0.17 in EPS. And it's going to continue being accretive next year as well.

Great. Thanks for the time.

Sure.

David Ross, Stifel Nicolaus.

Good morning, gentlemen. On the FMS side of things, talking to a private fleet operator the other day who said it's now cheaper for him to get a full-service lease from Ryder for all of his new trucks that he is adding to the fleet than to buy it himself and do the maintenance on it with their maintenance infrastructure, I guess because your cost of capital is so low and you have significant scale economies of purchasing.

How many people out there do you think know that this is now the case that may not have been the case before? And are you seeing any change in terms of your mix, who's signing full-service leases that may not have signed them before? Who is renting now that may not have been renting before?

I am going to turn that over to Robert for a little more detailed info for you.

David, at the end of the call I would probably ask you for the name and number of that private owner you were talking about. I think to answer the question, though, we are seeing increased interest from the ownership side, and we are also seeing increased -- an improvement in our ability to win those deals. So those two are two very positive things that we are seeing in our sales.

I'd tell you that it still hasn't moved the needle significantly, but we are seeing an upturn in interest from private fleet owners as they look at the economics of having to go out and borrow the money to buy their own trucks and do their own maintenance on more complex technology versus turning to somebody like Ryder who has the capital available and has the better pricing on the equipment and can perform the maintenance.

And what about actual carriers rather than private leases, other for-hire carriers, are they showing any more interest than in the past?

No, I think on the for-hire carriers, as Greg mentioned some of the innovation initiatives that we have, one of the things we're looking at is providing more transactional type maintenance for some of these companies. And we are finding that you do get more interest from carriers on that type of activity. They typically want to continue to do some of the maintenance activity. But in geographies where they are not present, they are looking for partners that can help them with that.

Thanks. One question for John on the Supply Chain Solutions side of things. Is the mix of profitability or business much different now after the TLC acquisition than prior? I guess if you could talk about maybe the breakdown between transportation management, contract logistics, other services, and how that may --?

Yes. The primary difference is we have a stronger CPG (technical difficulty), less dependent on the more cyclical automotive sector. The TLC acquisition, the revenue was mostly CPG warehousing. So it has also strengthened our warehousing segment, and it has given us a nice group of customers that we can grow with where the business is pretty stable.

Great, thanks.

Todd Fowler, KeyBanc.

Great, thank you. Good morning. Greg, can you talk about the expectation for the size of the rental fleet into the back half of the year? I know that there has been some acquisitions and it sounds like you are going to be moving some vehicles to sell. I just want to get an idea of how we should be thinking about the size of the -- the average size of the commercial rental fleet in the third and fourth quarter.

Again, I will turn over to Robert to give you a little bit more detail, but we have been adding to the fleet this year, both by our own capital investment as well as the acquisitions. I don't know that there is much more equipment to already arrive. I think what we want to make sure we watch how it plays out is how is demand, how is the economy looking, how is pricing.

Right now we think we have got that right-sized but we would evaluate for the rest of the year based on anything else we might see. In terms of the fleet size numbers, I think Robert may have that if he would like to comment.

Todd, at the beginning of the year we said that our goal was to be up 10% year over year on the power fleet for rental. We are going to come in right around that number plus the acquisition units, but we are still on track to be up around maybe 10% -- maybe a little bit higher. Maybe when you average it out we might be up 11% or 12% plus the acquisition units.

And then, Robert, the way that it should work is roughly in the third-quarter maybe flat sequentially with the second quarter but then drift a little bit lower to the fourth quarter to reflect the seasonality?

That is correct, that is correct. We ended the second quarter a little bit higher than what we had planned, maybe a couple percentage points. And that was just due to the fact we are holding some of the vehicles we would otherwise out service and sell because of the strong demand. But as we get into the fourth quarter those units will start coming out.

Okay, great. And then just as a follow-up, the change in lease miles driven on a per-day basis being flat here year over year in the quarter, and I think this is the first quarter they have been flat in maybe four or five quarters. I think if I remember correctly there is a variable revenue component associated with that.

Looking to the back half and some concerns about maybe the strength of the recovery or the pace of recovery, how have you factored in the variable component related to miles driven on the lease fleet into the back half guidance?

The assumption we have made on the guidance is that it continues at about the pace that it's at today. There is some seasonal activity that happens that we have worked in, so we are not assuming that there is a significant rise from the current levels.

It is something that we are watching. As you look at all of the indicators that we watch, that is probably the only one where you are seeing something that maybe isn't growing at the clip that we would like to see it grow. But it's still at a much healthier level than it was over the last several years.

So not at the peak in terms of miles per unit yet, but still at a pretty good pace. So there is other things that could be impacting it. Customers have begun to utilize their fleet and have been using rental more, so some of that could be impacting us getting to the peak levels.

Right, okay, that makes sense. And then just to be clear, I mean if you continue to see a trend the way it is basically you have that, to a certain extent, factored into the guidance with how it's up right now?

Yes, we do.

Okay, good. Thanks for the time today.

Anthony Gallo, Wells Fargo.

Thank you, congratulations. Could you maybe talk a little bit about supply chain and dedicated? The year-over-year growth, I am curious; how much of that is new business wins and how much of that is increased activity with existing customers?

Okay. I will let John Williford cover that.

Well, you have to kind of tease out the different impacts, Anthony. I think if you were just to do supply chain and you were to take out the tsunami impact and the acquisition impact then we have operating revenue growth of about 10%. And I would say that is about, I am giving you a ballpark, about 50/50 net new sales and organic revenue growth.

I understand there is estimates behind that, that is very helpful. How about in dedicated?

On the DCC side, basically -- well, if you exclude the impact of fuel then more than all of our growth has come from the Scully acquisition. So our dry revenue in DCC is actually down about 2.7% ex Scully. And that is really -- we have net new sales in there and a slight decline in existing business because of a couple of big customers whose volumes were down.

Okay. And then maybe a little bit of color on what the backlog looks like there. Obviously despite this squishy and concerning second half we are all staring at capacity, at least in the for-hire market, seems quite tight. Some of the for-hire carriers' dedicated business has been fairly decent recently so I am curious what your backlog looks like there.

We have had -- in DCC we had very strong sales -- we had poor sales in January and February and then very strong sales months in March through June. And we have a very strong pipeline.

So how does that fall? Is that sort of a 60 to 90 day once you close the sale that they start to show up?

Yes, there is probably a 60 to 90 days to close the sale or to win or lose the bid, and then there is a ramp up period of another 60 days or so to bring on new business.

Okay. And then I guess related to Dedicated, recently you have had some struggles on the driver front there but I thought I heard someone say that the driver situation has improved. And I am wondering what magic you are working there, because that sounds like great news.

Yes, you are right. The driver shortage really hasn't abated; we have just put a lot of focus on it. We started reporting on this in the second half of last year when we saw kind of a quick spike in the number of lease drivers we had to have. And so we really put a focus on recruiting and put a few new programs in and really have dramatically cut the number of days on average that it takes us to fill an opening.

And so the impact on lease drivers has really almost completely gone away. We would expect that to be really almost a zero, certainly a year-over-year zero impact going forward.

Great, thank you, John.

Ed Wolfe, Wolfe Trahan.

Good morning, guys. I just want to make sure I am looking at this right. If I back into $0.20 or so on an annual basis for Hill Hire it implies about a 12% pretax margin relative to where you are at in FMS this quarter, around 8%. Am I thinking about that right? Is there some synergy built-in or is it just a higher margin business at this stage?

That would include the benefits of synergies as well as the purchase price and the financing on that transaction.

But I am thinking about that right, right? Now that is a higher margin business for you?

Yes.

Okay. Second, Greg, you took us through slide 29 with the US asset management update in terms of talking about why you saw some potential for the leasing maybe to show some life in the second half. I am sorry I just didn't catch what you were focusing on; can you do that again?

Yes. The original question that we went to the appendix on page 29 was about early terminations but I extended the answer to also include extensions.

The fact that both terminations, early terminations, as well as extensions were down was a good sign that when equipment came do customers in particular weren't either giving up because they didn't need the equipment or they weren't just extending. The lack or the reduction in extensions was a reflection of the fact that they now had enough confidence and/or freight to move that those were becoming actual new leases with new equipment. So we think that that snapshot is a good sign for future lease sales, revenue, and earnings.

Is there something on this slide that if it starts to go up would be positive, like early replacements or redeployments, or are at those -- what do you expect there?

There will be some movement around early replacements, but that should stay fairly low as that chart would indicate. Re-deployments might mean that if that goes up we are having to be a little bit more creative because you don't have your natural model movement to the used truck sales or you are moving them between coming out of service or being extended into DCC. So as that is kind of reduced and leveled off that is just fine.

I think the expectation of all of these again would be the extensions and the early terminations. Extensions are still high by normal standards, but as those come down that means those customers are selecting and asking us to get them new equipment, which is a good sign.

Thank you for doing that again. Last question, commercial rental at 78%, what is kind of the practical peak utilization as you look at that?

Well, probably in some places we are at it. It depends on is there anything left in some yards. That means that some locations are pretty, pretty low on equipment. But, Robert, if you would like to further comment on that?

Yes, there is some seasonality there but I think we are at the levels now where -- certainly for this quarter we are at levels where I would say is a target and at a peak.

And while I still have you on, I think Art had one other follow-up point on your earlier question about Hill Hire, Ed.

Yes, Ed, around the benefits and the accretion from Hill Hire, one point I wanted to make sure you are aware of is Hill Hire is based in the UK. We have a lower corporate tax rate there; the corporate tax rate in the UK is 28% versus the high 30%s that we have here on a global basis. So that also adds a little bit of accretion to the transaction.

Thank you. That is great color.

(multiple speakers) direction for the US government I would say.

Thanks, guys.

Jeff Kauffman, Sterne Agee.

It's actually Kanchana Pinnapureddy in for Jeff. I just had one quick question for you. Could you talk a little bit about the spread between new contracts and your cost of capital now versus what is coming off of lease?

Robert, do you want to comment?

Yes, Kanchana, what we have stated publicly is that we target 60 to 100 basis point spread and, without getting into a lot of the detail, we are certainly getting that in this environment. So we are happy with the pricing. The pricing that we are getting is slightly better than what we had expected at the beginning of the year. So that is just another indication that the environment certainly is strengthening and we have got a good sales pipeline.

Got it, thank you. The rest of my questions have all been answered.

Thank you.

Matt Brooklier, Piper Jaffray.

Thanks, good morning. This question is for John. Curious as to how far along we are in terms of integrating TLC at this point in time. Were there cost synergies achieved thus far with that business? What is left as we move into the second half of this year?

And then on the flip side, maybe talk a little bit about the revenues synergy opportunities there.

We did the vast majority of the integration in the first 60 days, so that is behind us. The primary benefits from the acquisition are on the customer side. There weren't any big cost take outs or just some very small cost benefits, but we have really focused on bringing an enhanced value proposition to TLC's customers and then also bringing that combined value proposition out to new food, beverage, and CPG customers.

I am really happy with the response we are getting. I think at almost all the customers we have some growth opportunities, almost all the existing TLC customers, and then we are seeing lots of new customers that we wouldn't have been able to see if it wasn't for this acquisition.

Okay. And customers -- I guess the existing base of TLC customers it sounds like they have been relatively receptive to kind of the cross-sell effort with Ryder's other products. Typically how long does that take before you start to get traction in terms of selling other products?

That is probably a good nine-month cycle, because you start out talking about kind of big picture opportunities and getting to know these new customers. Then over time you start to zero in on actual projects. Quite often the customer then, these are big companies, they will often put out a bit on a new project and then you had to go win the bid.

And so we have been very focused on these customers since January and now we have built up -- we have won some new business and we have built up a pretty good pipeline of new opportunities. Then as we win new opportunities you will see -- there will be a ramp up period, so it probably will be next year before we start to see measurable revenue and profit growth from these initiatives. But the pipeline we are seeing and the kind of conversations we are having with these customers are all very positive.

Okay. And just a follow-up to that, the NBT at Supply Chain Solutions at 5.5%; you take out the $0.02 of negative impact from the Japan situation, a little bit higher. Were there any kind of volume anomalies -- because you saw nice growth with existing customers, were there any volume or cost anomalies that pushed up that margin or is this kind of the run rate of profitability moving forward?

Well, I think if you take our 5.5% margin and you add in the tsunami impact, you have what might be -- I am not a historian for Ryder, but it might be a record NBT. Certainly as a percentage margin that is at the high end of what I have said publicly we could get to at some point.

I think everything has been going right. I don't think you can expect -- I wouldn't take our NBT, add on the tsunami impact, and say that is what we are going to get every quarter. But I think everything was going right; we are not expecting a lot to go wrong in the rest of the year, but it was one of those quarters where everything went very well.

Okay, very good. Thank you.

You are welcome.

I would now like to turn the call over to Mr. Greg Swienton.

All right. Well, I think we have gotten to everybody's call and it's a little past noon so we are going to sign-off. Thank you all for your participation. Have a good, safe day.

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