萊德系統 (R) 2012 Q2 法說會逐字稿

Good morning and welcome to Ryder System, Inc., second-quarter 2012 earnings release conference call. All lines are in a listen-only mode until after the presentation.

(Operator Instructions)

Today's call is being recorded. If you have any objection, 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 2012 earnings conference call.

I'd 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 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; Robert Sanchez, President and Chief Operating Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Dennis Cooke, President of Global Fleet Management Solutions; and John Williford, President of Global Supply Chain Solutions, are on the call today and available for questions following the presentation.

With that, let me turn it over to Greg.

Thanks, Bob, and good morning, everyone.

This morning we will recap our second-quarter 2012 results, review the Asset Management area, and discuss our current outlook for the Business. And after our initial remarks, we will open up the call for questions, so let me get right into an overview of our second-quarter results.

I will begin on page 4 for those of you following on the web in the PowerPoint presentation. Net earnings per diluted share from continuing operations were $0.91 for the second quarter 2012, up from $0.79 in the prior year period. The second-quarter results included a $0.09 restructuring charge for recent workforce reduction initiatives. The prior year's second quarter included a $0.10 charge from a tax law change and a $0.03 charge from acquisition-related transaction costs. Excluding these items in each period for both years, comparable EPS was $1 in the second quarter 2012, up from $0.92 in quarter 2, 2011. This is an improvement of $0.08 or 9% over the prior-year period.

Second-quarter comparable EPS was above the high end of our most recent forecast range of $0.90 to $0.95. The outperformance was due primarily to higher used vehicle pricing in both retail and wholesale sales; lower than expected maintenance costs resulting from ongoing operational initiatives; and a modest decline in the lease fleet age, as well as lower discretionary overhead spending.

Total revenue grew 3% from the prior year. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, increased 6%. The increase in revenue reflects both the benefit of organic growth and the Hill Hire acquisition, which was completed in early June last year.

Page 5 includes some additional financial statistics for the second quarter. The average number of diluted shares outstanding for the quarter declined to 50.7 million. During the second quarter, we purchased approximately 234,000 shares at an average price of $46.87 under our 2-million share anti-dilutive program, which expires in December 2013. As of June 30, there were 51.1 million shares outstanding, of which 50.7 million are included in the diluted share calculation.

The second quarter 2012 tax rate was 36.6%. The prior year's tax rate of 45.5% was negatively impacted by a tax law change in Michigan. Excluding this item from 2011, the comparable tax rate would have been 37.7% last year.

Page 6 highlights key financial statistics for the year-to-date period. Operating revenue was up by 8%. Comparable EPS from continuing operations were $1.59, up by 11% from $1.43 in the prior year. Adjusted return on capital was 5.6% versus 5.3% in the prior year, as growth in earnings outpaced growth in capital. The spread between adjusted return on capital and cost of capital is 50 basis points for the trailing 12-month period and is now forecast to be 80 basis points for the full year.

I'd like to turn now to page 7 to discuss some of the key trends we saw during the second quarter in the business segments. In Fleet Management, total revenue grew 3% versus the prior year. Total FMS revenue includes a 5% decrease in fuel services revenue, reflecting lower fuel cost pass-throughs and fewer gallons sold. FMS operating revenue, which excludes fuel, grew 7%. This mainly reflects organic growth of both full-service lease and commercial rental, as well as the Hill Hire acquisition. Contractual revenue, which includes both full-service lease and contract maintenance, was up by 5%. Full service lease revenue grew 5% versus the prior year due to higher rates on replacement vehicles, organic fleet growth, and the Hill Hire acquisition.

At quarter end, the lease fleet size increased organically by almost 2% or 2,000 units versus the prior year. On a sequential basis, the organic lease fleet was unchanged from the end of the first quarter 2012, which was in line with our original plan expectations due to the timing of sales activity. The lease fleet age started to decline late in the quarter, which was earlier than initially planned due to greater use of new vehicles for lease replacements. Miles driven per day per vehicle on US lease power units increased 2% compared to the prior year. Commercial rental revenue increased 10%, reflecting acquisitions and higher pricing.

The average rental fleet increased 17% and was up by 5% excluding acquisitions. Global pricing on power units was up 6%, which was in line with our original plan for the quarter. Rental demand in North America was slightly down compared to the prior year and was below our initial expectations coming into the quarter. As a result of lower than expected demand and a larger fleet, rental utilization on power units declined to 75% from 78.7% in the prior year. As discussed in our prerelease, we have taken timely action to adjust the size of our rental fleet to current demand conditions and the fleet is already at our new target level. Based on this action, the year-over-year decline in utilization has already narrowed in July and this trend is expected to continue and further improve in the second half of the year. In the used vehicle area, we saw a continued strong pricing and demand environment. Robert Sanchez will discuss those results separately in a few moments.

Overall, improved FMS results were positively impacted by lower incentive compensation, the Hill Hire acquisition, and organic lease fleet growth. These benefits were partially offset by lower commercial rental results. Earnings before tax in Fleet Management were up 7% and FMS earnings as a percent of operating revenue was 9.2%, unchanged from the prior year.

Turning to page 8, in the Supply Chain Solutions segment, which includes all Dedicated Contract Carriage activity, both total and operating revenues were up 6%. Revenue increased due to higher automotive volumes and new business. The improvement in auto volumes included, but was not limited to, a year-over-year benefit due to production cuts in 2011 from the natural disasters in Japan. We also saw very nice growth of 14% in our Dedicated Contract Carriage services this quarter. Improved earnings in the segment were driven by higher revenue and were partially offset by unusually high medical benefit costs. In total, supply chain earnings before tax were up 9% from the prior year and Supply Chain's earnings before tax as a percent of operating revenue were 6.3%, up 20 basis points compared to the prior period.

Page 9 covers the business segment view of our income statement, which I just discussed, and is included here for your later reference. Page 10 highlights our year-to-date results by business segment. And in the interest of time, I won't review these results in detail but will just highlight the bottom line results. Comparable year-to-date earnings from continuing operations were $81.8 million, up by 10% from $74.2 million in the prior year period.

And at this point, I will turn the call 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 were $1.3 billion; that's up $437 million from the prior year. This was driven by increased purchases of new lease vehicles to fulfill contractual sales to customers for renewal and growth of their long-term fleets. This capital spending reflects an increase in the number of leases renewed, growth in the fleet size, and a higher investment cost per vehicle, which is being priced into customer rates. Capital spending on commercial rental vehicles was down $18 million year-to-date.

Our full year gross capital expenditures are expected to be near the low end of the $2.1 billion to $2.2 billion range we communicated at the beginning of the year due to somewhat lower spending in rental and lease. While our lease fleet size forecast has come down from our initial plan levels, the associated reduction in lease capital has been partially offset by increased use of new rather than used vehicles for renewed leases.

As we commented on during the first quarter, we continue to see increased acceptance by customers of the new technology for lease contracts, which provides us with longer terms on these deals, as well as the benefit of the step-up in rates due to higher equipment costs. This has also contributed to the lease fleet age coming down earlier than we initially anticipated.

We realized proceeds primarily from sales of revenue-earning equipment of $199 million -- that's up $57 million from the prior year. This increase primarily reflects more units sold compared to the prior year, as well as higher pricing. We also executed a $130 million sale leaseback transaction on vehicles this quarter due to attractive lease financing rates. Including these items, net CapEx increased by $250 million to just under $1 billion. Since the sale leaseback transaction was not in our initial forecast for the year, our net capital expenditures should now come in below our initial full-year forecast.

Turning to the next page, we generated cash from operating activities of $472 million year-to-date, unchanged from the prior year. Higher earnings in depreciation, net of gains, and other non-cash charges were offset by increased pension contributions and changes in working capital. We generated approximately $830 million of total cash year-to-date. This was up by approximately $190 million and included the proceeds from the sale leaseback, as well as higher used vehicle sales. Cash payments for capital expenditures increased by almost $400 million to just over $1.2 billion.

The Company had negative free cash flow of $370 million year-to-date. Free cash flow was down $198 million from the prior year's negative free cash flow due mainly to higher planned investments in vehicles that will generate revenue and earnings in 2012 and future years. This was partially offset by the sale leaseback proceeds. We have adjusted our full-year free cash flow forecast range by $130 million to reflect the impact of the sale leaseback transaction, which was not included in our initial plan. As a result of this adjustment, our revised full-year free cash flow forecast is now negative $270 million to $330 million, as compared to our initial forecast of negative $400 million to $460 million.

Page 13 addresses our debt-to-equity position. Total obligations of approximately $3.9 billion are up almost $480 million compared to year-end 2011. The increased debt level is largely due to higher lease capital spending. As expected, total obligations as a percent to equity at the end of the quarter were 284%. That's up from 261% at the end of 2011. The increase in leverage reflects our seasonal purchase of rental vehicles, which occurs during the first half of the year. Our leverage ratio is expected to decline in the second half of the year towards the lower end of our prior forecast range of 261% to 265%, excluding any year-end pension adjustment.

This forecast leverage is at the lower end of our target range of 250% to 300%. At these levels, we have the balance sheet flexibility to support expected organic capital and typical acquisition activity. Our equity balance at the end of the quarter was just under $1.4 billion. That's up $66 million versus year-end 2011. The equity increase was driven by higher earnings.

At this point, I will hand the call to our President and COO, Robert Sanchez, to provide an Asset Management update.

Thanks, Art.

Page 15 summarizes key results for our Asset Management area globally. At the end of the quarter, our global used vehicle inventory for sale was 9,200 vehicles, up from 5,000 units in the second quarter of 2011. On a sequential basis from the first quarter of 2012, ending inventories were only up 500 units. Used vehicle inventories are elevated beyond our typical target range of approximately 6,000 to 8,000 vehicles. This reflects a planned increase in lease replacement activity. It also reflects planned refreshments of the rental fleet as well as outservicing of rental units related to our recent rental fleet downsizing. Used vehicle inventories are expected to remain in the 9,000 to 10,000 unit range during the balance of the year.

We sold 6,200 vehicles during the quarter, up 41% compared to the prior year, reflecting continued strong market demand for used vehicles. Retail pricing for used vehicles increased year-over-year and was somewhat ahead of our expectations. Proceeds per unit comparisons were negatively impacted by a higher proportion of vehicles sold through the wholesale versus retail channel. The increased use of wholesaling, however, was in line with our expectations, as outlined in our recent earnings forecast update.

Compared to the second quarter of 2011, proceeds from all vehicles sold, including wholesale units, were down 1% for tractors and up 6% for trucks. From a sequential standpoint, tractor pricing was down 12% and truck pricing was up 5%, again including the increased wholesale activity. At the end of the quarter, 12,300 vehicles were classified as no longer earning revenue. This is up 5,200 units from the prior year, reflecting a higher used vehicle inventory, but was only up 100 units sequentially from the first quarter of 2012.

The number of lease contracts that were extended beyond the original lease term increased versus last year by around 200 units. This reflects and is consistent with the higher volume of renewal activity this year due to a heavier lease replacement cycle. Early termination of lease vehicles declined by about 460 units or 28%. Early terminations were about half of what they were two years ago and were at the lowest level in the past decade. Our rental fleet was up 17% including acquisitions, or 5% organically, in the quarter. With the softer than anticipated rental demand conditions we have seen in our recent de-fleeting actions, we are now expecting the full-year rental fleet to be down approximately 3% to 5% at year end, below our initial forecast for the year.

At this point, I will hand the call back over to Greg to cover our outlook and forecast.

Thank you, Robert.

Turning to page 17, let me cover our outlook and forecast. In order to address lower-than-expected rental demand, we quickly took appropriate actions to reduce costs by aligning resources with the current business outlook. As a result of our cost reduction initiatives, we expect to see an $0.18 EPS benefit in the second half of 2012. We have also taken timely actions to reduce the size of our rental fleet. We have already finished adjusting our rental fleet size to the current demand environment. We still need to dispose of some additional used vehicles to get our inventories closer in line with our target levels. However, the increased wholesaling we are currently doing above normal levels is expected to be concluded later this year.

We expect that used vehicle pricing will generally be stable going forward and that demand conditions will be solid, partially due to continued demand for pre-2010 engines. In full-service lease, we expect revenue growth in the low- to mid-single digit range during the second half of the year. Additionally, we have recently started to see the lease fleet age come down, which may provide some earlier-than-anticipated upside to margins, if this trend continues in the second half of the year.

In Supply Chain, we expect to see continued increases in new sales and activity levels, including improvements in our Dedicated Contract Carriage results. We anticipate overall Supply Chain results will be somewhat above our original expectations for the year. Given these factors and our final results for the second quarter, we are raising our full-year comparable EPS forecast from a previous range of $3.65 to $3.85, to a new range of $3.75 to $3.90. And this represents an improvement of 7% to 12% from $3.49 comparable in the prior year. We are also providing a third-quarter comparable EPS forecast of $1.15 to $1.22 versus prior year EPS of $1.09, an improvement of 6% to 12%.

And that does conclude our prepared remarks this morning, so we will move on to Q&A. And as usual, due to the number of callers in queue, I will ask that you limit yourself to two questions each, and if you have additional questions, you're 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)

Kevin Sterling, BB&T Capital Markets.

Greg, a month ago, you guys lowered guidance on essentially lower commercial rental demand and having to wholesale more used trucks. And now, a month later, you are raising your 2012 outlook, essentially by the upside we saw in the quarter. So does that mean the back half of the year assumes continued weakness in commercial rental revenue and lower wholesale used truck prices? And if commercial rental were to tick up in the second half of the year, maybe due to housing improving, would you cut back on the number of used vehicles you sell in the second half of 2012?

All right. I think, first of all, the expectation for demand is certainly considerably less than our original business plan, and our forecast for the second half of the year reflects the demand level that we think we've matched up our supply with through the second half of the year. If there should be some unexpected surprise or upside, and demand suddenly heated up, which is certainly not in our reasonable expectations at this time, then we'd probably again adjust how much we move out in the fleet -- how much you may move to other service, how much you may move to sell -- but that we'll monitor in the days ahead. I think at this point we feel that we have about got it right. You never know what's in the months ahead. After the month of May, things looked pretty weak. June stabilized. July looks better. But you can never tell in this environment -- this very weak uncertain economic environment -- how things are going to go month-to-month, so I think we will monitor it.

Okay, thank you, Greg. So June was better than May, and July is a little bit better than June. So the decline in volumes that you saw in commercial rental in May, can you maybe, could you help characterize that? How much is the tight driver situation maybe impacting some of your smaller customers where they can't find drivers and therefore have to outsource that business to, say, larger fleets?

Frankly, I don't think it has anything to do with drivers.

Okay.

I think it has to do with how much freight and volume there is to move. And as rental is one of the prime users for supplemental capacity for our customers who are lease customers as well as just rental customers, I think that you had many things going on simultaneously; but certainly a slow down in May for volume and I really think that's the case and it's not due to drivers.

Okay. Those are my two questions. Thanks so much for your time.

You're welcome.

David Ross, Stifel Nicolaus.

You talked about the lease fleet declining in average age earlier than anticipated. How much earlier than anticipated? When did you expect that to decline?

I think our original plans were that maybe by the end of this year, going into the start of next year, we would begin to see some reduction in average age of the fleet. So the fact that it's showing up now I think is a positive sign that portends well for the future. Now, the question is, will that keep up and will that continue to flow through? But certainly that was a positive and an upside addition in the second quarter. Maybe, Dennis, if you want to say anything from FMS in addition to that about fleet age at the moment?

No. That's right, Greg. We were expecting it to decline towards the end of the year. Due to the replacement activity that we are seeing, we actually saw it start to come down sooner and that, along with the initiatives that we are driving, bodes well for maintenance cost.

Even though extensions are still rising, replacements are well exceeding extensions to bring the average age down?

Yes, the replacement activity is very high, David. So, as a result, we are seeing, as we said, the age come down sooner than expected.

And then on the Dedicated side of things, sounded like you've made some improvement there. I know there was talk about fixing some legacy Scully account-specific issues. Have other cost pressures gotten better? Have we fixed all of those Scully issues?

Yes. That's right. That's a good memory. We had some last year in the third and fourth quarter, we had some margin decline in DCC, largely because of the accounts you reference. Our team has done a good job working on those accounts one at a time and brought the margins of those accounts back in line and that's part of what you see in these results.

And did you retain all of those accounts in bringing them back in line or did you have to exit some of them?

Retained virtually all the accounts, yes.

Great. Thank you very much.

You're welcome.

John Barnes, RBC Capital Markets

Greg, can you just talk about, as you take a look at the outlook for the remainder of the year, can you give us a little bit more guidance around CapEx? I apologize if I missed that during the call; but just as you see your business through the balance of this year and if you were to see another step-down in both leasing and the rental side, how much further could you pare CapEx back?

Well, rental spending is fundamentally done and it's a little lower than our original forecast. Lease is based on, as you know, the contracts that we sign, but even there we've modified that a bit and we are at the lower end of our range. And, Art, if you want to, again, provide your range numbers for CapEx being a little lower this year?

Right. Yes, John, remember we talked about a range of $2.1 billion to $2.2 billion for the year. We see the year ending up at the lower end of that range. And I think that Greg's point, if there was a significant slowdown, it would manifest itself in less new sales and we just would not spend the capital, if that occurred.

Okay. All right. So that will fluctuate with activity in that business and rental is pretty much done. Greg, just one other thought. A couple of weeks ago, your preannouncement was a dire -- it came across as world is coming to an end, business is falling apart, and here we sit a couple of weeks later and you are taking back up guidance. Outside of what you have done internally, that $0.18 you've created of earnings -- and I applaud you for addressing that -- but why not maybe just leave it alone and buy yourself a little bit of cushion? It still seems to me like there is a fair amount of uncertainty out there and I just -- why raise guidance here? Why not just buy yourself that margin of error?

We believe that our best interests are always served to give you and everyone else who invests in and follows the Company the best information with the right guidance that we possibly can at any point. And I'd hate to think that you felt that the world was ending when we did the preannouncement. But the fact, in May, was we saw a fall off in May that we'd just never seen before. And, as it came in rental, which is often a leading indicator, it certainly caused us, not undue concern, but reasonable concern about what was going on in the environment. I think as you've watched other companies report, we may have led in our description of softness, but we are hardly the only one now.

And there are many others in transportation and other industries that are reporting weak sales, weak performance, weak earnings year over year. We think that with the aggressive timely action that we have taken --and, from our experience we know it's better to act quickly than hope for something to improve -- we think that the actions we have taken are timely and appropriate. We've gotten the fleet levels where we want them. We've taken out discretionary costs in some other aggressive areas and we believe that, based on what we see and what we've calculated, we've given you an honest range and we are not trying to sandbag or hedge our bets. We are giving you the best guidance that we possibly can, which is always our objective.

Okay. All right. Thanks a lot for your time, guys.

You're welcome.

Todd Fowler, KeyBanc Capital Markets.

Greg, I want to make sure I understand the trends that you are seeing within the lease fleet and then what your expectation is for the rest of the year. It sounds like the number of units are a little bit lower, but it's more new equipment versus used equipment that you are signing leases for and it's having a positive impact on the fleet agent and potential positive impact on the margins. Is that the right characterization of what you are seeing? And then, what do you think is driving that, and how do you expect that to play out for the second half?

Well, I think fundamentally your comments are right and the first thing I would emphasize is that the good news through all of this time, in the last few months and going forward, the contractual business in both segments has held up and the contractual business with the full service lease and contract maintenance in FMS has held up. And we think that, again, supports the issues we've talked about for the longer term about the outsourcing trends and the value that we provide in the marketplace. For the leasing units, we are expecting to have 500 to 1,000 additional units at the end of this year compared to last year. That's a little bit lower than our original forecast; but we redid that and reassessed that in the prerelease just to be sure that in this environment that would hold up.

When you break that between power units and total units, the number I gave you was for total units that includes trailers. We are going to do a little bit of rationalization on trailers; but for power units, those units continue to sell even better and are a bit stronger or as strong at this point as we might have hoped. So I think that portends and bodes well for the future. It helps the maintenance costs and it helps the future revenue and earnings stream from those lease units. And the contract maintenance units, which may not be full service lease but that we are serving on a maintenance basis, those quantities of units are also going up. Dennis, if you want to add any other flavor or color to that?

No. Just building on what you said about the contract maintenance, there is a lot of interest out in the marketplace for a provider who can be a one-stop shop. Somebody who has got 800 shops across the country and the ability to lower maintenance cost along with increased truck up-time, Greg, is being received very well. So we expect to see that demand continue.

So the new leases that are being signed are the people taking new equipment, is that private fleet conversion versus existing customers, and is that really what's driving the trend of pushing the fleet age down and seeing more new equipment than what you maybe initially anticipated?

Yes, I think what we are really seeing, Todd, is that the fuel-efficient specifications that we are putting out there --

Sure --

-- is getting a lot of interest. So, as a result, we are seeing a lot of new equipment that's being put into our customer's fleets and that's really what's driving the age down.

Okay. And then, my follow-up on the rental fleet, the comments in the prepared remarks, it sounds like you have the rental fleet where you want it to be. Is that based off of where the rental fleet ended at the end of the second quarter, are there still more units that are going to come out into the third quarter? And I think I've got where it should end for the full year, but I was just trying to get an idea of -- is the ending fleet count in the rental side of the second quarter, is that really what we should think about for the third quarter, and can that give you that mid-70%s utilization based on what you are seeing right now?

Robert?

Yes, Todd, this is Robert. We are at the right level based on where we ended the second quarter, so I think that was the comment that was made in the prepared remarks. From here on in, we expect that there will be some natural de-fleeting as demand drops off primarily in the fourth quarter, but it's just what we would normally do. There is no incremental adjustment to the fleet that would be needed if demand continues the way it's been the last couple of months. So obvious that we are in a period that's a little less predictable, but right now we feel really good about the progress that we made on getting the fleet right. I think I have been through this cycle a few times in my career and this is probably the quickest we have been able to adjust. We saw the problem in February and got the fleet right by the end of June. So we feel good about that. Now there is no more new equipment coming in so if we need to adjust more in the second half of the year we are much better positioned to do that.

Sure. Okay. I got it. Thanks for the time.

You're welcome.

Anthony Gallo, Wells Fargo.

First question. When you preannounced, I suspect that you had envisioned some headcount reduction, so I'm trying to make sense of the $0.09 charge. I understand it from an accounting standpoint, but you sort of knew that some headcount reductions were coming so I'm trying to reconcile that against the core EPS number. And then I have a follow-up question.

I didn't quite hear the last piece of your question.

I'm just trying to make sense of the $0.09 charge, recognizing that you probably knew that you were going to have some headcount reductions when you preannounced. It would have been maybe helpful to get some color on that in the preannouncement. I'm just--

Anthony, this is Art, when we had the preannouncement, we did identify that we were taking a restructuring charge. We actually estimated it to be around $0.10, and it came in a little bit less at $0.09. But the actions were already contemplated in that preannouncement.

Okay, that's helpful. And then, back to the earlier comments off of John Barnes' question, just a little more color on what's happening in the core lease fleet. I guess we have got a little bit of a tug-o-war going on here -- very low small business confidence, uncertainty about the economy, but an aged national fleet, benefits of outsourcing. So bring us a little bit further into the weeds, if you will, with what's happening with your customer base as they look at leasing activity.

Yes, Anthony, I think what's happening is, you are right, and it's a tug-o-war. The demand is certainly less predictable than we'd like. But the customers are seeing the benefits of the improved fuel efficiency, as Dennis mentioned. So that is driving the replacement. The other thing is that the units have also gotten to the end of their life. A lot of these units have already been extended so we are at a point where they need to be replaced.

So the good news, I think, for Ryder, is as we are getting the heavy replacement with newer equipment, the fleet age is coming in younger than what we had originally forecast. And we've mentioned a few times in the past calls that in order to get lease returns back to where they were back in the '07, '08 time period, the fleet needed to get a little bit larger. We're probably about 2,000 power units off of what we were then. And it needed to get newer. And, actually, the newer is more impactful even than the additional 2,000 units. So, there is a margin benefit of the fleet getting newer, which will provide a larger percentage of the return back to the '07 and '08 numbers, then it will just grow. And so the fact that it's getting newer is a very good thing.

Okay, that's helpful. My apologies for the confusion on the restructuring. Thank you, gentlemen.

Sure.

Ben Hartford, Baird.

Wanted to -- you guys aren't alone in rationalizing rental fleet this quarter. Curious what rental pricing is like here into the third quarter, what your short-term view is while there might be, quote unquote, excess capacity in the market. And, similarly, can you talk about very short-term lease demand into the fleet disposals that are taking place throughout the industry?

Okay, well, in the second quarter, rental pricing was up 6%. And now that we are in the third week of July, Dennis, do you have any stats or anything you can share for current info?

It's below plan, Greg, but yet still up.

Original plan or reforecast?

Original plan.

Okay.

So we still see a decent pricing environment with rental, just below our expectations originally.

Okay. Good. Thanks. And then, as we have exhausted rental CapEx here year to date and you start to think about 2013 -- I know it's early, I know a lot can change between now and then, but can directionally you give us an idea of where you are thinking 2013 rental CapEx will be?

Yes. Although not official, certainly we expect and I think rightfully you can expect that, because the rental fleet is now right-sized and it is at an average age that we are really pleased with, over the last couple of years, the order of magnitude of rental CapEx could decline substantially.

Great. Thanks for the time.

Peter Nesvold, Jefferies.

Just one really quick point of clarification. The sale leaseback transaction in the quarter, was there any EPS impact from that or is that all cash flow?

Yes, it's pretty much a cash flow item, Peter.

Okay. That's all I had.

It has some benefit because the rates were pretty attractive but I don't think it's significant to the results overall.

Okay. That's all I've got at this point.

Thank you.

Scott Group, Wolfe Trahan.

So, just want to follow-up on the age of the fleet questions. Can you give a little bit of color on where the age of the fleet is today and how much it has aged over the past couple of years? And is there any way to think about how much that has pressured maintenance expense over the few past years? We are just trying to think about how we should think about the potential margin opportunities now that the fleet is getting younger. And then just with that, though, Greg, you didn't seem convinced that the fleet would continue coming down in age. Why won't it come down further?

All right. I'll let Robert touch on that from Asset Management point of view on those two questions and I think you are referring to the lease fleet and not rental, right?

Yes, sorry, yes, the leasing fleet.

Yes, Scott, the lease fleet is down, the age is down a couple months from where we started the year and from where we expected to be. If you compare that to what the fleet age was in 2007, 2008 time frame, it's about a year older. So we still have some ways to run before we get to where we were then. And, in terms of the magnitude, it is a pretty significant number that it has affected our maintenance cost. And maybe one way to look at it is, if you just step back and look at FMS margins from the ones that we are at now -- we're at about 9% for the year versus back then we were about 12%; so that 3 percentage points is really a combination -- is really coming from lease. And it's a combination of the higher maintenance costs and the fleet being a little bit smaller from a power standpoint. So, the 3% of revenue, if you assume more than 50% of that is going to come from the fleet getting younger, that will give you an idea. It's a pretty significant number.

And then for certainty or caution regarding how that may move in the future? Which was my comment.

Yes. Let me just elaborate that in June, we saw some promising results in maintenance costs, which is one of the things that we mentioned. And that was a combination, we think, of the fleet beginning to get younger and then some of the key initiatives that Dennis and his team are working on. We have not built that continued improvement into our balance of the year forecast because one month does not make trend. So I think if that were to continue for the balance of the year, we would have some upside on the numbers that we've -- the guidance that we've given.

Okay. That's very helpful. And the second question is, when we look at commercial rental, I think you mentioned that the fleet was up 17% and pricing is up 6%, but revenues is only up 10%. So can you talk about maybe some of the mix changes you are seeing within rental and if you have any color on what US rental revenue was down, maybe monthly trends or what you are seeing so far in July in terms of US rental revenue?

Yes, I think the reconciliation of those numbers is really demand, right? It's the fleet is up. Pricing is up. But overall demand for the vehicles was down. So that's what caused the revenue to be down. If I were to look at pricing year over year, it was up about 5% in the US. And we expect that to kind of remain steady for the balance of the year. I think, as Dennis mentioned earlier, the pricing environment -- even though demand is down, the pricing environment still continues to be relatively stable.

Do you have a sense on what US rental revenue was, up or down, in the second quarter, and then what you are seeing for overall rental revenue, up or down, so far in July?

Rental revenue in the second quarter was up slightly. And we see that trend continue through July; but then as we catch the tail of last year's really strong third and fourth quarter you will see that flip a little bit.

Okay. Great. Thanks a lot for the time. Appreciate it.

You're welcome.

Art Hatfield, Raymond James.

Just first a question on used vehicle sales. You had quoted what proceeds for tractor and proceeds for truck had done in the quarter. Does that include the impact from wholesale?

Yes.

Can you tell us what those numbers did on a retail level?

We have a few people trying to look for some pages to give you that answer, if we can find it if it's in the room.

Well, while they are doing that, just a clarification, too, on commercial rental. I think, Greg, you had commented or somebody had commented that sequentially demand had improved in June and then had improved again in July. Is that correct?

We said June was considerably lower than our original expectation in June, but had stabilized and was a bit better than May, because May was really bad.

Right. Right.

And July is holding up all right compared to our most recent reforecast.

Okay. And is, I guess, the question I'm asking then, is July -- what has it done relative to June?

It's just a little -- a slight seasonal move. So I would say it's stable with June. I think a good way to look at rental is, it's not continuing to decline. It's relatively stable, which is sort of what we had forecasted going out and it will move seasonably now for the balance of the year.

Okay. That was really my question was going to get to, what, is it doing things normal from a seasonal perspective, so.

Yes. Again, it's hard to tell. This environment has been a little bumpy; but we did adjust, just so you understand. The seasonality we built into the balance of the year, we did adjust downward to reflect maybe a little bit more conservative years that -- over the last seven years. So I think we built some of that already in.

Okay.

Dennis, did you have an answer to the original question?

Yes, Art, to your original question about the proceeds in the retail market -- for trucks, it's up 17% year over year and for tractors it's up just shy of 11%. So it's a real robust retail market right now for used vehicles.

No, that's what I thought. I just wanted to confirm that. Thanks for your time today.

You're welcome.

John Mims, FBR Capital Markets.

Just one point of clarification, on the rental fleet reduction, when you said you are looking at rental fleet down to about 3% to 5% from where you were projected for the end of the year, is that -- I'm just -- there's a lot of numbers thrown out there -- I'm trying to just conceptualize how many actual trucks that is. Is that somewhere around 2,000?

Yes, we will be down -- from the beginning of the year, we will be down about 3,000 units.

Okay. So 3,000 total.

Right.

All right. That's helpful. And then just another point on that line. As you flood the wholesale market with these trucks, as you're putting more into the wholesale market than you normally would, where are these trucks going? Is there a risk that suddenly excess wholesale sales will then detract from your future ability to sell on the retail market?

Well, first, just to have all the listeners get the right impression, the units that we are putting into wholesale would not be a flood. It would be a more moderate inclusion into the marketplace. So it wouldn't be substantial and it wouldn't overwhelm it. Many go offshore. So we are always paying attention to where they go so they don't end up being connected to the retail market. I don't know if we have or actually divulge the degree or the percent of where they all go or what the countries are, but we do pay attention to the end markets because you wouldn't want to put them in a market where you are competing with yourself.

That makes sense. On that line, is there a geographical pockets of where you did most of your cutting or where you have pockets of excess trucks for sale?

No. I think the only additional color maybe I would add to that, John, is that we do control that centrally. So we have 55 or so used vehicle locations that we sell out of. But the decisions on wholesaling are done centrally, based on where we see opportunities. And that's, as Greg mentioned, some of that is done -- you are selling to other resellers in some cases but for the most -- a lot of it is also where we sell to folks that are going to be taking them offshore and, again, some folks are going to be selling to larger fleets.

Okay. That's helpful. But that reseller percentage is not something that you have available?

No, no.

All right, guys, thanks for the time.

You're welcome.

Jeff Kauffman, Sterne, Agee.

Congratulations. Just a follow-up to that last question, first. I think you said the fleet was going to be down 3,000 units from the beginning-of-year number. Where would that be targeting the fleet? I want to make sure we are using the same beginning-of-year number.

Okay. We're just rechecking the page. We're going to -- all right, you're asking about the start-of-year 2012 and end-of-year 2012, with the 3,000 unit decline, what were the actual numbers?

Okay. We'll end the fleet at about 38,000 units.

Okay. So you are saying you are still at 41,000?

No, we were at the start of the year.

Okay. All right. Okay. And then, second question. We've had a highway bill pass with pension reform provisions on smoothing of interest rates. We didn't talk much about forex, and you do have some operations outside the US Can you discuss when these new pension allowances might be able to affect your assumptions, if at all, and what the forex impact that you are looking at is?

Sure. Art?

Okay. Yes. Jeff, around pension, we are going through the calculations now. We expect that it should impact or would impact our 2013 required pension contributions. So the balance of year -- we still expect to make the contributions we had in our beginning-of-year plan for 2012. We would probably give more guidance on that as we move along, but it should be an impact to our 2013 pension contributions.

Being lower.

Being lower.

Positive impact?

Yes. It should be a reduction in the contributions since they are really allowing companies to use a higher discount rate in the calculations for funding purposes. Then, as far as your comment around foreign exchange, that really did not have a big impact to us for the quarter, nor do we expect it to have a significant impact for the balance of year.

Okay, great, guys, I'll pass it on. Thank you very much.

You're welcome.

Brad Delco, Stephens.

Greg, maybe I got a little confused on some of the answers at first and I hate to beat a dead horse, but on the revised guidance, would you say that your outlook for the back half of the year today is materially better or unchanged relative to where things were June 22 when you released your revised guidance? Just from a macro high level?

Yes. For the last six months, it's really unchanged. And then we did actually better than we expected for the remainder and the close of June.

Okay, great. Yes, that's what I was thinking. And then maybe if we could get into some of the details on the used truck sales. Is there -- can you provide a breakout of what percent of the, I think, 6,200 trucks were sold in the retail market versus wholesale? And I guess what I'm really focused on is, you really saw a 24% increase in your used truck sales in the second quarter relative to the first, but the gains were relatively flat and so I'm trying to understand how we should be thinking about that going into the back half of the year.

Yes, we did -- just to expand on that a little bit, we did about 70% of the sales were in retail and 30% in wholesale. And that's what we -- we forecasted that to continue through the third quarter. Our normal -- a more normalized level would be an 80%/20%, 85%/15% level. So that gives you an idea of how much wholesaling we did.

All right, gentlemen, thanks for the time.

You're welcome.

David Ross, Stifel Nicolaus.

Yes. Just a follow-up on the sale leasebacks that you talked about due to attractive lease rates. Is that going to have any impact on losing out to straight finance leases for private fleets considering to outsource?

I didn't understand--?

I guess, if lease rates are really low and somebody is looking to outsource and they look at Ryder Full Service Lease solution where you include the maintenance versus strict finance lease, are some people just going with the strict finance lease option, as opposed to going to the maintenance included option?

Yes, no, Dave, I don't see that. These are really two separate transactions. What a sale leaseback is more to akin to a financing decision we make and how we could best monetize tax benefits available to us and that's why we did it. I don't think it has really any impact on the value prop of our full service lease offering.

Okay. And then--

Before you leave that, Robert, did you want to add something?

Yes. No, actually I just wanted to correct one thing on a previous question. The question that was asked about the rental fleet, I want to make sure everybody is clear on the number. The target ending fleet for rental is just around 38,000 units, as I mentioned. At the end of last year, we were at 39,600. So you are about 1,500 -- year over year we are going to be about 1,500 units lower. The 3,000 is from where we ended the second quarter, so we are going to be down 3,000 units from the 41,000 that we ended the second quarter in.

Thank you. David, another question?

Yes. Just on the SG&A line, that's one of the few expense line items that dropped on an absolute basis year over year. Is that where a lot of the restructuring costs were, and were there any cuts in your sales force?

No. The reduction in the SG&A line is driven in large part by reduced management incentive compensation expense this year relative to last year.

Okay. Excellent. Thank you very much.

Okay. You're welcome.

Thank you. And this does conclude the question-and-answer session. I would like to turn the call over to Mr. Greg Swienton for any closing comments.

All right. Well, we do have a couple of minutes left but I think all questions have been handled and answered so we are going to sign off. So thank you for being on and have a good, safe day.

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