萊德系統 (R) 2012 Q4 法說會逐字稿

Good morning, and welcome to Ryder System, Inc. fourth-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 objections please disconnect at this time. I would now 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 fourth-quarter 2012 earnings and 2013 forecast conference call. I'd like to remind you that during this presentation you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations, and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission.

Presenting on today's call are Greg Swienton, Executive Chairman; Robert Sanchez, President and Chief Executive 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.

Thank you, Bob, and good morning, everyone. Today we'll recap our fourth-quarter 2012 results, review the asset management area, and discuss our current outlook and forecast for 2013. Then after our initial remarks, as always, we'll open up the call for questions.

But, before I get into the actual numbers, please allow me to make a few personal comments. As you are aware, in December, we announced our organization plans and that I'll be retiring as Chairman after are annual shareholders meeting on May 3. And we've transitioned to Robert Sanchez as our new CEO, effective the first of this year. And as you've known him in various positions at Ryder over the years -- as CIO, CFO, President of FMS and Chief Operating Officer of the Company -- I know you agree he's an ideal and a great choice. For myself, it's hard to believe how time flies by. But today, I am presenting Ryder results for the 55th consecutive quarter. And in reaching almost 14 years, I wanted to say how privileged and grateful I've been to not only serve Ryder and our customers and our employees, but also to thank all of you as investors and analysts for the relationships and the time we have also shared over the years.

It would be hard to calculate how many hours and days we've spent in conversations, meetings, presentations, conferences, road shows, one-on-one sessions. But I trust, as you followed our progress over the years, in improving our business model and direction and results, that this was time very well spent together.

We've not only worked on improving our performance and credibility. But we've also diligently worked at always providing solid and improved disclosure so you could understand our business. We are unique in our portfolio of business and structure. And therefore believe that the better you understand us and our business model and its subtleties, the better you could be at analysis and investment. Which ultimately serves both of our mutual interests. We believe in telling it to you straight, in good times or bad times, with challenged results or with great results. And though I may not be the one personally delivering the earnings report in the future, those commitments from the team at Ryder will not change.

So, with that, let me move on to our presentation. On page 4, fourth-quarter results, net earnings per diluted share from continuing operations were $1.07 for the fourth quarter 2012, up from $0.92 in the prior-year period. Fourth-quarter results included a $0.10 charge for vehicle-related losses from Superstorm Sandy. And these vehicles were owned by full-service lease customers for which Ryder had liability under certain agreements. We're currently pursuing recovery of these losses under the applicable insurance programs, but at this time, recovery remains uncertain. We've since enhanced our insurance coverage in order to mitigate this type of risk going forward.

In 2011, the fourth quarter included a $0.05 charge for acquisition-related restructuring costs. So, excluding these items in each year, comparable EPS was $1.17 in the fourth quarter 2012, up from $0.97 in the prior year. And this is an improvement of $0.20, or 21%, over the prior-year period.

Our results also represent outperformance of $0.06 to $0.11 versus our fourth-quarter forecast of $1.06 to $1.11. And our outperformance this quarter primarily reflects better than expected rental demand. And we estimate that Superstorm Sandy recovery efforts benefited operating results by approximately $0.03, largely due to increased rental demand, as well as some additional used vehicle sales. Total revenue increased 3% over the prior year. And operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, increased 4%. The increase in revenue reflects organic growth in full-service lease, as well as increased volumes in new business in the SCS automotive sector.

Page 5 includes some additional financial statistics for the fourth quarter. The average number of diluted shares outstanding for the quarter increased slightly to 50.8 million shares. During the fourth quarter, we did not purchase any shares under our 2 million share anti-dilutive program which expires in December, 2013. As of December 31, there were 51.4 million shares outstanding, of which 50.8 million are included in the diluted share calculation. The fourth-quarter 2012 tax rate was 32.9%. And this tax rate includes the impact of the Superstorm Sandy vehicle-related losses. Excluding this item, the comparable tax rate would be 33.3%. And the prior year's tax rate of 34.8% was impacted by acquisition-related restructuring costs. And excluding this item in 2011, the comparable tax rate would have been 34.4%.

Earnings per share, excluding the non-operating portion of pension expense, were $1.26, up by $0.24, or 24% over fourth quarter 2011. And as a reminder, beginning in 2013, we will report comparable earnings per share on this basis by excluding non-operating pension costs.

Page 6 highlights key financial statistics on a full-year basis. Operating revenue was up by 5%. Comparable EPS from continuing operations were $4.04, up by 16% from $3.49 in the prior year. The spread between adjusted return on capital and cost of capital was 80 basis points for the year, which represents an improvement of 60 basis points from 2011. Earnings per share, excluding non-operating pension costs, were $4.41, versus $3.71 last year, up by $0.70 or 19%.

I'd like to turn now to page 7 to discuss some of the key trends we saw during the fourth quarter in the business segments. In Fleet Management, total revenue grew 4% versus the prior year. And total FMS revenue includes a 3% increase in fuel services revenue, reflecting higher fuel prices. FMS operating revenue, which excludes fuel, grew 4%, as well. And this increase primarily reflects organic growth in full-service lease. Contractual revenue, which includes both full-service lease and contract maintenance, was up by 5%. Full-service lease revenue grew 6% versus the prior year due to higher rates on replacement vehicles and organic fleet growth.

At year-end, the lease fleet size increased by 1,400 vehicles versus the prior year, with organic growth of 900 vehicles. On a sequential basis, the organic lease fleet decreased by approximately 300 units from the end of the third quarter this year. The sequential lease growth was impacted by planned, non-renewal of some lower-margin trailers in the UK, and Sandy-related vehicle losses. In contract maintenance, the fleet grew year-over-year by 2,500 units, and sequentially by 800 units. The lease fleet age began to decline in June, and has steadily improved since then, due to continued solid replacement of units by customers on higher-than-average lease expirations. In the fourth quarter, the lease fleet age was down by another month sequentially. And was down by a total of four months during the year.

Miles driven per vehicle per day on US leased power units increased 2% compared to the prior year. Commercial rental revenue was down 1%, reflecting lower demand on a smaller fleet. Rental demand was down 4% compared to the prior year. But was a little above expectations, partly due to Superstorm Sandy recovery activity. Rental utilization on power units was strong and above expectations, although it declined 70 basis points to 78.2% from 78.9% in the prior year. The average rental fleet decreased 3% versus the prior year. Global pricing on power units was up 3%, which was generally in line with our expectation.

In the used vehicle area we saw a continued strong demand environment and good pricing. Robert Sanchez will discuss those results separately in a few minutes. Overall, improved FMS results were driven by improved lease performance, due mainly to lower maintenance costs and organic growth. Earnings also benefited from lower compensation costs versus the prior year. These benefits were partially offset by lower commercial rental results. Earnings before tax in Fleet Management were up 17%. FMS earnings as a percent of operating revenue were 10.1%, which were up 100 basis points from the prior year.

Turning to page 8, in the Supply Chain Solutions segment, total revenue was up 2% versus the prior year. And operating revenue was up 4%, as higher operating revenue was partially offset by lower subcontracted transportation. SCS operating revenue grew due to higher volumes and new business in both the automotive sector and in dedicated services. Included in higher operating revenue was an 8% increase in revenue from dedicated services. Improved segment earnings were driven by increased volumes and new business in both automotive and dedicated, partially offset by higher medical benefit costs. Supply Chain's earnings before tax as a percent of operating revenue were 6.3%, up 90 basis points from the prior year. And in total, SCS earnings before tax were up 22% from the prior year.

Page 9 shows the business segment view of our income statement, which I just discussed, and is included here for your reference. Page 10 highlights our full-year results by business segment. We saw mid single-digit operating revenue growth and double-digit earnings growth in both segments. Comparable full-year earnings from continuing operations were $207.4 million, up by 15% from $180.6 million in the prior year.

And at this point, I'll turn the call over to our Chief Financial Officer, Art Garcia, to cover several items, beginning with capital expenditures.

Thanks, Greg. Turning to page 11, full-year gross capital expenditures were approximately $2.2 billion, up $400 million from the prior year. This growth reflects an increase of $481 million for purchases of new leased vehicles. 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 in to customer rates. Capital spending on commercial rental vehicles was down $80 million.

We realized proceeds primarily from sales of revenue-earning equipment of $413 million, up by $113 million from the prior year. This increase reflects more units sold versus last year, as well as higher pricing. Including a $130 million sale leaseback in the second quarter, net capital expenditures increased by $200 million to just over $1.6 billion.

Turning to the next page, we generated cash from operating activities of over $1.1 billion during 2012. $92 million over the prior year. The improvement reflects higher cash-based earnings, partially offset by increased pension contributions. We generated $1.75 billion of total cash for the year, up by $300 million, including higher used vehicle sales as well as increased proceeds from sale leasebacks. Cash payments for capital expenditures increased by $434 million, to approximately $2.1 billion. The Company had negative free cash flow of $384 million for the full year. Free cash flow was down by $127 million from the prior year's negative free cash flow, due mainly to higher planned lease fleet investments. Free cash flow came in somewhat below our latest forecast range of negative $270 million to $330 million, primarily due to shorter OEM lead times on a new lease vehicles ordered.

Page 13 addresses our debt to equity position. Total obligations of just under $4 billion are up by over $500 million compared to year-end 2011. The increased debt level is largely due to higher lease capital spending. Total obligations as a percent to equity at the end of the year were 270%, up from 261% at the end of 2011. Our leverage calculation was impacted by a pension equity charge that was determined at year end based on planned discount rates and asset values. Year-end leverage increased by 12 percentage points from the pension charge, which related primarily to lower discount rates.

The format of the chart shown here has been revised to illustrate the cumulative impact of the pension equity charge on leverage. As you can se, this impact has been quite significant in recent years, and was 83 percentage point at year-end 2012. Equity at the end of the year was just under $1.5 billion, up by $150 million versus year-end 2011. The equity increase was driven by higher earnings, and was somewhat offset by a $50 million pension equity charge.

At this point, I'll had the call over to Robert 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 used vehicle inventory for sale was 9,200 vehicles. Up from 6,300 units in the fourth quarter of 2011, but in line with our expectations coming into the quarter. On a sequential basis, from the third quarter 2012, ending inventory increased by only 100 units. Used vehicle inventories are elevated beyond our typical target range of approximately 6,000 to 8,000 vehicles. This largely reflects a planned increase in lease replacement activity. Used vehicle inventories are expected to remain in the 9,000 to 10,000 range during 2013 due to the continued heavier-than-normal lease expiration and replacement.

We sold 5,400 vehicles during the quarter, up approximately 30% compared to the prior year, reflecting continued, strong market demand for used vehicles. Pricing for used vehicles remained strong. Comparisons were negatively impacted, however, by an increased use of wholesaling to manage inventory levels, as discussed on previous earnings calls. As well as some softening for tractor pricing coming off of historically high levels. Compared to the fourth quarter of 2011, proceeds from vehicles sold, including wholesaled units, were down 9% for tractors and up 2% for trucks. From a sequential standpoint, tractor pricing was down 3%, and truck pricing was up 2%, again including the increased wholesaling activity. Retail pricing was down by 3% for tractors and up 6% on trucks on a year-over-year basis.

Given our current inventory levels, as well as anticipated strength in lease replacement activity, we expect to continue somewhat higher uses of wholesale channels in 2013. The number of leased vehicles that were extended beyond their original lease term increased versus last year by 340 units. This reflects, and is consistent with, the higher volume of renewal activity this year due to a heavier lease replacement cycle. Early terminations of leased vehicles declined by 225 units, or 8%. Early lease terminations remain at the lowest level in the past decade. Our average commercial rental fleet was down 3% versus the prior year. Following a more normal seasonal de-fleeting during the fourth quarter of 2012, the ending rental fleet was down by 4%, or 1,600 units, to end the year at 38,000 vehicles.

I'd like to turn now to discuss our outlook for 2013. Pages 17 and 18 highlight some of the key assumptions in the development of our 2013 earnings forecast. Our 2013 plan anticipates low to modest growth for the overall economy, with continuing uncertainty in the macro environment. Stronger-than-expected macroeconomic growth, and/or a sustained housing recovery, could provide upside to our forecast. We expect to maintain the cost reductions implemented in mid-2012. And this should result in a carryover benefit from these actions into 2013.

In Fleet Management, given the external environment, we're anticipating continued solid contractual sales and modestly higher fleet renewal levels. As in 2013, lease expirations are again higher than average this year. We expect continued strength in lease replacement activity, leading to further declines in the average age of the fleet. A younger lease fleet, combined with execution on maintenance cost initiatives, is expected to result in ongoing maintenance cost reductions this year.

In commercial rental, our forecast is based on modestly lower rental demand, with improved utilization and pricing on a smaller fleet. The strong used vehicle pricing results that we realized in 2012 will benefit depreciation rates this year, as these results our blended into our average vehicle residual calculation. This benefit is forecast to be slightly offset by lower gains on sale of used trucks in 2013. We expect that the number of vehicles sold will increase due to the high lease replacement activity. But are forecasting modestly lower pricing on some classes of power units as we come off of historically high pricing levels.

Our overall FMS margins are expected to increase, due to a lower lease fleet age and maintenance cost, organic contractual revenue growth, the depreciation change, and cost savings. This increase in margin will be partially offset by higher compensation, insurance premiums, and strategic investments. Due to the elevated lease replacement cycle, higher capital spending per vehicles to fulfill signed lease contracts is expected for 2013. As a result of the significant investments we've already made in recent years to refresh our rental fleet, as well as anticipated market conditions, we believe that the rental fleet size and age are appropriate. As such, we've planned significantly lower capital spending for rental units this year. In total, capital spending is expected to be lower, and this will benefit free cash flow.

Turning to page 18, in Supply Chain, we expect growth in revenue due to both strong new sales, including many deals signed in the second half of 2012, and improved retention. Which will more than offset slightly lower volumes in our high-tech and CPG industry verticals. We're expecting continued improvement in SCS earnings, driven both by revenue growth and leverage of overheads.

In terms of corporate actions, we plan to temporarily pause our anti-dilutive share repurchase program. As mentioned earlier, we ended 2012 with a leverage ratio of total obligations to equity at 270%, with a significant impact coming from the pension equity charge. While this is within our target range of 250% to 300%, in order to maintain near-term balance sheet flexibility, and provide capacity, we've elected to temporarily pause our anti-dilutive share repurchase program. As leverage is expected to decline throughout 2013, we anticipate reinstating the anti-dilutive share repurchases at some point in the future as balance sheet conditions merit.

Page 19 provides a summary of some of the key financial statistics for our 2013 forecast. Based on the assumptions I just outlined, we expect operating revenue to grow 4% this year. Comparable earnings from continuing operations are forecast to increase 8% to 11%, showing strong operating leverage on our revenue growth. Comparable earnings per share are expected to grow by 7% to 10% to a range of $4.70 to $4.85 in 2013 as compared to $4.41 in the prior year. As a reminder, these numbers exclude the impact of non-operating pension costs, as we'll report comparable earnings excluding this item starting in the first quarter of 2013.

Our average diluted share count is forecast to increase by 600,000 shares to 51.3 million shares outstanding. We project a 2013 comparable tax rate of 35.2%, which is slightly below prior year's tax rate of 35.4%. The spread between our return on capital and cost of capital is forecast to widen from 80 basis points in 2012 to 100 basis points this year, driven by higher projected earnings in both business segments.

The next page outlines our revenue expectations by business segment. In Fleet Management, contractual revenue in lease and contract maintenance is forecast to grow by 4%. This largely reflects the improved organic growth, higher rates on new sales resulting from increased vehicle investments, and CPI rate increases. In commercial rental, we're forecasting a 2% decline in revenue due to lower expected demand on a smaller fleet. Supply chain operating revenue is expected to grow by approximately 6% for the year, driven by new business activity and higher retention. Due to the irregular timing of sale activity, and the startup schedule of certain contracts, Supply Chain revenue is expected to be only up slightly in the first quarter.

Page 21 provides a chart outlining the changes in our comparable EPS forecast from 2012 to 2013. We plan to make certain strategic and discretionary investments to support the long-term growth and profitability of our business. These investments fall mainly in the areas of customer-facing technology, and sales and marketing investments. These strategic investments are expected to cost between $0.23 and $0.27 this year. Higher compensation expense is expected to cost between $0.20 and $0.23 a share this year. While higher insurance and medical costs are expected to lower EPS by $0.21.

The temporary suspension of our anti-dilutive share repurchase program will reduce EPS by a projected $0.06 this year. As a result of our expectations for low to modest macroeconomic growth, and lower rental demand, we're forecasting rental earnings to be unchanged, as lower revenues is offset by higher utilization on a smaller fleet. Were currently planning for the average rental fleet to be down by 7%, or 2,600 units. If conditions improve, however, either due to a better-than-forecast macro environment or an improving housing market, this plan could be revised. And we would also benefit through improved utilization and price.

The overall benefit from the actions taken in mid-2012 to reduce cost is expected to add $0.18 to EPS this year. We expect improved results in Supply Chain solutions in 2013. New sales, improved retention and leverage of overhead costs are projected to increase EPS by $0.21 to $0.24 this year.

In FMS, the net impact of updated residual value estimates and gains on new vehicle sales is expected to benefit EPS by $0.29 to $0.31 this year. As a reminder, our annual update of residual values reflects a rolling multi-year average of used vehicle price levels, and the stronger 2012 pricing we actually realized on sales.

The largest driver of 2013 EPS improvement is better performance from our contractual product lines in FMS. This improvement is driven primarily by the maintenance cost benefit generated from a newer lease fleet and various maintenance initiatives. At year-end 2012, the average age of our lease fleet was four months younger than it was at the end of 2011. It's expected to decline further in 2013 due to the high levels of replacement activity.

Modestly positive organic fleet sales and returns on higher per unit investment costs are also forecast to benefit contractual FMS performance. Overall, the ongoing recovery of the lease and contract maintenance product lines is expected to benefit EPS by between $0.38 and $0.41 this year. In total, these items are expected to result in comparable earnings per share of $4.70 to $4.85 in 2013.

I'll turn it over to Art now to cover capital spending and cash flow.

Thanks, Robert. Turning to page 22, we're forecasting gross capital spending in a range of about $1.8 billion to $1.9 billion. Down by almost $300 million to $400 million from the prior year, due to lower spending on rental vehicles. Lease capital is projected to remain at the elevated levels seen in 2012, increasing modestly in '13 by up to $75 million. Spending on replacements is forecast at $1.1 billion, and represents a higher-than-normal level of expiring leases. Replacement spending is currently anticipated to decline in 2014, as lease expirations return to a normalized range.

Growth-related lease spending in 2013 is forecast at $450 million to $500 million. This includes $410 million to $420 million of higher purchase cost per vehicle, and $40 million to $80 million due to growth in fleet size. We plan to spend $150 million on commercial rental vehicles, significantly below last year's spent of $542 million, as our rental fleet is appropriately aged and sized relative to forecast demand levels. As always, please note that the split of capital between lease and rental could be revised during the year based upon movements of trucks between product lines. And that lease capital is only spent once we've signed customer contracts.

Proceeds from sales of primarily revenue-earning equipment are forecast to improve by $17 million to $430 million. This reflects an increase in the number of vehicles sold. We're not forecasting a sale leaseback transaction this year. As a result, net couple expenditures are forecast at roughly $1.3 billion to $1.4 billion. This represents a decrease of approximately $200 million to $300 million from 2012. Accordingly, free cash flow is forecast to improve to a negative $130 million to $190 million due to lower gross capital spending, partially offset by the lack of a sale leaseback in 2013 forecast.

We expect total obligations to equity will decline throughout the year to reach 241% to 245% by the end of 2013. The year-end leverage forecast is just below the low end of our target range of 250% to 300%. And includes the temporary pause of our anti-dilutive share repurchase program. At this leverage, we have capacity to support additional organic growth, a typical acquisition spend, and cushion for potential unplanned pension equity charges.

Turning to the next page, our return on capital is forecast to increase from 5.6% in 2012 to 5.8% this year. Driven by growth in projected earnings outpacing growth in capital invested. The spread between return on capital and cost of capital is projected to grow from 80 basis points in 2012 to 100 basis points in 2013, which returns the Company back to pre-recession levels. Our longer-term target for capital spread remains 150 basis points. And would be driven largely by improved returns on capital and FMS. In addition to an improved spread, in 2013 our projected total invested capital of over $5.6 billion is higher than any time in the past decade.

Page 24 provides a brief description of the change we're implementing to our comparable EPS metric. As we discussed on our third-quarter call, beginning this year comparable EPS will exclude non-operating pension costs, along with any other appropriate exclusions. As you may recall, our pension plans were frozen to all new and most existing participants several years ago. Despite this action, we and many other companies continue to experience significant earnings volatility, due to pension accounting and changes in investment returns and discount rates. We're implementing this change because we believe it provides better visibility to the Company's operating performance, and also reduces the volatility associated with this non-cash item.

The 2013 EPS forecast we just reviewed excludes non-operating pension costs of $0.24 in 2013, and $0.37 in 2012. We'll begin reporting actual results on this basis in the first quarter of 2013. We've provided five years of comparable quarterly EPS history under the new method. And ten years of quarterly non-operating pension expense history for modeling purposes. This information is included in the appendix to this presentation, and also on our investor website.

At this point, let me turn the call back over to Robert.

Thanks, Art. Turning to page 25, as I previously outlined in the waterfall chart, our full-year 2013 EPS forecast is a range of $4.70, to $4.85, up $0.29 to $0.44 from the comparable $4.41 in the prior year. As Art covered, 2012 comparable EPS has been adjusted to exclude $0.37 of non-operating pension costs. We're also providing a first-quarter EPS forecast of $0.75 $0.80 versus comparable prior year EPS of $0.69. I'd like to point out that the first-quarter forecast includes $0.02 of planned restructuring costs for FMS international operations, which will remain in the comparable EPS for the quarter.

Turning to page 26, we've provided a view of historical and forecasted comparable earnings per share under the new reporting that excludes non-operating pension costs. As you can see, the midpoint of our 2013 EPS forecast is $4.78. This represents record comparable EPS, exceeding our prior peak earnings year of 2008. And reflects the many improvements made in the business over the past five years. While FMS margins continue to improve, they're expected to still remain below pre-recession levels in 2013. And as such, we believe there is significant earnings upside in the business going forward.

That concludes our prepared remarks this morning. We had a lot of material to cover today with both our fourth-quarter results and 2013 outlook. As a result, I'd ask that you limit yourself to one question and one follow-up each. If you have additional questions, you're welcome to get back in the queue, and we'll take as many calls as we can. At this time, I'll turn it over to the operator to open up the line for questions.

Thank you. (Operator Instructions)

Kevin Sterling, BB&T Capital Markets.

Greg, let me say, congratulations on your pending retirement. I hope you get to spend some time with your family.

Thank you. I'm here through May 3, if you need me.

Okay. I'm sure we'll be talking. Let me start with your CapEx outlook. And you did a great job on page 22 of your presentation, walking through your forecast for 2013. In particular, your full-service lease replacement and full-service lease growth. Could you tell us what full-service lease replacement and full-service lease growth look like for 2012, just so we can compare to 2013?

Yes, I'll let Art take a look at that. It's probably not too different from what you're seeing in 2013.

Right, Kevin. Yes, those numbers would be comparable. Obviously we're spending a little bit more in the 2013 forecast. So maybe a little bit higher this year around growth, but not measurably.

Okay. So a little bit more on growth. All right. And then just as a follow-up question here, if we get to the back half of the year and, say, the economy picks up, will you have to grow your rental fleet? Or do you think you're still at the right size where, if we do see some pickup in the economy, you still have enough trucks in rental?

I think, Kevin we've got a few things we could do. The first thing we can do is obviously get even better utilization on the fleet we have. We have units that we have planned to dispose from our rental fleet that we could hang onto, certainly throughout most of the season. We can redeploy units coming off of lease and coming off of other product lines into rental. And we can do all those things without additional CapEx. If it were to really heat up, we could probably handle maybe 3% demand increase that way, 3% to 4%. If it got beyond that, then we'd probably be in a position that we would be adding some trucks. Anything else, Dennis?

No, that covers it, Robert. That asset management flexibility is what we will turn to first before we spend the CapEx.

Okay, great. I'm sure you'll take greater than 3% demand anyway. That's all I had. Thanks for your time this morning.

John Mims, FBR Capital Markets.

Greg, best of luck in whatever comes next. Robert, let's start with you. We've discussed for several quarters the reasons why used truck prices have been as high as they been. And that you've been able to enjoy that for the last several quarters. But we're talking now about that unwinding a bit in 2013. In your mind, does that indicate that the replacement cycle that everyone has been talking about for so long is starting to unwind? Or is it just more Ryder-specific pricing issues that you expect to happen in '13?

No. I want to make sure we left the right message on that. We expect slight reductions in some of the pricing. But really, still, at a pretty healthy level. We're coming off of record high used vehicle prices. So I would probably describe it as still relatively strong pricing. And again, a lot of that is due to the fact that we still have the pre-'07 engine technology. Plus what we are seeing in the market. We're still seeing good demand on the used truck side.

Okay. That's fair. And then maybe switching over to the Supply Chain side, John, can you comment? It's gotten progressively stronger. Now, when you look at the guidance outlook for '13, Supply Chain revenue growth is expected to be a bit stronger, leading the charge. Can you comment on how much of that is just Ryder-specific organic new business growth versus just the outsourced market getting better as a whole?

Yes, thanks for that question. As Robert mentioned, we've had really strong, actually record sales in Q4, and that's been continuing into Q1. I think there's a bunch of things going on. I think our strategy of focusing on vertical industry groups is driving part of that. And then I also think part of it is coming from some private fleet conversions that are out there, that we're seeing more of. And we're expecting to continue to see more of. And probably a big driver there is the new CSA regulations that are causing private fleets to report and post their safety scores. And some of these private fleet operators are starting to look at how their safety scores compare to companies like Ryder that focus on this as a business and have much better safety scores. And are starting to consider outsourcing. So we're seeing some more private fleet conversions, and that's part of our growth, as well.

What's the margin profile of the dedicated private fleet slide versus your traditional supply chain?

We used to report on that, and so you could look back in prior years. It had been a little higher than Supply Chain, and had come down a little bit in 2011, as we reported, because of some of the challenges we had with some of the Scully accounts that we brought on, if you remember. And then during the year we fixed those challenges and the margins came back up. Probably -- I'm not looking at the precise numbers -- but at a high level I would say they're back up to about the kind of margins we had historically had, where they're very slightly higher in dedicated than they are in the rest of the business.

Right, okay. So it's safe to say that dedicated, the engine -- you're getting slightly better growth out of dedicated and slightly higher margin, which should reflect in the whole group.

Yes. I think that's a fair statement.

Great. Thank you very much for the time.

Ben Hartford, Baird.

I know it was stated, but, Greg, congratulations on the retirement. It's certainly well-deserved. Can we talk a little bit about FMS margins? As we look toward to calendar '14, and if we assume that the fleet age will start to normalize within the lease fleet at some point in time that year, what prevents either that year's margin or, as you exit that year, the margin on an EBT basis as a percent of operating revenue, at least matching 2006 peak of roughly 13%? Can you talk a little bit about some of the puts and takes? And how we should think about what the margin profile will be if and when the lease fleet age does normalize?

We're probably getting a little ahead of ourselves to talk about '14 yet. But I can tell you that we expect the fleet age to continue to decline in 2013. And I think it's fair to say that will also continue into 2014 based on our latest estimates. So, I would expect continued improvement coming from the fleet age and the maintenance cost reductions. In FMS over the next, certainly, 12, and I would say even beyond that, probably into the next 24 months. So, I think you're seeing in 2013, continued improvement in FMS margins, I would expect that. It still hasn't gotten back to pre-recession levels, and we expect that, as we'd said in the past, to get to pre-recession and even a little better over time.

Okay. And then, you've given some of this data in the past, on the organic fleet side, both within full-service lease and commercial rental. Could you talk about where the fleet size is today on the full-service lease side relative to maybe 2008 's peak? And, similarly, commercial rental relative to maybe 2006's peak? How far are we from those peak levels? Do you have that data on hand?

The group is trying to get that. I'm not sure we have that on hand. But I can tell you, if you remember, the lease fleet was getting back close but the power fleet was still slightly below. I think that's probably where we're at. Our power fleet is still slightly below maybe the peak '08 in lease.

Right. If you focus, Ben, on pre-recession we're probably that 1,000, 2,000 units down, still, in power. Because when we acquired Hill Hire, they had a big trailer business and that's not obviously our core.

Right. Okay. I think that's -- I'll follow-up offline for the details. I appreciate it.

But our rental fleet, just to follow up on rental, our rental fleet, as you know, came down last year. We started the year at about close to 40,000 units and we ended at 38,000. And we're expecting now in 2013 to probably be down another 1,600 units, if demand doesn't come back. If it does, obviously you'll see us hold off and keep that fleet up.

Okay. That's helpful. Thanks.

Peter Nesvold, Jefferies & Co.

Can I turn to slide 23? I am looking at the spread between the cost of capital and the return on capital. And we've seen this really terrific step up from negative 2% in 2009 to positive 1% in '13. First question would be, is there a way for me to estimate what the incremental spreads were in 2012? What kind of spreads were you writing incremental new business at?

Right. We write our lease business, is in that 60 to 100 basis point spread over cost of capital.

So as I look at the 2013 target of 1.0%, in the past it was like 1.0% to 1.2% back in 2005, 2006. Does that mean that you have repriced all of the bad business last cycle, in that the spreads level off here? Or is there more upside to that number?

I would highlight first, I wouldn't say we're repricing bad business. Our pricing has been disciplined throughout the period. So, really, what we've seen here is the fleet age associated with the lease business is dragging down the spread, if you will, right now. Were starting to see that improve in '13 as we go through the replacement cycle. And that really is what gives the upside that we see long-term. Our target is 150 basis point period.

And I think the other thing I would add to that is certainly a robust rental environment would help also. If you go back to '06, we were also in a pretty healthy rental year then. So if we saw some strengthening in rental, would certainly help too.

Is there a way -- do we know how much of the book was repriced since, let's say, January 1 '07, the last major peak of the last truck cycle?

Yes, if you assume it's 15% to 20%, each year you've probably got a lot of it already repriced.

Okay. Last question. Maintenance costs -- we're hearing from some of the other truckload carriers, some of the public guys who have reported recently, their maintenance costs are still going up even though they've really lowered the average age of their fleet. What's been your experience so far on the post 2010 trucks? And, I know you don't know inside their business, but where do you think others in the industry aren't seeing the same earnings leverage from better maintenance costs with the new equipment?

Yes, I'll hand it over to Dennis to give you more color on that. But I think a couple things. Remember, the holding periods on our fleet are very different than what many of the truckload guys are doing. They hold them, certainly, shorter. And I think we certainly are benefiting from the expertise that we have in the maintenance area. But, no, our experience with the new technology has been good. We work very closely with the OEMs. And certainly there's more components with the new technology, more expensive components. But all and all I think the experience has been good. Dennis, do you want to add?

I would just add, Peter, that we've been focused on truck uptime. And we're having a lot of benefit there by focusing on fewer breakdowns and fewer repairs in between our PM cycles. So, with that focus, we're getting some real benefit year over year with the maintenance cost.

Yes, the difference in the trade cycles really explains it, yes. That's very helpful. Thanks, guys.

David Ross, Stifel Nicholas.

Also on that return on capital, cost of capital side, that includes both FMS and SCS, correct?

That includes everything. That's consolidated.

Yes, the whole business.

So if SCS grows as a percent of operating income, that spread should widen.

Yes, that helps the spread.

Okay. And then on the SCS new business that's coming in, is that mostly with existing customers opening up new plants, or using you guys in new geographies? Or is it new customers coming into Ryder?

Mostly new customers. Some of it's expansion with existing customers. But, no, most of it is new customers. And it's across the board. It's in all of our vertical industry groups, and it's in dedicated, as well.

And are those generally guys that are new to outsourcing? Or are you winning that business from competitors?

Our best opportunities, and certainly well over 50% of our new business, is customers who are -- where the project, at least, is new to outsourcing. Maybe the customer has outsourced somewhere else in their company but the project is a new outsource. The service we're performing is new outsourcing.

And are you losing any business to insourcing? Has that been an issue? Or is outsourcing still the --?

It occasionally happens. It's not -- on a net basis it's not even close. We talk a lot about only 11% of the services we provide are outsourced -- performed logistics services we provide in the US are outsourced. So there's a huge, that 89%, that our strategy is aimed at, going after that 89% and providing more value than anybody else, and helping customers save money by outsourcing to us. So that's really everything we're aiming at, is the 89% that's not outsourced.

Very helpful. And then one quick question. There was a comment made about shorter lead times at the OEMs. I didn't write fast enough to understand what exactly you guys were talking about there.

Right. As we went through the year, David, we were seeing, when we order equipment we forecast when it will be delivered to us. And as we got later in the year, the lead times shortened. So we probably went from four months at the beginning of the year, until at the end it was maybe 90 days. So that drove a little bit more spending at the end of 2012 than what we had forecast.

But that's generally a good thing because it gets --.

Yes, there's nothing wrong with that. It was more commenting about why our forecast was off a little bit on free cash flow.

And do you expect that to trend back to the four months in 2013? Or stay at the 90 days? Any idea from the OEMs?

Dennis?

It's just dependent on demand that we see in the marketplace. So right now, based on the estimates, I think it's going to stay in that three-month time frame.

Excellent. Thank you very much.

Todd Fowler, KeyBanc Capital Markets.

Greg and Robert, congratulations to you both, again. Where I wanted to start, on the waterfall chart. Looking at the head winds that are coming in, in '13, related to compensation and insurance and medical, those are higher than what I would have expected. Is that normal wage inflation? And is that something we should expect on the medical side based on where medical costs are going? I know that you just went through a period of cost reductions and you still have some benefit from that. But I'm trying to get my arms around the salary increases and if that's related to having to bring on new people to support growth. Or the leverage that you have in the model.

Yes, let me give you a little more color on it. The compensation is a combination of salary increases that we give as part of the normal annual process. And also, getting bonus back to the target level. We fell short of our plan this year, due to the challenges we had in rental. So, certainly a portion of that, about 50% of that, is for getting back to target. So again, that's self adjusting. If we don't hit the numbers, that doesn't come in. On insurance and medical, again it's about 50/50. About 50% of that $0.21 is due to higher insurance premiums. And that's really been, as we've renewed our insurance agreements, we've seen some premium increases. On the medical side, certainly this last year we had some challenging experience in medical, that we're now planning for some of that in 2013. Obviously, if that doesn't come in, then we'll have a benefit. But, Art, go ahead.

Yes, Todd, a couple things. The insurance here we're focused on is more around the property. It's not related to medical. The market is hardening generally around property insurance. And also there is a post-Sandy impact there that's embedded in there. So, we're anticipating that. The medical side, as Robert said, we saw much higher medical costs in 2012. We highlighted it a couple times back in the second quarter, as well as in the fourth quarter for Supply Chain. So we forecasted that to grow a little bit based on, I think it's prudent at this time. 2012 was, in that sense, not the best year for us, so we may have some upside if it doesn't really replicate again in '13.

Okay. All that helps. Just wanted to make sure it also wasn't all of Greg's severance, I guess. (laughter) The follow-up that I had was, there were some comments about the age of the lease fleet coming down, I think four months this year. Can you talk about where the age of the lease fleet is relative to, I think that it had bottomed somewhere below 40 months in 2009. Can you at least give us a sense of where it is relative to when you were at higher margin levels historically?

Yes, we still have some room to go. We're probably in the high 40's now. And we still have, we probably still have a ways to go to get to the high 30's, which is where we were.

High 30's, low 40's.

Low 40's, back during that time. So, we still expect certainly to get an improvement this year. Maybe four or five months. That's why I still think there's some opportunity for 2014, also.

Great. Thanks for the time today.

Todd, I appreciate your sense of humor but, in case for the people on the call don't know, there isn't any. (laughter)

I wasn't sure if the board was listening or not. (laughter)

That's why it's on the waterfall.

Thanks again, guys.

Art Hatfield, Raymond James.

Let me just start by congratulating Greg and saying job well done to you. And you're definitely leaving the Company in some good hands. I've got a question about your leverage and your comments on the cumulative pension charge that is built up within that number. And how we can think about that going forward. Because if I look at what your leverage is ex that, in my opinion, and correct me if I'm wrong on this, but I would characterize that pension charge or liability, however you want to phrase it, as somewhat contingent as it could potentially get reversed out going forward. Given that, it appears that the Company would be significantly under levered, from a historical perspective. So is it fair to say that really, even though you're up in that range, or midpoint of that range, that you're really not constrained going forward? I know you want to consider the ratings of the Company and all that, but as we think about the Company, you're really in a good position from that standpoint. Help me, how I should --.

You're right. Art, you're right, in that, if you just look at balance sheet debt to equity, we really haven't levered up that much. Most of the increase has been driven by the pension equity charge. Now, that being said, it is a metric, it is an item that has to be considered. It's factored in by the rating agencies when they look at the Company. And ratings are important to us. So, it's not something that we can just push aside, if you will.

Now, to your point about -- it's due really to this interest-rate environment we've experienced over the last three years. Discount rate is down over 200 basis points in that period of time. So, it probably won't turn around that fast. But, you're right, in that once you get back to a more normalized rate environment, you would see our leverage come down. And then we would have ample capacity to do other things.

Okay. Thank you for the time.

Jeff Kauffman, Sterne Agee.

I apologize, I got on late. Is it true that that jump in the comp expense on the waterfall chart was Greg's compensation?

Those of you who have been around a long time, your sense of humor never dwindles, and I appreciate it. But you know the answer to that.

Yes, I do. Greg, congratulations. Best of luck. Now, I want to go back to something you were proud of, though, as we were pushing the stock for the last decade. Which is, in the decade in the '90s, free cash flow was a negative $3 billion. And in the decade of the 2000s, free cash flow was a positive. That $3 billion, I think, was the number. So, I want to talk a little bit about that because you've had three years of some pretty elevated capital spend. At what point in the next two to three years do you think we get back to that normalized cap spend? And what do you think the free cash flow profile looks when we get back there? Because I see chart 23 on return on capital, cost of capital. But yet it seems like the free cash flow isn't what it was because of the higher cap spend. Can you talk a little bit about that?

Jeff, I think -- and I'll let Art expand on this -- but I think the biggest driver over the last few years has obviously been this replacement cycle that we're in on lease. Which was really driven by a pretty significant replacement that happened in 2006, 2007. I think once you get past that you're going to see free cash flow improve, obviously go positive. And I would expect over a ten-year period to have similar free cash flow as we had in the 2000s. But, Art, go ahead.

Right. One thing I would not lose sight of, Jeff, is, when we talk on the deck on page 22 about growth capital, the lion's share of that is associated with replacement equipment. So, we said it was around, just a little over $400 million of that is just on the replacement equipment. And the 2012 spend had a similar amount. We talked with Kevin earlier about that. So you think about, in the last two years, what were seeing in '12 and '13, there's $800 million of upfront spend that's outside the normal run rate. And that goes to Robert's point, then, as we move forward, you're not going to see those kind of deltas going forward. So that's when you see the free cash flow play out over the cycle.

I think the important thing is we've maintained pricing discipline on the lease side. And as long as we have that, you're going to have some capital up-front, which is going to impact free cash flow negatively. But the cash flows from that lease will come in for a six-, seven-year period and will provide you that benefit going forward.

So when we get to a normalized run rate on cap spend, Art, what kind of CapEx should we be looking at?

Right here you see replacement is higher. It's probably in that $1.3 billion, $1.4 billion range, I think, at the higher levels that we're now at, since the cost of vehicles are so much more.

Okay. And that's what I'm getting at. And I'll wrap up with this final point and then pass it on. But if the cost of vehicles has risen, do we need to generate higher margins across a cycle to compensate for that higher cost per vehicle, if we're to get back to that $3 billion over a ten-year free cash flow thought process? Or, at the end of the day, are we swallowing, so to speak, the higher cost of equipment for our customers?

No. By the nature of our pricing model we should generate higher margins because we're getting a return on that capital. And so, even though it does cost more, we're getting a return. It may vary within the structure in that margin percents may start to change a little bit between the lines. But on an net, on a pre-tax basis, you'll see earnings rise because we're getting a spread over that.

All right, I'll end there. Thanks so much.

Thomas Kim, Goldman Sachs.

I wanted to ask you about the fleet inventory days. And I was wondering if you could just elaborate on how much the inventory days outstanding may have changed. And then related to that, would you be able to remind us the last time you may have had to write down inventories?

Okay. Inventory days, they're looking that up. But we haven't had -- the last inventory write-down was way back in 2001. I'm sorry -- you're talking about inventory on used vehicles?

Correct, yes, used vehicles.

All right, thank you.

There hasn't been a big change in the days outstanding for inventory. We've been running at this --.

Elevated levels.

About this 9,000 range in inventory, selling 5,500 units a quarter, at that clip. It hasn't really changed dramatically.

Okay, good.

Just to remind you, we adjust the price -- not address the pricing, adjust the book values on an ongoing basis. So it really minimizes the chance of a one-time write-down, if you will, of used vehicles.

Coming out of the '01 timeframe where we had that write-down, we changed some of our accounting around used vehicles to reflect any value declines we see as units age out. And so that's reflected in the numbers. It's within the depreciation expense we report every quarter. And we can give you that off-line as to what that totaled for Q4.

That's really helpful, I appreciate the additional color. I know you'd commented that the sales activity has been very healthy. So this is helpful. And then just with regard to the commentary about the pause of the buybacks, could you help give us a little bit of guidance in terms of what balance sheet benchmarks that we should be looking at to help us understand when the buybacks might resume? Or if there's certain debt coverage ratios that we might be able to calculate independently to help us understand how that perspective on the buybacks might change?

I think the main we would continue to focus on is the leverage metric. Obviously we do look at interest coverage and the like. But I would focus around the leverage we're at right now, at the lower end of the range by 2013, or the end of 2013. So we're comfortable to have a little cushion there to provide the flexibility for growth and acquisitions. As well as to cushion us around pension charges since we keep thinking it can't happen again. But it's happened three straight years, it seems like. So, I think as it moves down below that, we'll have to see how the numbers play out in 2014. That will start to drive our decisions about whether to reinstate it.

Great. Thank you very much.

Scott Group, Wolfe Trahan.

Just want to go back to the waterfall chart for a second. When I look at the strategic investments and other, the head wind there, it looks like it's about twice as big as what you estimated in last year's waterfall chart. Can you give a sense what's in here -- a little bit more color. And then how do we think about future benefits associated with these costs?

Sure, Scott. We've got $0.23 or $0.27 in there. I'll tell you about half of it, I would really explain as customer-facing technology projects. And some maintenance technology projects where we're doing things that are going to make us more competitive in the marketplace, with technology that we present to our customers. Giving them better fleet data, better fleet information. Some investments we're making with our RydeSmart telematics device. And then also sales and marketing investments -- additional salespeople and some sales productivity investments. So, it's about half of it. The other half, there's several different items. There's some one-time items, some one-time benefit that we had in 2012 that we don't expect to recur in 2013. And we also have some one-time hits from 2013 that were not in 2012. As an example, I mentioned the restructuring of some international activity in the first quarter. We got $0.02 there that is included in that number, also.

Okay. So maybe a normalized run rate, as we think about future years, is somewhere between what you laid out this year and what you laid out last year.

Right. I think that's fair.

Okay, that's helpful. And then just, we've spent a lot of time talking about the age of the leasing fleet. Is that all that needs to go right to get back to peak margins? Or are there other things? Because, even though the fleet age started to come down and you saw margin improvement in '12, we're still a ways below where we were in '06. What are the other things that need to happen?

I think there's really -- we've mentioned this in the past -- that there's about 300 basis points delta in our FMS margins from where we were last year to the peak. And we said about 50% of that was really from improved fleet age and lower maintenance costs. The other 50% is really growth and getting the fleet count, the power fleet count back up to those levels. And, obviously, also rental, I think, is another component that could help. So, if you look at it across those three items, that's probably what would drive us getting back to peak margin levels.

And how do much lower interest rates today relative to then impact margin percent?

Can you say that one more time, Scott?

We have much lower interest rates today relative to peak in '06. How does that impact margin percentages?

It's not dramatic. As we price business, obviously we're renewing them at, and we contemplate the lower rate environment. So some of that is manifest in lower pricing to customers.

But, remember, these are full-service leases. So the cost structure, interest is not a large component of it. You've got maintenance costs and depreciation as bigger components.

Okay. All right. Thanks, guys.

Matt Brooklier, Longbow Research.

Congratulations to everyone. Just wanted to dig in a little bit. I think Robert mentioned there was roughly $0.03 of rental benefit from Hurricane Sandy or Superstorm Sandy, whatever we're calling it these days. But was curious to hear if, A, some of that carries forward into first quarter, and those customers hold onto those trucks. And then, B, looking at utilization, how much of utilization improvement on the rental fleet was due to Sandy activity?

You're right, there was $0.03 in the fourth quarter that was really from improved rental demand, as well as we had some used vehicles that were impacted by the storm. And we accelerated the sale of those vehicles, actually, through an insurance coverage on those vehicles. So the combination of those two was really the $0.03. We are expecting in the first quarter to continue with some of the benefit around rental. I think we've got about $0.01 in there for the first quarter. And in terms of improvement in the utilization, Dennis?

We got about 100 basis points of improvements. 100 basis points of improvement year over year in utilization.

Okay. Yes, I was just curious if we're able to distinguish between how much of that was just your regular business and then how much of that was potentially related to Sandy. I'm just trying to get a sense for the ongoing direction of the rental utilization.

Yes. I think maybe -- what we can tell you is that the fourth quarter was 100 basis points better than our expectation. So, a good chunk of that, I would say, was probably driven by the Superstorm Sandy.

Along with a right-sizing that we had done to the fleet already.

Right. So, Matt, one thing you want to keep in mind. We talked about it as we were going through it, is that we're positioning the fleet, we have a smaller fleet in '13 relative to the prior year. And also we're forecasting lower demand. That's going to be offset by higher planned utilization of the fleet. So, we would expect favorable comps from a utilization perspective in 2013.

Okay. And then a second question related to what sounds like a pickup in terms of demand for outsourcing of vehicles on the dedicated side, given the impact of CSA in the markets. Just curious to hear if hours of service and the potential for that changed this year is also part of that conversation?

That's harder to tell. The benefit we've seen in terms of fleet outsourcing because of CSA has been something we've seen anecdotally. Customers have come and said one reason we're thinking of outsourcing is this issue. I just haven't heard that as often about hours of service.

Okay. Maybe we do in future quarters. Thank you for the time.

Brad Delco, Stephens.

I think, Art, I want to go back to a question earlier. You said the replacement and growth CapEx on the full-service lease is about the same. Incrementally a little bit higher, though, versus '12. Is it fair to assume a similar change in the average equipment for lease in terms of growth, call it, 4.5% to 5%?

I didn't understand the question, Brad. Try that one more time.

If your CapEx on full-service lease is fairly similar to '12 -- we have your average fleet count on the full-service lease up about 4.9% in 2012 -- should we think about the same amount of units being added to that business in '13 versus '12?

What we had talked about earlier is we were forecasting fleet growth of 500 to 1,000 units. That's buried within the growth capital there I talk about. Replacement is just that. It's really the fleet size stays the same. It's just the amount we have to spend for customers who are renewing.

And the fleet growth is consistent with what we did this year.

Yes, got you. And that's where I wanted to get to. And then, so when I take that and looking back at that waterfall chart for '12, the FMS contractual EPS contribution for the year that you expected this year was going to be, I think it was $0.13 to $0.17. So it's about $0.25 higher this year. What really drives the difference if CapEx is the same? Is that all average age savings that you're seeing?

Yes. That's reflecting the benefit of the fleet age.

And the maintenance initiative that we've got going.

Okay. Got you. So, in essence, bringing down the average age should be about $0.25 of that difference.

Right. Average to average.

That's probably right.

Okay. That's it for me. Thank you.

Thank you. And this concludes the question-and-answer session. I would now like to turn the call over to Robert Sanchez for closing comments.

Okay. Thank you very much. We're about 15 minutes past the hour so we went a little long. But we wanted to get to everybody's questions. Appreciate everybody getting on the call. And have a great day, have a safe day, and we'll talk to you soon.

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