萊德系統 (R) 2013 Q2 法說會逐字稿

Good morning and welcome to the Ryder System Incorporated second quarter 2013 earnings release conference call. All lines are in a listen-only mode until after the presentation.

(Operator Instructions)

Today's call is being recorded and if you have any objections please disconnect at this time. I would like to introduce Mr. Bob Brunn, Vice President, Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning and welcome to Ryder's second quarter 2013 earnings conference call. I would like to remind you that during this presentation you will see or hear some forward looking statements within 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 Robert Sanchez, Chairman 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 Robert.

Good morning everyone and thanks for joining us. This morning we'll recap our second-quarter 2013 results, review the asset management area, and discuss the current outlook for our business. We will then open up the call for questions. With that let us turn to an overview of our second-quarter results.

Net earnings per diluted share from continuing operations were $1.19 for the second quarter 2013, up from $0.91 in the prior year period. Second quarter results included $0.06 of non operating pension costs. The year ago period included $0.18 of net expense related to non operating pension costs and restructuring charges. Excluding these items in both periods, comparable earnings per share were $1.25 in the second quarter, up from $1.09 in the prior year, an improvement of $0.16 or 15%. Total revenue grew 3%. Operating revenue which excludes FMS fuel and all subcontracted transportation revenue was up by 4%. These revenue increases reflect new business in Supply Chain as well as lease revenue growth.

Page 5 includes some additional financials for the second quarter. The average number of diluted shares outstanding for the quarter increased by 1.2 million shares to 51.9 million. This reflects the temporary pause of our anti-dilutive share repurchase program that we discussed previously and is higher than planned due to increased employee stock activity. As of June 30 there were 52.3 million shares outstanding of which 51.9 million are included in the diluted share calculation. Our second quarter 2013 tax rate was 35.7%, and included the impact of nonoperating pension costs. Excluding this item, the comparable tax rate would be 36%. This rate is below the prior year comparable tax rate of 36.8% reflecting a higher proportion of earnings in lower tax jurisdictions this year as well as the impact of a prior year tax law change.

Page 6 highlights key financial statistics for the year to date period. Operating revenue is up 3%. Comparable earnings per share from continuing operations were $2.06, up by 16% from $1.78 in the prior year. The spread between adjusted return on capital and cost of capital increased to 110 basis points for the trailing 12 month period, up from 50 basis points in the prior year. We now expect this spread to remain at 110 basis points which is wider than our original plan as we continue to make good progress towards our longer-term target of 150 basis points.

I will turn now to page 7 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions total revenue grew 2%. Total FMS revenue included a decline of 0.5% in fuel services revenue due to lower fuel costs. Excluding fuel, FMS operating group revenue grew 3% driven mainly by growth in full-service lease. Full-service lease revenue grew 4% due to higher rates on replacement vehicles reflecting the higher cost of new engine technology. Our lease fleet declined by 1% from the prior year reflecting non renewal of some low margin trailers in the UK, the impact of economic uncertainty, and more efficient redeployment of off lease vehicles.

Miles driven per vehicle per day in the US lease power fleet increased 2%. Miles per vehicle have improved over the past two years and are now only 2% below their pre-recession levels. The average age of our lease fleet began to decline in June of 2012 as a result of elevated replacement activity. It continued to improve this quarter and was down by one month sequentially or four months since the second quarter of last year.

Contract maintenance revenue declined 3% due to a shift in vehicle mix reflecting more trailers and fewer power units. Contract related maintenance increased 12% since the prior year, partially due to our new on-demand maintenance product which is in the pilot stage with several large customers. Commercial rental revenue was down by 1%. Globally rental demand was down 4% from last year, but better than the 5% decline we expected coming into the quarter. This reflects better-than-expected demand in the US, partially offset by weaker demand in the UK. The average rental fleet declined 10% due to defleeting in the second half of 2012.

With stronger than forecast demand on a smaller fleet, rental utilization on power units was 80.5%, an improvement of 550 basis points over last year and a very strong absolute rate. Global pricing on power units was up 2%. Given this rental environment, we are expanding -- we expanded capacity in the US by redeploying vehicles from lease into rental and by purchasing a modest number of new vehicles. In used vehicle sales we saw continued solid demand and good pricing. I will discuss these results separately in a few minutes. Overall improved FMS earnings were driven by higher lease rates reflecting new engine technology and improved residual values. Earnings before taxes in FMS were up 16%. FMS earnings as a percent of operating revenue were 10.4%, up 120 basis points from the prior year.

I will turn now to Supply Chain Solutions on page 8. Total revenue was up 5% and operating revenue grew by 6%. These increases are due to new business, primarily in dedicated. We have seen nice sales in dedicated coming from both new customer wins supported by outsourcing trends and from our internal efforts to migrate customers from lease into dedicated. Segment earnings improved 8% reflecting new business, offset by increased commissions paid up front on new sales. SCS earnings before taxes as a percent of operating revenue were 6.3%, consistent with the prior year. Page 9 shows the business segment views of the income statement I just discussed and is included here for your reference.

Page 10 reflects our year-to-date results by business segment. In the interest of time I will not review these results in detail, but I will just highlight the bottom line results. Comparable year to date earnings from continuing operations were $107.5 million, up by 17% from $91.5 million in the prior period. At this point I will turn the call over to our CFO, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Robert. Turning to page 11, year to date gross capital expenditures were just under $1 billion, that is down $328 million from the prior year. This decrease primarily reflects lower planned investments in our commercial rental fleet. Around lease capital, we are seeing a higher than planned percentage of sales being filled with new equipment versus used equipment. This is obviously a positive story as we our contracting for longer terms. However, capital spend will be up. This additional spend offsets the impact of less than planned fleet growth.

Around rental capital, given improved demand versus our initial expectations, we are going to spend a modest additional amount on US rental purchases, partially offset by lower purchases in the UK. As a result of these factors, we expect full year capital expenditures to be at the high end of our forecast range. We realized proceeds primarily from sales of revenue earning equipment of $229 million, up by $30 million from the prior year. The increase reflects more units sold versus last year. Net capital expenditures decreased by $228 million to $760 million.

Turning to the next page, we generated cash from operating activities of $564 million year to date, up by $92 million from the prior year. The improvement reflects lower working capital needs, higher earnings, and lower pension contributions. We generated $841 million of total cash year to date, up by $7 million reflecting higher operating cash flow in the current period, offset by a sale lease back in the prior year. Cash payments for capital expenditures decreased by $256 million, to $948 million year to date. The Company had negative free cash flow of $107 million year to date, free cash flow did improve by $263 million from the prior year, due to higher cash from operations and lower rental capital spending. As a reminder, our original full-year free cashflow forecast was for negative $130 million to $190 million. Given the capital spending trends I just discussed, we now expect to be around negative $190 million.

Page 13 addresses our debt-to-equity position, total obligations of $4 billion increased by $87 million from year end 2012. Total obligations as a percent to equity at the end of the quarter were 262%, down from 270% at the end of 2012. Ryder maintains a long-term target leverage range which reflects our focus on having solid investment grade credit ratings and broad access to the capital markets. In light of these long-term objectives, we slightly -- we are slightly revising our long-term range from 250% to 300% leverage to 225% to 275%. As we previously discussed, our leverage has been impacted by pension equity charges driven largely by an historically low interest rate environment. As of June 30, 76 percentage points of leverage were due to pension equity charges. As market interest rates rise, our leverage will decline, all other factors being equal. This should provide us with additional balance sheet capacity and flexibility over time.

We calculate the pension equity charge at December 31 of each year. Given year to date asset performance and interest rate moves, we have the opportunity for favorable pension impacts for the first time since 2009. Assuming current discount rates and asset values in our pension plan, the year end 2013 pension equity adjustment would free up 10 to 15 additional percentage points of leverage. Equity at the end of the quarter was over $1.5 billion, that's up by $80 million versus year end 2012. Equity increase was driven primarily by earnings. At this point I will hand the call back over to Robert to provide an asset management update.

Thanks Art. Page 15 summarizes key results for our asset management area. At quarter end our used vehicle inventory for sale was 9,600 vehicles, up from 9,200 units in the same period last year. This is in line with the expected range that we previously communicated of 9,000 to 10,000 vehicles for 2013, reflecting the elevated lease vehicle replacement cycle. On a sequential basis from the first quarter of 2013, ending inventories decreased by 400 units and are expected to be lower by year end. Pricing for used vehicles remained generally stable, comparable -- compared with the second quarter of 2012, proceeds from vehicles sold were down 1% for tractors, and up 2% for trucks, including heavier than normal wholesale volumes due to the replacement cycle. From a sequential standpoint, tractor pricing was down 3%, and truck pricing was up 1%.

Excluding wholesaling, retail pricing was down 7% for tractors primarily due to selling older units and up 4% for trucks on a year-to-date basis. We plan to continue higher use of wholesale channels this year, given our elevated inventory levels and our expectations for continued lease replacement activity. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by almost 784 units or 20%. Early terminations of leased vehicles increased by 365 units, but remain well below pre-recessionary levels. Our average commercial rental fleet was down by 10% versus prior year and was unchanged from the first quarter.

I will turn now to page 17 and cover our outlook and forecast. In Fleet Management we saw nice improvement in full-service lease revenue driven by higher rates on new vehicle technology and better residual values. The lease fleet is somewhat below our expectations reflecting non renewal of some low margin trailers in the UK, the impact of economic uncertainty, and more efficient redeployment of units coming off lease. We expect the lease fleet to remain around the current levels through the balance of the year as modest growth in the US is offset by additional non renewals of low margin trailers in the UK. Over the longer term, we remain confident in our ability to grow the lease fleet by both secular outsourcing trends and our own internal initiatives. We expect commercial rental to continue to perform above our initial expectations, with higher than expected demand in the US, partially offset by softer economic conditions in the UK.

We're very pleased with the early success from new product initiatives such as on-demand maintenance solutions and natural gas vehicles and are encouraged by opportunities they provide for further -- to further penetrate the private fleet and the for hire market. While currently small in size relative to our overall business, these products could become important drivers of growth in the coming years. We continue to expect maintenance cost benefits driven by an elevated number of lease fleet replacements. Although we didn't realize all of the benefits anticipated in the second quarter from our maintenance initiatives, we continue to focus on driving lower costs in future periods. In the used vehicle area we expect inventories to decline from the current levels by the end of the year. We anticipate solid demand and generally stable pricing.

In Supply Chain we expect continued growth in revenue and earnings. We are particularly encouraged by the strong sales activity in our dedicated service offering where we are seeing outsourcing activity driven by CSA regulations, driver shortages and other macro trends. We are also benefiting from our internal initiatives to migrate customers from lease up to dedicated.

Finally, our higher share count versus our original plan is expected to negatively impact our earnings by $0.05 this year due to higher share price and increased employee share activity. A higher than expected tax rate will also negatively impact earnings by $0.02. Given these factors, we are narrowing our full-year comparable earnings-per-share forecast to $4.75 to $4.85 from $4.70 to $4.85. This is an increase of 8% to 10% from $4.41 in 2012. Our third quarter comparable earnings-per-share forecast is $1.41 to $1.46, versus the prior year of $1.37.

Our forecast for the full year includes margin expansion in both segments. In FMS, we expect to deliver full-year, double-digit margins for the first time since 2008. This margin expansion is despite continued economic uncertainty, headwinds impacting lease fleet growth. Over time, we remain confident that we will realize FMS margins at levels that we saw back in 2007 and 2008. Given the changes in the environment since that time, the makeup of the FMS margins may be a bit different and will likely include contributions from growth, benefits in fleet replacements, improving residual values, new products and services, and cost management. That concludes our prepared remarks for this morning. At this time I will turn it over to the operator to open up the line for questions.

Thank you. We are now ready to begin the question-and-answer session.

(Operator Instructions)

David Ross, Stifel Nicolaus.

Good morning gentlemen. You talked about in your lease comments, a more efficient redeployment of off lease vehicles, could you just add a little more color on what that means?

Sure, if you remember on the last call we talked about as rental is coming in stronger than expected, in the US, we would look to sell fewer units out of rental, hold onto them a little longer, and we would also redeploy units coming off lease into the rental product line. Over the last quarter, really through the year, we have done quite a bit more of that than we normally do. That has accounted for about 800 additional units that otherwise would be in an off lease status, so they would be in the lease fleet count but would not be earning revenue, are actually earning revenue in rental now.

Okay. And then you talked about the on-demand maintenance product that I think you are testing with some larger customers, what exactly is the on-demand maintenance product and how is that expected to get you more business or more profitability?

Sure, as you know, we have been working on various new initiatives and new products to help us really solve customer problems and penetrate more of the non-outsourced market. One of those products that we have been piloting is really doing maintenance primarily targeted at the for hire carrier market, and just doing maintenance on those fleets. That is a very large market segment. We have found that many of those customers, although they have their own maintenance facilities, there is a lot of maintenance that they do with third parties. We are looking to work with them to help them in that area. So far we have a couple customers that we have been piloting, and the results are coming out pretty promising. So we expect that to grow. As I said, it is still a very small part of the total business, but I would expect in the coming years it to become a bigger part of the growth story.

Yes I think there would be a lot of opportunity there. And then just quickly, on the Supply Chain side of things, you mentioned dedicated being very strong, but on the more, management, supply chain logistics piece, what industry segments were strong, what regions, trade lanes, might've been considered strong in the quarter and which might've under performed?

John?

Yes, well, we have had good growth in our CPG business segment, and good growth in Mexico, have been the two highest growing areas. And then our growth has been a little constrained by existing volumes in automotive.

So auto did very well the last couple of years, but it kind of is not getting much better, is that what you're saying?

Yes, and the thing in automotive for us, is we have -- while we have a general exposure to almost all the car companies, and all the Tier 1s, we have a little more exposure on certain projects that are aimed at certain plants, especially when we do all the trucking to supply a given plant. And we have had a couple of car companies with specific models and plants where the volumes are down, and that, you can see from our results, auto was only up 2% in the quarter and that is what is holding us back a little bit there.

Excellent, thank you very much.

Todd Fowler, KeyBanc Capital Markets.

Great, thanks and good morning. I just wanted to come back to the discussion on the long-term leverage targets, and I guess I was just curious, it obviously sounds like the pension impact is going to be favorable for the balance sheet at the end of the year, but is the decision to reduce the leverage targets, is that driven by the credit agencies or is that a function of what is happening with interest rates? Just curious as to what the thinking behind that is right now.

Yes, Todd, this is Art. It is a combination of a lot of factors. Obviously we had a longstanding target of 250% to 300% that was set many years ago before we actually were in that range, as we have been in the range over the last few years, we have obviously doubled our efforts to make sure we understand our standing within that. It is impacted to a certain extent by where pension is and where we expect it to be over a period of time. So in light of that, we took all those factors into account to determine what was the best range for us to maintain a solid investment grade rating as well as keeping the right access to the capital markets.

And then does that push out the timing of when we could potentially see it come back into at least buying stock on the anti-dilutive side?

That is going to be an item, as we talked about, we paused it for this year. The plan would be to take a look at it again next year and it is a combination of, one of the reasons why we paused it was we wanted to reduce leverage a little bit to provide flexibility for acquisitions and the like. We have not done any deals yet, but you are right, we are going to see benefits from pension, so we will have to look at it as we move forward into next year.

Okay, and then on the lease fleet, can you put a number around the number of trailers that came out from the UK during the quarter, I am just kind of trying to get an idea of maybe what an implied organic growth rate would be if you excluded the mix impact.

Sure, if you look at we are down year to date, Todd, about 2,100 units and UK trailers is about 800 of those units. That is the ones that we had planned to take out. In addition to that, this redeployment of vehicles from lease into rental, makes up another 800 units as I mentioned earlier. So you have got 1,600 of those units that are really these two activities, the balance of it is softer than expected results in terms of sales, and that is primarily in the UK. As you know, the UK economy is extremely soft. We are seeing the impact of some of that, not only in rental, but also in lease.

Okay, and then Robert, so the comments about the lease fleet being consistent going forward, are there more trailers that are going to come out, or what is kind of the mix impact I guess for the rest of the year as well?

Yes, for the balance of the year, we expect some more trailers to come out. There is going to be an additional 500 trailers between now and the end of the year, in the UK. And then we expect again some additional softness in the UK partially offsetting some fleet growth that we expect in the US. So the US we expect fleet growth from this point in terms of lease and it is going to be offset by some softness in the UK.

And so the mix of all that though should be favorable from a margin standpoint because you're trading out low margin units on the trailer side with probably more normal margins or maybe even higher margin business in the US because it is new equipment?

That is correct. The power is significantly more margin dollars if you will than the trailers. And these trailers are really related to the acquisition we did a few years ago. When we did the acquisition, we did it primarily for the power fleet that we could use to leverage our infrastructure, there was a trailer fleet that came along with it, that we had originally planned, we would certainly partially defleet over time.

Right, I remember that. Okay, and then the last one I had and then I will turn it over. On the maintenance initiatives this year, I think in your original guidance when you had a range of $0.38 to $0.41, and part of that was on the fleet age coming down and then some internal initiatives on the maintenance side, I guess I am curious, the comments in the release say that it sounds like that there is still some more benefit to recognize. Is the lease fleet age on track with your expectations and then you are still expecting something on the internal maintenance initiatives? And how does that impact margins for the rest of the year then?

Yes, both of those have been built into the range that we gave, but yes, we are seeing the benefit of the fleet getting younger. We are a little bit behind on the initiatives that we had laid out, if you remember, there was a couple of things driving that. One is that we had more units to outsource, to out service, and send to the used truck center, it was primarily in the first quarter. And then there were some initiatives, the example I gave was really around we hired some additional technicians in order to do more work in-house versus sending it out to third parties. We still think that is the right thing to do, we are seeing benefits at least from an uptime standpoint with our units. But the cost benefit that we were expecting, we have not gotten all of that yet, so that is an example of some of that.

Do you still expect to get the full amount of guidance this year or does some of that get pushed out?

We expect by the end of the year to start getting most of it, but yes, the full dollar amount for the year we are going to be short.

Okay. All right, thanks a lot for the time. I will let somebody else have it.

Anthony Gallo, Wells Fargo.

Thank you. Just, I guess, when a customer -- my first question is, when a customer moves from lease to dedicated, what is the internal accounting of that look like? I assume it move, the revenue recognition, et cetera, moves from one division to the other. Is that correct?

Yes, you are going to see, what happens there, the customer will then become a dedicated customer, with the third party revenue obviously being recognized there. But like with all of the equipment in dedicated, it is leased from our FMS division, so you will see FMS still have the truck on its books, and then we have that line equipment contribution where we eliminate the intercompany profits, if you will.

So that is not going to have much of an influence if we are trying to look at the size of the lease fleet, correct?

Right, that should not affect the lease fleet, because it stays within the lease fleet.

Okay, and then a question for John, you mentioned Mexico, could you just tell us what you are doing there right now, how much of Supply Chain is Mexico and are you involved with some of the auto business down there?

Yes, all our verticals have businesses in Mexico, we have a really, I think we have a very strong competitive position in Mexico, we have a really nice set up. We have multi client warehousing in all the main cities in Mexico. And also at all the border crossings in Mexico. We have a multi client transportation network that connects all of those cities, and also runs cross-border to and from the US. We have a focus on the same type of customers we have in the US. So primarily auto, high-tech, CPG and retail. If you are looking for numbers, we did I think we did about $30 million of operating revenue in the second quarter, and about $3 million of NBT in the second quarter, in Mexico.

What do you think those numbers were last year?

Excuse me, I missed that question.

The revenue in NBT, Q2 of '12, for Mexico?

Oh, Q2 of '12?

Yes, I'm just curious what the year over year growth was.

Q2 12, give me one second. We grew about 9% in operating revenue, and we had very significant growth in profit, which is a number, it's so high I am not going to read.

I will just say congratulations and then pass it along.

Thank you.

Congratulations to Mexico.

Thank you.

Ben Hartford with Baird.

Good morning guys. Could I, just looking at rental utilization and it being above 80%, the highest that we have on record, why not better pricing on the rental product this quarter on a year over year basis maybe, there is no accusation there, I'm just trying to get an understanding of how you guys are looking at utilization here above 80%, relative to price and also wanting to maintain some of those engagements and hope to transition those over to lease. Can you talk a little bit about the logic there?

I think you have got the gist of it. Obviously, we would like to run out and just raise rental rates tomorrow much higher, the issue is, we're coming off of a year, last year, we had, we were in the opposite situation, we had too many vehicles. So it is a way of really doing it in a way that is digestible for the customer base, a portion of our rental business is with lease customers where their rates are more contracted, if you will. So those take a little longer to move up. And on the spot market, we are moving them up, as a matter fact we had a rate increase that we rolled out towards the tail end of the second quarter that will start to see some more of that kick in in the third and fourth quarter.

Okay, that's good. On these maintenance initiatives, some of the benefits being deferred into 2014, Robert, when do you think the full effect would be absorbed within the segment for the various initiatives, both the reduction in the fleet age, or the normalization of the fleet age I should say, plus the realization of these other initiatives? Is it mid 2014? Is it late 2014? Is it into 2015?

Yes, I think it is into at least early 2015 for the replacement cycle. However maintenance initiatives are an annual event. We do this every year, we identify things that we can do better and that we want to focus on in order to improve the operation and be more efficient. And you are going to see, we have done it every year, you are going to see us continue to do that, so that is an ongoing just continuous improvement process.

Okay, and then John, just a follow up on the comment that you had made within auto, with respect to some of the challenges that you guys had model specific or product specific, is that a function of the given OEMs model and it is something that when we get the changeover, and we go toward the fall, that those product specific issues should normalize? It is just something that is a function of the given product here in 2013 and it will not persist into 2014? How should we think about that.

Yes, like I said, we have such broad exposure to automotive in the long-term it has to normalize. I feel like we got some bad luck with a couple of plants. But it is not going to normalize in the second half, it should get actually -- those couple of situations should get a little bit worse in the second half of this year and maybe be a point drag, 1 point in growth drag on us in the second half.

Okay. And then if I could sneak one more question in, Robert, your perspective on the UK economy, we know it is soft, there is some leasing headwinds that you are experiencing there, but some anecdotes generally about signs of bottoming in Europe, what is your sense about the UK economy and kind of where we are as it relates to the economic cycle?

Yes, I think if you look at it, GDP is still sub 1% they're expecting for this year. It does appear to be hitting the transportation sector more heavily because the OEM production there of commercial equipment is down about 20%, 25% from their forecast at the beginning of the year. So we are seeing the impact of that not only on the rental side, but also on new lease sales. So I think, I think it is moving sideways for now. And we will see if things begin to improve here over the next, over the balance of the year, or certainly getting into 2014.

That is helpful, thanks.

Art Hatfield, Raymond James & Associates.

Hey, morning. I apologize if I'm regurgitating anything. I unfortunately got on the call late, but I just want to go back to your decision to lower the targeted leverage range that you have. And can you comment on how maybe you think that may impact your position competitively, or should we really be thinking about this going forward, that if we get higher interest rates, that really lower pension obligations is going to really wash out and you are going to still be able to grow the business?

Yes, let me take a shot at that, Art, the decision to lower the range as Art said was really driven by our focus around maintaining a solid investment grade rating, and that is something that in order to be competitive in the marketplace, we believe we need to do. In terms of the impact on our lease pricing, it is very small. So I do not see that being a significant driver on lease, I think interest rates going up, though are important because as interest rates rise, our pension liability will come down. And you will see a positive impact on our leverage, it will bring our leverage down quicker. So as that happens, obviously we start to get closer to a position where we could start to turn back on our anti-dilutive share repurchase program. So I think net net interest rates going up is more of a positive story for Ryder because of the impact it is -- positive impact it will have on our pension.

That I think -- will that make you more competitive vis-a-vis some of the regional and kind of local competitors that you face in the marketplace?

It is hard to tell. I think our competitive advantage versus the local guys is much broader than just the interest rate side, it is purchasing leverage, it is leverage across all of our facilities, and our residual values as we sell vehicles through our used truck network, so those are probably bigger drivers in terms of the competitive advantage than just the industry.

Right, I think you think about interest rates for us from a corporate view, pension accounts for about 76 percentage points of our leverage right now, so that will come down as interest rates rise and it normalizes. It will just provide us with a lot more balanced sheet flexibility and capacity to handle acquisition growth and things like that.

Great, thanks, I will get with Bob later on some of my other questions. Thanks.

Great, thanks, Art.

John Mims, FBR Capital Markets.

Good morning guys. Robert, let me first follow up on the question Ben asked on utilization on the rental fleet, the timing, as far as modeling going forward, with utilization versus price, how long does it take for that to roll over? Could we see utilization stay at or near 80% over the next couple of quarters, or you see that switch into more rate and less utilization for the back half of the year?

Well, just seasonally, you would expect utilization to remain strong in the third and the fourth quarter. We are at historically very high levels right now at 80%. So 80% plus. So I would say barring any significant change in the economy or in activity, utilization levels should remain strong, certainly into the third quarter and most of the fourth quarter, really just dropping off post holiday in the fourth quarter. So I think that would be a reasonable assumption for the balance of the year.

Since we're kind of in uncharted territory here, at 80%, how high is, if you see that seasonal swing up, could you get 200 more basis points, or is 85% out of the realm of possibility?

No, we're probably at the peak levels here. You may be able to swing up maybe another percentage point or so, but we are really in uncharted territory, I think most of the benefit will come from price uplift in the next couple of quarters, primarily around some of our more transactional type customers.

Sure, that is fair. On the maintenance side, the contract maintenance versus contract related maintenance, your contract maintenance truck count, kind of slid throughout the quarter, contract related maintenance is growing. Are those tied together at all, is one pulling from the other, or they are completely different products that growth in contract related doesn't?

I do not think it is as simple as one is pulling from the other, I think they are just different products that we are beginning to offer now. In contract related, as I mentioned earlier, we are beginning to offer and piloting this on-demand maintenance that maybe historically, actually historically probably would not have been dealing with those customers, but you might have had more growth on the contract maintenance side, so I think they complement each other, and they are different product offerings that we can offer different market segments.

Okay. But is there a contract related still in line for double-digitish type of growth, but with the fleet count within the contact maintenance division, should that reverse the trend you saw in the second quarter going forward or is there any kind of drivers there that we should be modeling or thinking about?

Yes, I think we're looking, I will let Dennis elaborate somewhat, but I think we're looking for generally flattish on the contract maintenance side for the balance of the year. Contract related, I think over time, certainly I do not know precisely what could happen in the third and fourth quarter, but over time I think you should look for that to start to really increase as we are able to over time sell more of these new products and services.

I agree with that, Robert, the contract maintenance I'd say flat, here as we look at the second half. Contract related maintenance, the pipelines are rich. There is a lot of people looking for somebody who has the ability to provide coverage throughout the country and could provide the same level of quality on an on demand basis, so I think that you are going to see the contract related maintenance continue to increase over time.

Okay, great, I think all of my other questions have been asked. Thank you so much for the time.

Great, thank you.

Scott Group, Wolfe Research.

Thanks, morning guys. So, when I think about the earnings waterfall chart you gave us in the beginning of the year, it sounds like the taxes and share count are a $0.06, $0.07 headwind relative to that and you are taking up guidance $0.02 despite that. So underlying results a little bit better. Is that underlying better, is that just on the rental side, I guess my question is, I am not clear if FMS on the contractual side, is better or worse than you thought, I get that the fleet is lower than you thought, but is the pricing and margin better than you thought, and is that offsetting the lower fleet size?

Yes, the margin is not better than we thought on the contractual side. I think the benefit is primarily coming from rental, and it is also coming from better results on the used vehicle side.

Okay. Got you. Fuel was down year over year and sequentially, what kind of impact do you think that had? I think typically you guys benefit a little bit when fuel is going up, was that a few cents in the quarter?

No, I think fuel was primarily in line.

Yes.

Okay and last couple of things, when you talk about trailers being lower margin than power units, is that, are we talking like 100 basis points, or is it something more material? Directionally?

I think if you look at it in terms of margin dollars, so what they contribute, to the Company, you are looking at -- in the case of these particular units in the UK, you are looking at 20%, to 30% of the contribution you would expect to get from a power unit.

Okay, that is really helpful. And just last thing, so the last time we saw the rental utilization start to get towards peakish levels, we got excited. Eventually that is going to spill over into the leasing side, and it never happened. Is there any reason to think it's going to happen this time or is this just more of the same of we just do not really get why there is not more leasing, even though rental is so strong?

Yes, Scott, that is a good question, this all gets back to the same thing we have had for the last several years, it is the uncertain economic environment that kind of seems to have fits and starts, right. And we're in an environment now, last year we were in an environment where weather really softened on us unexpectedly, now we are seeing it sort of beginning to solidify some, which usually is an indication that there is some activity out there. But until there is more certainty, you do not start to see more of that conversion to lease, and that is really what I think is holding us back a bit. We are making good progress on a lot of our sales and marketing initiatives, especially here in the US, and we are seeing strong activity, like I said, US lease fleet, we expect to be up from where we are today by year end. And we are seeing good revenue and earnings growth in that product line. Really, the overall water table rising, is probably more tied to economic certainty and really trying to get some more of that in the environment.

Got you, all right, thanks guys.

Thank you.

Kevin Sterling, BB&T Capital Markets.

Thank you, good morning, gentlemen. Robert, let me take that question a little bit further, of Scott's, as you talk to customers, given the uncertain macro, are they asking for shorter-term leases, or it just seems like they are mainly sticking with commercial rentals for the time being?

Yes, I'll pass that to Dennis in a minute, I think they are asking for shorter-term leases which we provide, we have several products that we offer, either taking midlife equipment from the rental fleet and leasing that, or providing them some shorter-term products. However, we are seeing certainly a percentage of the customers that are just saying, you know what, for the short term, I am just going to go ahead and rent and wait it out a bit more. Now as we get the benefits of some of the new fuel efficiency on the newer units, I think that is helping us, but you are in a position right now where it really has not tipped the scales completely to help us with the growth that we are looking for. Dennis, want to elaborate on that?

I think that is right. I think the fuel-efficient spec is helping with the interest. But again, it comes back to economic uncertainty with the willingness to commit longer-term, so we are focused on providing the flexibility that is needed, not only in terms of shorter-term lease, but even, and I'll go back to the on demand product, if someone wants to hold onto a vehicle that they are struggling with getting the maintenance quality that they need, we offer that product to them. And oftentimes, that is leading to an opportunity then to move into lease, so again, I think if you get a little more economic certainty, I think you start to see people look more at the lease product.

Right, okay. And so it sounds like your commercial rental duration is longer too. Is that right, customers renting for a longer period of time, whether over weekends or even for a couple of weeks at a time? Is that the right way to think about it?

Well usually, Kevin, when you get into an environment like this they do because they do not want to lose the vehicle. When you get into this kind of an environment, they know that if they return it, it may get rented to somebody else, so if for no other reason you are seeing that. But you're right, I think intuitively you would expect that in an environment like this where they're substituting it for a vehicle they would otherwise own or lease, they would be renting it for longer.

Okay, and Robert, let me kind of follow-up there, commercial rental, obviously doing well, you talked about the high utilization, do you worry about building the rental fleet too much and we get in a situation like we saw a year ago, where you grew your rental fleet and then all of a sudden the rental demand just hit a cliff and dropped off? Or maybe this year is a little bit different, just not growing your fleet that fast and just keeping utilization above that 80% level.

Let me, I will hand it over to Dennis, I would just tell you that just as a data point, we are not looking to grow the fleet from where it is today, where otherwise we might have had some movement. So what we're doing is we're keeping a steady so we are not having a big growth and more importantly, where the vehicles are coming from is we are not running out and buying a whole lot of new vehicles, we are buying some, but a lot of them are redeployed.

Kevin, I would just add that we have been really focused on our asset management because of the concerns to not get in the position that we were in last year. As Robert mentioned earlier, we have been focused on moving units from the surplus category, or lease surplus, over into rental, and we have been driving that very aggressively. And the reason for doing that, is better asset utilization, and frankly we do not want to be in a position that we were in last year. So as mentioned in Robert's opening comments, we've grown the rental fleet some from used vehicles but a very small amount. It has been a lot of movement from the non revenue generating lease category over into rental for the very reason, the very concern that you described.

Okay, great, and then one last question, just going down a different path here. Do you guys see, what is the opportunity for you in the energy space, with the growth in fracking, and the oil plays, coming from the shales, could you just maybe just talk a little bit about it if there's an opportunity for you in energy?

Sure, let me hand it over to John, because John has one of the initiatives that he has, talking about new initiatives and new products that we're working on, one of his initiatives has been around really penetrating that oil and gas sector with some of our dedicated offerings, so I will let John expand on that.

Yes, we have a pretty successful oil and gas initiative, mostly in our Ryder dedicated business, where we, at a high-level, we kind of combined three different things, we have a management, we call it LLP, lead logistics provider servicer, where we help oil and gas companies manage the flow of materials and products in and out of a field and within a field, including repair parts and other products. Except not bulk oil. And then we combine that with offering Ryder dedicated services, and we have gotten a lot of new sales in this area, in our dedicated business for those kinds of customers in those fields. And then we have a very small transactional trucking business that does flatbed trucking in one of the field. And that is kind of an experiment to see if we can combine some transactional business, very specialized small transactional business in areas we are very strong in to kind of leverage our strength. And so, those three products are really successful right now, and driving a little bit of growth for us in Ryder dedicated.

Okay, great. Thanks so much for your time today.

Great, thank you.

Matt Brooklier, Longbow Research.

Thanks, good morning, just wanted to quickly clarify something Robert said earlier on the commercial rental fleet. We are at roughly I think 38,000 units at the end of the quarter, the expectations are that we do not grow any further from here or we are just not adding I guess new equipment to that -- to the commercial rental fleet?

Yes, we are at 38,000, we are going to be right about that at the end of the year. So we are not going to add a whole lot to the commercial rental fleet between now and then.

Right, that is helpful. And then aside from maybe a little bit of uncertainty, driving customers to use rental a little bit more than the lease product, could you also talk to what verticals within rental are feeling stronger, are doing a little bit better where you are actually seen some I guess net positive activity?

No, I think it is interesting, it is really across the board, we are seeing rental really pick up. Obviously super storm Sandy helped some of that in the last several quarters. But it has really been strong utilization across sectors and really across regions in the country. And I think that is just generally the combination of some economic activity with a lot of uncertainty, and it is really driving some of what we're seeing.

Okay. And then it may potentially be a little bit too early, but hours of service, the change there, is that a potential opportunity for Ryder on the rental or lease side, how are you thinking about that and have you seen I guess a change in the marketplace since that rule went into effect beginning of July?

Yes, we have not seen a big impact from that yet. Certainly in our own dedicated business, we did not see a big impact. As you know, most of our dedicated business is closed loop and drivers are usually back home each night, so not a big impact from those changes. But no, I couldn't say that in our rental fleet we have seen any significant change from that.

Okay. That is helpful, thanks, guys.

All right, thank you, Matt.

Justin Long, Stephens.

Thanks and good morning. You touched on the balance sheet earlier, but based on where it stands today, I was wondering if you could talk about the possibility of an acquisition in the near-term. Are you still looking at opportunities today? And also could you just talk about the level of activity in general that you are seeing out there in the M&A market?

Yes, first of all, to your first question, the level of interest we always -- we're always interested in acquisitions, both in the FMS side, tuck in type acquisitions, and then on the Supply Chain side to really expand our service offerings. And I would tell you, there is still activity, but as you know, historically these things it depends on when an owner is ready to do something, usually it gets to transition periods and times when a seller is ready to sell. So it is hard to predict exactly when those are going to happen. And I think the important thing to know is that we are out there in the market and we continue to be and we continue to be actively looking for opportunities.

Okay, great. One on D&A, I know you're benefiting this year from the increase to residual values, but could you remind us of the expected year over year benefit in 2013, and now that we are a couple of quarters into the year, has there been any change to that?

Yes, year to date, it is probably about $15 million I want to say. Something like that. So you could just double that for the full year. And so it is $28 million, $30 million type of benefit year over year. That will be an item that we will look to each year, we adjust our residuals factoring in what current pricing is doing. As we have talked about pricing continues to be stable and at historically high levels, so everything else being equal, you'd expect we'd have some upside as we go into next year around that item.

Okay, great, I appreciate the time.

Great, thank you.

Nicholas Bender, Wunderlich Securities.

Good morning, gentlemen, and thanks for letting me sneak in here at the end. You mentioned a step down in used vehicle inventory, by the end of the year, is that sort of a linear progression we're going to see in the third and fourth quarter or do you just expect to be down to a more typical sort of range on the used vehicle side at the end of the year?

Yes, no, it is hard to tell if it is going to be linear or maybe a little more in one quarter or the other, but I think generally what we're -- the message there is that we are seeing that improve, right. We were at levels that were certainly higher than what we would like to be. Last quarter we were at 10,000, our range is 6,000 to 8,000, so we have been wholesaling more than we would like to as a result of those elevated levels. So the good news is, as we continue to come down, you should see, there should be less wholesale activity happening, especially as we get into next year. So I think that is certainly a positive trend.

Yes, understood. Definitely. Certainly the on demand maintenance offerings, exciting opportunity for you guys, is there much capital investment there over the next couple of quarters as you sort of are ramping that in a pilot stage?

No, one of the beauties of that product is there is really, the capital investment is very little, because you're not buying the trucks. In that type of situation, what we're doing is we are maintaining the vehicles for a customer based on pre negotiated rates, but the work is done and paid by the job. So customer comes in, we give them an estimate of what it's going to take, they agree to do the work, we do the work, and then we bill them. So there is no, we do not own the vehicle, we do not lease it to them, the revenue in dollars per vehicle are much less than a full service lease as you might imagine, because there is not the reinvestment in the -- there's not the investment in the vehicle, but the return on capital is dramatically higher. And it allows us to leverage our network infrastructure and really bring incremental revenue and earnings to the Company. I want to make sure I'm clear, we are still in the early stages of this, but the reason we have mentioned it is because we are getting positive results from it, and we really believe that over the next several years that could begin to drive more -- some of the growth story on the FMS side.

Right, that definitely seems to make sense longer term as you sort of layer it on the current network. Just a quick follow-up for John real quick, on the SCS side, I know we've talked a lot about auto on the call today. Can you talk a little bit about trends you are seeing in tech, which directionally seems to be a little bit encouraging this quarter, and also in industrial that saw the nice jump year over year, if there is anything specific there, if you're having a particular success in one side versus industrial?

I'm glad you asked the question because earlier I was asked which segments were we getting the strongest growth in, and I neglected to mention industrial. We have landed a fair number of new projects in industrial, some of that is related to oil and gas, some of it is related to taking our skills and largely from automotive, and applying them to large industrial companies who have big plants in the US, and doing those same kind of logistics projects for those customers, that has helped us a lot this year as well. All of that has helped our new sales to grow dramatically, I mean our new sales have been up almost 40%, basically since the last -- since the middle of last year. New sales growth has been stronger than it had been historically. So that is the industrial answer, and then what was the first part of your question again?

Just directionally, with revenue in the tech segment.

Oh, tech. Yes, tech had been down, the thing holding back tech is, if you're not making tablets or cell phones, or you are not doing -- and you are a manufacturer then your growth has been down, and if you're doing logistics for those companies, your growth had been down as well. And that has been -- that had been holding us back. I think we have kind of bottomed out on that and you can see that in our results. And we are landing new customers and I think our traditional tech companies, their volumes seem -- hopefully have bottomed out as well. We should see little better results in tech going forward.

Fair enough, thanks very much guys. Nice quarter.

Okay.

Jeff Kauffman, Buckingham Research.

This is Ryan Mueller on for Jeff Kauffman, thanks for taking our call here. Just quickly, with the guidance of negative $190 million of free cash flow this year, when do you expect free cash flow to turn positive? We want to know just kind of how much free cash flow do you see generating over the next decade compared to the last decade and where you think the lowest free cash flow you can get to?

Jeff, you were kind of breaking up little bit but I think your question is about free cash flow and we're guiding towards a negative $190 million, and I think your question was when do we expect to be cash flow positive. Without really doing the full plans for the next couple of years, I think just intuitively next year, this was a heavy replacement cycle this year, we expect some of that to roll into 2014, which as you start having this heavier replacement, that negatively impacts free cash flow. So we would expect improvement next year, and I cannot tell you whether it would be positive or not yet, but certainly as we get into 2015, you would expect to see some positive free cash flow.

Right, Ryan, I think one thing you want to factor in is that there is a big premium on replacement activity, trucks cost 40% to 50% more than what the ones we're replacing, so even though next year may be a lower replacement process, we are still going to have a decent amount of growth spend within there because the premium is large. So that is going to play out here over the next couple years, and that will impact what our free cash flow really looks like, but Robert is right, we should see less lease replacement next year. This year the rental spend is fairly low, it is below maintenance levels, so we would expect, everything else being equal, that would probably rise over time.

Great, thanks for the time.

David Campbell, Thompson, Davis & Company.

Good morning, good afternoon I guess it is now. I just wanted to check on your statement about lease vehicle sales in the last six months, I think I heard you said it would be down, it would be down but I cannot remember down from the first six months or down from one year ago?

You're talking about the lease fleet?

Yes, the vehicle sales, the vehicle sales.

Oh, used vehicle sales.

Yes.

Used vehicle sales on a net net are actually slightly positive year over year.

In the last six-months?

You might be thinking about inventory. Our inventory will be down. That is what we said. The inventory of used vehicles will be down from where we are today. So today we are at 9,600 units, we expect that by the end of year to be lower, which is a good thing, because we are currently above our target range of 6,000 to 8,000.

Right, and that means that your vehicle sales will be down in the last six months?

No, vehicle sale results will not be down because we're still selling, we have got plenty to sell so we are selling the inventory that we have. And we are as that inventory gets closer to our target levels, you will see us do more retail and less wholesale which should be a positive.

Okay, yes, that is right. Okay, great. Thank you.

Okay, thank you, David.

Thank you, and that concludes the question-and-answer session. I would like to turn the call over to Mr. Robert Sanchez.

Great, thank you. I appreciate everybody getting on the call, I think we are a little bit beyond the top of the hour, but I wanted to make sure that we answered every call that was out there. Every question that was out there, I am sorry. Now I wish everybody a great day, and look forward to seeing you as we get on the road.

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