萊德系統 (R) 2013 Q3 法說會逐字稿

Good morning and welcome to the Ryder System, Incorporated third-quarter 2013 earnings release conference call.

(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 third-quarter 2013 earnings conference call. I'd like to remind you that during this presentation you will hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on Management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economics, business, competitive markets, 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 third-quarter 2013 results, review the asset management area, and discuss the current outlook for our business. We'll then open up the call for questions. With that, let's turn to an overview of our third-quarter results.

Net earnings per diluted share from continuing operations were $1.40 for the third quarter of 2013, up from $1.26 in the prior-year period. Third-quarter results include $0.06 of nonoperating pension costs. The prior-year period included an $0.11 charge related to nonoperating pension costs and a tax law change. Excluding these items in both periods, comparable earnings per share were $1.46 in the third quarter up from $1.37 in the prior year; an improvement of $0.09 or 7%. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up 5%. Total revenue grew 4%. These revenue increases reflect new business and higher volumes in supply chain, as well as lease revenue growth.

Page 5 includes some additional financials for the third quarter. The average number of diluted shares outstanding for the quarter increased by 1.6 million shares to 52.2 million. This reflects the temporary pause of our anti dilutive share repurchase program and share issuance being higher than planned due to increased employee stock activity. As of September 30, there were 52.6 million shares outstanding, of which 52.2 million are included in the diluted share calculation.

Our third-quarter 2013 tax rate was 33.7% and includes the impact of nonoperating pension costs and a pension settlement charge. Excluding these and other smaller items, the comparable tax rate would be 34.1%, which is generally in line with our forecast for the quarter. This rate is below our prior year comparable tax rate of 34.9%, reflecting a higher portion of earnings and lower tax jurisdictions this year.

Page 6 highlights key financial statistics for the year-to-date period. Operating revenue was up 4%. Comparable earnings per share from continuing operations were $3.53, up by 12% from $3.15 in the prior year. The spread between adjusted return on capital and cost of capital increased to 100 basis points for the trailing 12 month period, up from 70 basis points in the prior year. We now expect this spread to be approximately 100 basis points by year end, and in line with our initial plan, as we make continued progress towards our longer-term target of 150 basis points.

I'll turn now to page 7 and discuss some key trends we saw in the business segment's during the quarter. Fleet management solutions total revenue grew by 2%. Total FMS revenue included a slight decline in fuel services' revenue. Excluding fuel, FMS operating revenue grew 3% driven mainly by growth in full-service lease.

Full-service lease revenue grew 3% due to higher rates on replacement vehicles reflected in the higher cost of new engine technology. The average number of leased vehicles declined by 1% from the prior year, reflecting the non renewal of some low margin trailers in the UK, the impact of economic uncertainty, and more efficient redeployment of off-lease vehicles. The lease fleet grew sequentially by [500 units] (corrected by company after the call) at quarter end, reflecting stronger than expected sales activity in North America, partially offset by fewer trailers in the UK. Miles driven per vehicle per day in the US lease power units increased 2%. Miles per vehicle have improved over the past two years and are now back to normalized 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 third 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. A significant portion of this increase is coming from our new on-demand maintenance products, which is in place with several large customers.

Commercial rental revenue was up 3%. Globally rental demand was down 2% from last year, which was slightly better than expectations, as increased demand in the US was more than offset by lower demand in the UK and in Canada. The average rental fleet decreased 4% from the prior year, but was seasonally up 3% from the second quarter.

Rental utilization on power units was 79.7%, an improvement of 230 basis points over last year and a very strong absolute rate. Global pricing on power units was up 4%, improving from the 2% growth we realized in the first half, as the rate increase we implemented during the second quarter is taking hold. In used vehicle sales, we saw continued solid demand and good pricing. I will discuss those results separately in a few minutes.

Overall, improved FMS earnings were driven by better commercial rental performance and strong full-service lease results. Improved lease earnings reflects vehicle residual value benefits and higher rates on the new engine technology. These improvements were partially offset by lower earnings in the UK, which were impacted by weaker demand and one-time charges. Earnings before taxes in FMS were up 2%. FMS earnings as a percent of operating revenue were 11.1%, unchanged from the prior year. Performance in the UK negatively impacted earnings before tax percentage by approximately 60 basis points.

I'll turn now to supply chain solutions on page 8. Operating revenue was up 9% and total revenue grew 8%. These increases are due to new business and higher customer volumes. We saw nice growth in our industrial high-tech and retail and consumer packaged goods industry groups.

Operating revenue from our dedicated offering increased by 10% reflecting strong sales activity. New sales from dedicated have come from both private fleet conversions, supported by outsourcing trends, and from our internal efforts to migrate customers from lease into dedicated, where we realize increased returns. Dedicated achieved double-digit growth despite headwinds from an automotive customer with significantly lower volumes in the year. Supply chain earnings improved 21% reflecting new business and higher volumes. Segment earnings before taxes as a percent of operating revenue were 7.3%, up 70 basis points from the prior year.

Page 9 shows the business segment view of the income statement I just discussed, and is included here for your reference.

Page 10 highlights our year-to-date results by business segment. In the interest of time, I won't review these results in detail, but I'll just highlight the bottom-line results. Comparable year-to-date earnings from continuing operations were $184.5 million, up 14% from $161.9 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 $1.5 billion. That is down $220 million from the prior year. This decrease primarily reflects lower planned investments in our commercial rental fleet. Around lease capital, we continue to see a higher than planned percentage of sales being filled with new equipment versus used equipment. We also realized better than expected lease sales in the third quarter. As a result, we have increased our full-year capital spending forecast to $2.1 billion, above our previous forecast of $1.9 billion.

Obviously, the stronger lease sales we have seen recently is encouraging. Additionally, filling a greater percentage of lease contracts with new versus used equipment is also a positive story for us. It reflects greater receptivity from customers regarding the new engine technology, including a desire for fuel savings benefits. Importantly, it also means that we're contracting with customers for longer lease terms on the new equipment. We realized proceeds primarily from sales of revenue earning equipment of $337 million, that's up by $27 million from the prior year. The increase reflects more units sold versus last year. Net capital expenditures decreased by $116 million to approximately $1.2 billion.

Turning to the next page, we generated cash from operating activities of $890 million year to date, up by $122 million from the prior year. The improvement reflects lower working capital needs, lower pension contributions, and higher earnings. We generated almost $1.3 billion of total cash year to date, up by $31 million, reflecting higher operating cash flow in the current period, partially offset by a sale lease-back in the prior year. Cash payments for capital expenditures decreased by approximately $200 million to $1.5 billion for the year-to-date period.

The Company had negative free cash flow of $206 million year to date. Free cash flow did improve by $230 million from the prior year, due to lower rental capital expenditures and higher cash from operations. Our prior forecast projected full-year free cash flow to be around negative $190 million. Given the increase in lease capital, due to stronger sales and greater use of new vehicles, we now expect full-year free cash flow of around negative $350 million.

Page 13 addresses our debt-to-equity position. Total obligations of almost $4.2 billion increased by $186 million from year-end 2012. Total obligations as a percent to equity at the end of the quarter were 251%. It was down from 270% at the end of 2012. Leverage is within our target range of 225% to 275%.

As we previously discussed, our leverage has been impacted by pension equity charges driven largely by a historically low interest rate environment. As of September 30, 69 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 around 15 additional percentage points of leverage.

Equity at the end of the quarter was $1.66 billion, that's up by $188 million versus year-end 2012. The equity increase was driven primarily by earnings.

At this point, I'll 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. We continue to reduce used vehicle inventories, which are at the lowest level in the past seven quarters. Used vehicle inventory held for sale was 8,200 vehicles, down from 9,100 units in the same period last year, and 1,400 units below second-quarter levels. Used vehicle inventory is nearing our target range of 6,000 to 8,000 vehicles following recently higher levels caused by the lease-replacement cycle. Used vehicle inventory at year end is expected to be around the top end of our target range.

Pricing for used vehicles remains generally stable. Compared to the third quarter of 2012, proceeds per vehicle sold were down 6% for tractors and up 9% for trucks, including heavier than normal wholesale volumes due to the replacement cycle and the age of the vehicles sold. From a sequential standpoint, used vehicle pricing was unchanged from the second quarter.

As our used vehicle inventory approaches our target range of 6,000 to 8,000 vehicles, we expect to reduce the number of vehicles sold through wholesale channels. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by almost 550 units, or 10%. Early terminations of lease vehicles increased by our around 400 units, but remained well below pre- recessionary levels. Our average commercial rental fleet was down 4% versus the prior year, but was seasonally up 3% from the second quarter.

I'll turn now to page 17 to cover the outlook and the forecast. In fleet management, we saw better third-quarter performance in commercial rental, driven by higher pricing and utilization. We also continued to see strong full service lease results reflecting higher rates on new engine technology and better residual values. These factors should continue to benefit the fourth quarter.

As a reminder, our midyear forecast projected a global lease fleet to remain flat in the second half of the year. Due to improved sales activity, however, we saw lease fleet growth during the third quarter of 500 units, in spite of a headwind of 400 units from the UK trailers, and now expect growth to continue at an improved pace in the fourth quarter.

In addition to improved sales results with our traditional leased products, we are also very pleased with the strong interest in our new products including on-demand maintenance and natural gas vehicles. While currently small in size relative to our overall business, these products could become an important growth driver by penetrating the historically non outsourced private fleet in four higher markets. We continue to make progress on maintenance initiatives, which are designed to address the higher costs of new engine technology. We also continued to expect maintenance cost benefits driven by the elevated number of leased fleet replacements and a reduction in the lease fleet age.

In the used vehicle area, we expect solid demand at generally stable pricing with inventories around the top end of our target range. We anticipate improved FMS results in North America will continue to be partially offset by challenges in the UK fleet market. While UK results should improve sequentially from the third quarter, we're forecasting them to be below our prior expectations. We remain confident that over time we will realize FMS margins at the levels we saw in 2007 and 2008. Given changes in the environment since then, the makeup of the FMS margin may be a bit different and will likely include contributions from growth, benefits from fleet replacement, improving residual values, new products and services, and cost management.

In supply chain, we expect solid year-over-year growth in both revenue and earnings. Growth rates in the fourth quarter are expected to be somewhat less than in the third, due to some lost business and lower forecasted volumes. We are particularly encouraged by sales activity in our dedicated services offering, where we are seeing outsourcing activity driven by CSA regulations and other secular trends. We are also benefiting from our internal initiatives to migrate some customers from lease to dedicated. In the fourth quarter, we expect a higher share count to negatively impact earnings by an additional $0.01 above our prior forecast. This brings the full-year impact of a higher share counts versus the prior year to $0.12 above our original forecast of $0.06. Finally, a higher tax rate will negatively impact the fourth-quarter earnings by $0.02 versus the prior year.

Given these factors, we are tightening our full-year comparable earnings-per-share forecast to $4.78 to $4.83 from $4.75 to $4.85. This is an increase of 8% to 10% from $4.41 in 2012. Our fourth-quarter comparable earnings-per-share forecast is $1.25 to $1.30 versus the prior year of $1.26.

That concludes our prepared remarks this morning. At this time, I'll turn it over to the operator to open up the line for questions.

(Operator Instructions)

David Ross, Stifel.

With the full-service leasing business, you mentioned higher maintenance costs associated with the new vehicle technology. Is that factored into pricing?

It is, David. We review our pricing on an annual basis and sometimes even more frequently than that. As we've seen these price increases, we have been updating the pricing on a regular basis.

Okay. And in addition to that, with the new trucks supposedly being more fuel efficient, are you factoring in, at least for some accounts, the expected reduction in the fuel services' revenue that you should be getting?

Some of that is built in, but if you remember, our fuel is generally a pass through regardless of price. There is some margin built in, but some of that reduction that you may get from the higher fuel efficiency, we're looking to probably make that up with new fuel customers we might get through some of the new products like on-demand maintenance.

Okay. About the FMS segment in terms of the margin, a lot of things seem to be going right in the business. The rental utilization is strong. The fleet age is still coming down. Residual values are holding. But, we're not seeing as margin expansion as we might like. Could you give us any more color there?

Yes, I think the key thing in this quarter was really the UK. If you look at -- we highlighted that the UK represented about 60 basis points of margin in the quarter. So, had it not been for the UK, if you just looked at North America, you'd have a 60 basis points improvement in earnings before taxes percentage.

Is that operating revenue or total revenue?

Operating revenue. It's a percentage of operating revenue.

Then last question, the press release mentioned the multi-employer pension plan settlement charge. Did you guys buy your way out of one in the quarter? Are there still any lingering multi-employer plans that you're part of?

We have a small percentage of our employee base that is represented by unions. Of those, there is a percentage of those that have a multi-employer pension. As a percent of total employed it is a very small percentage. However, as we look at some of the risks associated with those, even though they're small, because of the way that the regulations work around that, there's a little bit of a disproportionate risk. We are looking where it makes sense to work our way out of those. I don't expect those to be material items. Just as they come along, if we have an opportunity to convert them, we will.

Right. David, that was just an agreement with one union where we were going to convert them to a 401(k) plan moving forward. We have probably 10, I want to say 10-odd total multi-employer plans. Our strategy is to try to address these as they come up. Usually you do that when the collective bargaining is up for renewal. So, it's going to happen, we would expect and hope, over the next few years.

You guys aren't part of Central States, right?

We are. We have a very small presence in that plan.

Okay. Thank you.

Todd Fowler, KeyBanc Capital Markets.

Robert, I want to make sure I understand your comments on the guidance when you're taking down the full year just by a couple of pennies on both ends. I know you gave a couple of reasons at the end of your prepared remarks, but would you attribute the adjustment to guidance? Is that most of the higher tax rate and the higher share counts? And if you can quantify the issues in the UK, what's going on there and how long you expect that to persist, I think that would be helpful as well?

Tax rate is really a year over year issue, but versus our prior guidance, it's really two things. It's, let's call it $0.01 for the higher share count then $0.02 for UK. Because UK, even though we expected to get better than the third quarter, it's going to be a little worse than what we had expected it when we gave the guidance midyear.

What is the issue in the UK at this point? Is it something that gets cleaned up by the end of the year? Or do you see that going into 2014?

It's primarily a result of soft demand, especially around rental versus what we had expected. The economy in the UK seems to be getting a little bit better since what we had talked at midyear, but we're still not seeing a lot of that in rental demand. That's the biggest headwind that we've got there. We've got a couple of other issues that we're working through. The third quarter was impacted by a few one-time items. We had some bad debt in the UK that hurt us. Obviously, we don't expect that to recur, but certainly, we think the rental headwind will continue for certainly into the fourth quarter. I think beyond that we expect to be able to either offset it or we would see some pick up.

Okay. That helps. Just on the leasing business, I guess I'm curious, what you think was different here in the third quarter versus what you've been experiencing for the first part of the year? Seeing that lease writing activity pickup, which is something you haven't talked about recently. Also if you can give some color on the cadence of what we should see for the lease fleet? It sounds like that there were 500 units that were added, but 400 units that were lost. I'm trying to get an idea how to think about the lease fleet's for the balance of the year?

Let me clarify, I may have misspoken on the first part of the presentation. The lease fleet, including all units globally, was up 500 units. That included 400 units of headwind. So, had it not been -- of headwind from the UK trailers. Had it not been for the UK trailers, lease fleet would have been up 900 units. I want to clarify that.

I think, and I'll hand it over to Dennis to give you a little more color. I think in general, the challenge has been, in this uncertain economic environment, is getting some traction on customers feeling good about the economy and feeling strong enough about the economy to be willing to sign up to these longer-term leases. We've had some choppiness in that. I think as you saw in the first half of the year, we are a little bit softer than we had expected. However, we did see in the third quarter a pickup of customers willing to sign up.

Now, I can speculate on what some of the reasons are. I think certainly the fuel efficiency of the newer equipment is helping us. I don't know if at some point customers are just realizing that they've got to make some decisions because some of these vehicles have really aged out. They are looking to make some moves. We really are encouraged by what we saw in the third quarter in terms of not just the fleet growth, but really sales activity. We're expecting that to continue into the fourth quarter and really set us up nicely for 2014.

Let me hand it over to Dennis for some more color.

Robert, I would just add to that that some of the macro trends, Todd, that are out there, such as the new technology, the expense associated with not only the acquisition costs but the maintenance cost, I think that's leading to customers saying hey, maybe I want to look at outsourcing. I think also CSA scores is playing into this. Finally, I would say as you look at the new technology and the training challenges for technicians, some customers are saying, look, maybe it's time to look at outsourcing this to a company like Ryder. I think a lot of those macro trends that we have been talking about for the last several years, I think we are starting to see them play out.

There is no substitute for a little bit more visibility in the economy, a little more certainty would really help, but even in spite of that, I think we saw some good performance and some good activity in the third quarter.

Okay. That helps. And just to get the clarification, so the number of units that we'd expect sequentially in the fourth quarter, a couple hundred and we're into the third quarter? Or how should we think about the fleet going into the fourth quarter?

We're expecting in to the fourth quarter being up another, even including the UK, being up about 1,000 units in the quarter, which is one of the reasons why we feel really good about what we're seeing.

Okay. And the 1,000 is a net number?

You're right. 1,000 is a net number. Correct. Remember the revenue for that usually isn't going to -- you're not really going to see that until you get into the first quarter of 2014.

Got it. Okay. Thanks a lot for the help. I'll turn it over.

Ben Hartford, Baird.

John, if I could ask your perspective on SCS, what's obviously a strong result this quarter, I think in the past you talk about that business being a 6% to 7% margin business. So the question is how sustainable is this margin that you experienced this quarter? Maybe if you could spend a little bit of time discussing the mix shift within that segment? I know DCC historically was higher margin than traditional SCS business and it sounds like you are getting some good growth momentum within dedicated. So, maybe those targets should be rethought going forward? I'm just looking for a little bit of perspective on how we should think about margins in that segment in light of the third-quarter results?

Let me start with the growth question. We did get a little higher growth rate, a lot higher growth rate than we expected in the third quarter. It's going to be higher than what we expect going forward by a little bit, too. We've had -- and it's mostly because we had strong growth in volumes at existing accounts. We've had really strong sales growth across SCS and especially in Ryder dedicated, but not just in Ryder dedicated. For close to two years now, where we had a big step up, maybe it was about 18 months ago, we saw a big increase in new sales.

Now, we're really at a point where if we could just get consistent volume growth at our portfolio of existing customers, then we would see growth rates like this, or close to it. At least in the near term, we don't expect to see that. So, that's why we've been saying 5%, 6% growth, that kind of thing. That's the growth side.

Our margin's been consistently improving and it's been improving across both dedicated and SCS, traditional SCS segments. I don't think that there's a big enough difference in margin between the two that you should worry about the mix changing the target total margin. I think we're getting margin expansion because we are growing and that's helping us amortize our -- we don't have a huge overhead, we have a little overhead, but it's helping us amortize that. At the same time, we're selling more value-added services. This has been our strategy now for five years, is to add capabilities and new services, both in Ryder dedicated and in our verticals, that create a little more value for customers. So, over time, we're seeing projects come on with slightly higher margins.

That's good. That's helpful. Art, on the share buyback or the share dilution discussion here in the fourth quarter, that's understood, the impact. Can you help us think about how we should think about dilution going forward as the balance sheet starts to normalize and presuming at some point in time you don't experience net dilution, you are able to at least reengage the anti-dilutive purchase? If and when that time comes in 2014, what is the point of view on the share count going forward? Are you content with current levels or slightly higher levels and then keeping it at that level? Or do you have a desire to repurchase stock to drive the share count back below 2013, 2012 type levels? I'm just looking for a little bit of perspective on once trends normalize in 2013 from a balanced perspective?

Right, Ben, I think what we're looking at it right now is we turned it off at the beginning of the year to provide us with some flexibility. We've been seeing a lot of adverse hits from pension and the like. So, pension is going to go in our favor, but we're going to deliver more than we thought at the beginning of the year, everything being equal as of right now. Our plan is to take a look at the anti-dilutive at the beginning of the year and make a call. Right now I wouldn't see -- I would expect, if anything, if it was turned back on, it would be on a prospective basis. I wouldn't think we're going to do a look back as to what happened this year. So, that's our view right now, but it's a process we got to go through over the next few months here.

Okay. That's helpful. Thanks.

Kevin Sterling, BB&T Capital Markets.

You may have mentioned this. I might have missed it. I'm sorry if I did. Did you give lease miles driven per day? I didn't see that or maybe didn't catch it.

Yes. The lease miles driven per day is up 2%. We did mention that it was up -- it's already at our historical norms. Not at the peaks yet, but certainly at historical norms.

Remind me what peak was?

Hang on while I look at that. It's a little bit off of where we are at.

Okay.

3% more than where we are right now. So, another 2% 3% from where we are right now.

Okay, so got a ways to go. It looks like directionally we are heading there. Is that the right way you guys thinking about it?

Correct. At some point -- I think we're in the range now where you would normally see some conversions. So, I'd say that also is an indicator of maybe what we saw in the third quarter.

Yes. Looking at some of this full-service lease growth, you're talking about some of your optimism. Is that new customer growth or existing customer expansion? Is there any way to break that down?

It's a little bit of both really. We are seeing -- I think Dennis mentioned earlier, we're seeing customers coming to us who have currently owned their own fleet and are struggling with some of the items around the maintenance costs associated with the new equipment, the new capital investment. Some of the macro trends that we've been talking about for a while, we're really beginning to see a lot more of that. Then, we're seeing some expansion from existing customers, but maybe not as strong. Dennis, do you want to?

I agree. It's a little of both, Kevin, but I would say we are encouraged by what's happening with ownership customers. Where again, they're seeing these challenges and looking for some help. I think we're at that point where customers are saying, look, with the new technology being so expensive and the challenges associated with training of the technicians. As I mentioned earlier, the challenges associated with CSA scores being put up on websites, they're looking to a Ryder to say, can you help me? We're really encouraged by, is the number of ownership customers that are now looking at that total cost of ownership and regulatory challenges that they face and looking to Ryder.

Okay. Last one here, from what you guys can tell, this increase in full-service lease, it really wasn't anything, say one-time in nature, all of a sudden maybe customers trying to get out in front of a potential hours of service crunch, for instance. It's just more so that realizing hey, my equipment's gotten older. This technology is so expensive, I've got to do something. It's just maybe the light bulb all of a sudden going on now. It's nothing as far as you can tell that was one time that might attribute a bump?

The only thing that happens around this time is the model year change. There's always a little bit more activity around that, but we are seeing activity beyond that. Even after the model year change occurred, we continue to see stronger activity.

Then your lease pipelines, is it customers really, as far as you can tell, looking for that new equipment that you talked about versus used equipment?

Yes. You get into the fuel efficiency and the attractiveness of that. They're looking at new equipment. I'd add is that as we're talking to these customers, we're also packaging all the value-added services that we can provide. I think that is very attractive to them also. So, yes, there's a lot of customers out their saying look, can I save on fuel? Also, they'll come to a Ryder, where we look at optimizing their fleet and we're seeing a lot of interest in dedicated also. It's not only the technician challenges, but it's also the driver challenges, which is why I think you saw such strong growth in dedicated this quarter.

Okay, great. I really appreciate your time today. Thanks a lot.

Anthony Gallo, Wells Fargo.

Congratulations. I'd guess first, could you clarify what the reduction in the average age of the fleet was? I thought I heard you say a month?

Yes, it was. It was one more month, so we're down four months from last year.

Okay, so it continues to run about one month every quarter.

Correct.

It seems like that should accelerate as the lease fleet expands more rapidly than you were thinking. Is there any reason why it would not?

You're saying it should expand as the lease fleet grows?

Yes.

Sure. On the edge is right, because you're talking about -- if you add 1,000 units, it's on a base of 120,000 vehicles. So, I wouldn't say that's going to have a huge impact on it. It's more the replacement cycle is probably the bigger driver.

Okay, that makes sense. In the dedicated business, I thought you might actually get tripped up there, a lot of the for-hire carriers saw some strains on driver recruiting and actually hours of service within their dedicated suit. Can you just walk us through how you were able to avoid that, both the driver recruiting challenges and the hours of service challenges?

Okay. Driver recruiting is a big challenge for anybody in this business, and it's a challenge for us. We think we are good at it. We think, in general, this business has an advantage over say the for-hire truckload because most of it's short haul and your drivers are home every night. But, it's our business, recruiting drivers, and it's not our customers' business. So, I think we're seeing some conversions because of that. Hours of service is really what is virtually a non issue for us, mainly because of the short-haul nature of our projects. We might have had a couple of accounts where we had to restructure or re engineer the routes and maybe ask for a small rate increase, but it really was no significant issue to us.

Okay. That's helpful. Robert, maybe could you expand a little bit on the type of spending you are doing for on-demand services and maybe where you are in that process? Are you 25% of the way through it or 50% through it? Just a little color there would be hopeful. Thank you.

I'm sorry, you broke up a little bit. Are you talking about what we're doing around on-demand maintenance?

Yes, the nature of this spending that you're doing to get that up and running and maybe where you are in the process? Are you 25% of the way through it? 50% through it, et cetera?

It is a product that really leverages all of our infrastructure that we have out there, so all the shops and the technicians, we bring on additional technicians as we get a larger fleet. The management and the infrastructure stays the same. There is some IT spend that we're incurring, but it's really not a big number. You saw some of the, in the earnings results, we talked about a little bit of overhead increase from some IT spending. There is a small portion of that, which is related to on-demand, but I would say there's not a lot of significant capital or investing. It's just really trying to leverage the infrastructure that we have.

I agree. Anthony, I'd just answer the second part of your question, which is where are we at with rolling this out and the answer is we are at the beginning. We have about 10 customers right now, we're talking to larger fleets in general, and we see that expanding through 2014. There's a lot of interest in getting help with maintenance. Maintenance is the acute pain point that the industry is seeing. When you look at our 800 shops and over 5,000 technicians, this is something we're good at and something that we're going to offer the industry to help them out with the issues they're seeing.

Fantastic. Thank you.

Scott Group, Wolfe Research.

Just in terms of the CapEx going up, it sounds like so the CapEx goes up this year and you really see the revenue and earnings benefit in 2014. How do we think about CapEx in 2014? Does the higher CapEx this year mean that 2014 CapEx can come down year over year? Or do you view those independently? Do you have any thoughts on 2014 CapEx?

Scott, if you exclude growth, any additional growth in 2014, beyond whatever units we bought this year, CapEx would clearly go down next year because there is a lot a fewer replacement. The unknown, I would say, is still what additional growth capital we're going to need next year. What additional units we're going to have? We want growth. We want to be able to grow the lease fleet. So, I think what's still the unknown is if there's no growth or very little growth, you'll see CapEx go down and really free cash flow improve. If growth really picks up, then you'll have some additional CapEx, which should be a good thing because we will get good returns on that, but then delay the free cash flow benefits longer.

Got you. Okay. That makes sense. Within that, do you have a view at this point on rental CapEx in 2014 versus 2013?

No, not yet. We still haven't. We usually wait a little longer before we make those decisions because, as you know, rental can be a little more volatile than the rest of our business.

Okay. And just as I think about the earnings outlook for 2014, I know you don't have guidance out yet, but I see expectations that we get to low teens earnings growth next year and then the guidance for fourth quarter is certainly below that. I wanted to ask you, do you think we need to see FMS margin improvement to get to low double-digit earnings growth next year? Then, what's your confidence that we will see margin improvement at FMS next year? Maybe there's some maintenance offsets to the lower fleet age that we are hearing about this quarter, but maybe UK looks worse next year. I'm guessing residual value is still a positive next year, not sure about gains on sales, not sure if we can keep up this high utilization on the rental side? Some moving parts and maybe you can give us your views on that, and I guess your level of confidence in margin improvement in FMS next year?

We started a question, we don't want to get into the outlook for 2014. I don't want to do that, but I will tell you that yes, in order to see continued earnings growth, really, we need to have earnings growth in FMS. That is still the largest segment in the Company. That earnings growth, certainly, a portion of that is going to come from FSL. We've talked about in the past, as the fleet gets younger, margins improve. As we mentioned in the press release, we're seeing some of the same maintenance cost headwinds that the rest of the industry is seeing.

However, we have, over the last year and a half, two years, have shown that we can manage those costs through our maintenance initiatives and through other parts of the Business, whether it's controlling overheads or other things that we do. I expect that to continue, and I expect us, though, to also see contributions from other things such as residual values continue to hold strong and depreciation benefit from that should continue into next year. We haven't quantified that yet, but that should be a benefit. So, those are pluses. Then, continued strength in our transactional businesses. You combine that with what we are seeing in supply change and the good sales and hopefully improved volumes, continue to improve volumes into next year, those should all be positive. That's, without looking at 2014, that's some of the puts and takes that we see, but still some time to get there and we've still got a lot to learn as we make it through the fourth quarter.

Okay. Appreciate that our guys. Thank you.

Jeff Kauffman, Buckingham Research.

I want to drill down a little bit on UK. Not to take away from the forward growth, but I just want to understand it. If I take your comments, and that's implying the 60 basis points, about $4.5 million of pretax profit that you were out. Can you help me understand how to think about what's temporary and what's a longer-term battle? For instance, you said you had the higher bad debt expense. You said you were out about 400 trailer rentals. How much of the $4.5 million would those have accounted for versus say the operating market just being at a lower profit level?

I would, very simplistically, I'd tell you a little less than 50% is one timers and the rest is more challenges around rental and some of these other things we're doing.

Okay. There was an interesting release you guys had on a small company in Pennsylvania, Macaroni, in early October, where they had leased vehicles from you. They had their own private fleet and now they're taking a lot of that private fleet and outsourcing it with this natural gas conversion option. Can you talk a little bit -- is that the new model and can you give us an idea RFP activity this year, if there's a way to compare it versus a year ago when you were talking about more of these companies stepping over the threshold? Is this kind of what you are talking about?

Yes, and Dennis alluded to it earlier, we are seeing more customers that are in ownership looking at leasing, whether it's full-service leasing and or it's some of these natural gas vehicles or even some of the on demand as ways to have Ryder help them with maintenance costs or the financing of equipment that they have or introducing them to natural gas vehicles. There's the secular trends that I think are really helping some of this. Then I think, there are some of the things that Dennis and his team are doing around new products and services that are really opening up the portfolio of ways that companies can do business with us and making it easier for them to do business. That was a small example, but an important one, of a customer who was in ownership and really found a solution that Ryder could really help them be more efficient in their business. I think that is a theme that we're seeing more and more of this year.

Okay. And the RFP activity? There's no backlog number that we could really measure, but help us understand how these RFPs are different than they were a year ago, the magnitude?

We don't talk a lot about the sales pipeline, but I would tell you just a couple of things. One is that we probably are seeing more large deals this year than last year. So, larger fleets who had historically maybe been in the ownership and been doing maintenance different ways, seem to be more interested in doing business with Ryder, whether it's full-service lease or under some type of maintenance agreement. We are seeing more prospects that are coming from ownership versus what we saw a year ago, where it was mostly trading of full-service lease customers among competitors.

All right. Congratulations and thank you.

Thank you, Jeff.

Matt Brooklier, Longbow Research.

I just want to clarify one thing. The increase in CapEx going to $2.1 billion, is all of that increase due to this pickup within lease spend or is there anything else in that number?

Matt, the increase in CapEx is associated with the lease growth that we were talking about in the second half.

Okay. Can you remind us how much UK contributes to FMS, roughly?

Yes, Matt, it's about 10% of the operating revenue for the business.

Okay. Off of some of Robert's comments to the last question, it sounds like maybe half of that 60 basis points of headwind was one time-ish. Things still relatively weak within the UK during fourth-quarter, would it be fair to assume that we see a little bit less headwind in terms of the margin during fourth quarter? Or is it potentially equal to that 60 bps that we saw in third quarter?

Well, it would be less just because we highlighted about half of that was associated with one-time items, so we're not expecting that to continue. You should see less impact from the UK in the fourth quarter.

Okay. Thank you. Thank you for the time.

Nick Bender, Wunderlich Securities.

Could you guys just -- maybe this is a best question for Dennis, walk us through a little bit, in terms of the rental market, how demand broadly feels there? Obviously, the second straight quarter of solid results, is it more managing the rental fleet in a consistent market or are there some more one-off discrete variables that are helping around market?

First, from a demand point of view, Nick, as we stated earlier, the US was up year over year. The UK and Canada were down, but better than our expectations. Yes, from an asset management and utilization point of view, this is something we've been really focused on. As you know, a little over a year ago, we came out with a warning when we had too much fleet So, we've really been focused on our asset management capability and keeping utilization high, and that's helping us quite a bit. We're going to continue to drive utilization in those high 70%s, in that range is our target.

And are you seeing strength in any discrete areas or is it just, domestically speaking of course, or is it just broadly a little healthier market than obviously we're seeing same time last year?

It's broad strength. I can't point to any particular area where we are seeing a lot of pick up. Just in general, it's been strong. We see that continuing here in the fourth quarter.

Moving to the SCS side of the equation, certainly a nice rebound here for a couple of quarters in some of these verticals. How can we be thinking, moving forward, about the growth rates, particularly in high tech and in retail, which, obviously, again this time last year were comping negatively and certainly seemed to be enjoying a rebound? John, you spoke to broad customer wins, but can we look for this kind of growth moving into the back half of the year and then the beginning half of next year?

Overall, over a long period of time, we are going to see good growth in all those verticals you mentioned. We've had really good sales performance, especially in CPG, and we don't break that out in our public reporting. We combine it with retail, but that's been a real bright spot. We're doing some things to build a stronger retail vertical, and so we expect overtime to get more sales there and to see good growth there. We've had good performance in new sales in high tech.

On any given quarter, you're starting to divide the business up into finer and finer segments, and any given customer can have a decline like we are seeing right now in automotive, one customer pulling the vertical down in terms of year over year growth rates. I think the whole point of our strategy is building value and competitive advantage by specializing in verticals. We're seeing that result in good sales across all the verticals. Over a long period of time, I would expect to see them all grow well.

Got you. I'll just finish with one more for Robert. As far as we think about the disposition of used equipment, obviously, that number came down like you said, toward the top end of your long-term target range. Do you expect it to move down into the middle of that range as you work through any other equipment? Or we can expect to see used vehicle sales trending in a similar line? Then conversely, with the reduction wholesale activity, how much better do you expect pricing to feel as we move forward?

The answer to your question, yes, we expect to get in the range, certainly, to start moving into the range here in the fourth quarter. Then, as we get into next year, really bring those inventories down even further. Because as we get out of the lease replacement cycle, there'd just be fewer units to be sold. Your point on wholesale, is exactly right. As we approach this range, we are going to start wholesaling fewer units and retailing more units. So, that should help us on the sales proceeds side, which is good for us in many ways. Not only is it good for our current periods, but it's also good for the residual value calculations that we make on our lease trucks.

That's all good. There's nothing bad about having lower inventories. That's something that we are really happy that our team has worked through, I think very well this year. We're now approaching those target ranges on inventory, and again, we're working now to really reduce the amount of wholesaling we are doing and focus more on retail.

Sounds good. Great quarter, guys. Thank you.

Thank you.

Justin Long, Stephens.

I know we're running a little short on time. Just a couple quick ones. First, you mentioned some lost business in SCS in the prepared remarks. Could you provide a little bit more color on what drove that and the impact it could have as we think about growth in SCS going forward?

Yes. Lost business, you expect to have a certain amount of lost business every year. You obviously work hard to minimize that. I think what happened, what we referred to here, is that there was a little almost bunching of lost business here where there's a few big projects coming on -- not huge projects, but largish projects coming off in the fourth quarter. It shouldn't cause the growth rate to be below what we've been seeing over the long-term. It's just below what we saw in Q3. So, it's not a huge impact, and it's certainly nothing -- I mean the customers we're talking about are generally low-margin customers that were lost on price.

Got you. That makes sense. John, if you could talk about the typical length of the contract you're signing up in SCS today? And looking over the next few years, are there any major renewals you see that are coming up?

The typical length is three years. There are some that are shorter and there are a few that are longer, so the average is probably a little less than three years. So, every year a third of our business, on average, a third of our business comes up. That's a lot of business and we're always working very, very hard to renew those. It's a huge priority for our team every year. It kind of feels like every year, there is more business than normal coming up. It's probably just about the third every year, and we work very hard to retain that. I don't see any big difference next year. It's probably about the average.

Okay, that's helpful. I appreciate the time today.

Thomas Kim, Goldman Sachs.

Robert, obviously you've been with the company for awhile, but as you're settling into the CEO seat I wanted to ask you, presumably the lens at which you're looking at the Company now has changed. I'm wondering, are there any areas within the organization that you feel like are not really critical to the organization or are not necessarily core? I know there's been some questions around other businesses before, but I just wanted to sort of follow up and see if your perspective has changed at all over the last quarter or two?

No, Thomas. I have been around a long time. I remember when I first got to this Company that we had a lot of different businesses, and many of them obviously were not core to the businesses that we have today. A lot of work went into really rationalizing the businesses and getting us to where we are. As we develop strategies going forward and we look to how we're going to grow the business, you've heard us talk about really focusing on the two businesses that we're on and focusing on penetrating the non- outsourced portions of the business, whether it's on the fleet side or the supply chain side. Doing that with new products and services, but all within the same businesses that we have.

That, I think, is the right formula for Ryder for now. It's that we have big markets that we can go after in both segments. We have opportunities to really get after them, not only because of the secular trends that we are seeing, but because of some of the new products and services that we know we can offer. We think that those things are going to drive growth. So, as I sit here today, I feel really good about the businesses that we are in and the services that we offer and the synergies also that exist between them, especially as you look at what's going on with our fleet management full-service lease customers that are migrating to dedicated. I really think that this portfolio businesses can really provide some exciting growth for us.

If I could just add one more follow up on the FMS and in particular the UK side of the operation? As you think about that business on the longer-term, just given that Europe is basically and ex growth or very slow growth type of environment, how core do you feel like that is to the Ryder franchise and network?

That business, we've been in the UK now for about 40, 50 years, I believe. We have developed, really, the same type of market leadership in the UK in our business as we have in North America. We also have a very strong management team out there that really does a great job of running the business. So, even though if you look across synergies across continents are not as obvious, certainly a lot of the knowledge base that is really critical here in the US around truck maintenance and around some of the operations, whether it's rental or how we dispose of vehicles, is shared and really we do leverage across the operation.

That really helps us to drive efficiencies in the business. I do see that continuing, and I see that really continuing to be an important part of FMS and an important part of Ryder. They're in a bit of a soft patch over the last couple of quarters, but they have been good contributors to the earnings of the Company. I expect them to continue to be over the years to come.

Okay. Thanks a lot.

Thank you. I would now like to turn the call over to Mr. Robert Sanchez for closing remarks.

Okay. We're just past the top of the hour, so I want to thank all of you were being on the call and look forward to speaking with you between now and the next call and certainly on the next one. So, everybody, have a safe day.

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