萊德系統 (R) 2014 Q1 法說會逐字稿

Good morning and welcome to the Ryder System, Inc. first-quarter 2014 earnings release conference call. All lines are on a listen only mode until after the presentation.

(Operator Instructions)

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

Good morning, and welcome to Ryder's first-quarter 2014 earnings conference call.

I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of th 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. With that, let me turn it over to Robert.

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

Comparable earnings per share from continuing operations were a record $0.92 for the first quarter 2014, up from $0.81 in the prior year. This reflects an improvement of $0.11, or 14%. First-quarter comparable results excluded non-operating pension costs and the benefit from a state tax law change.

The prior-year comparable results exclude non-operating pension costs and a foreign currency translation benefit. We beat our first-quarter forecast range of $0.83 to $0.88 by $0.04 to $0.09. Our performance was driven by petter than expected commercial rental and used vehicle sales results.

Severe weather was a negative impact of $0.04 to overall Company earnings. However, this was offset by other benefits including a property sale and some favorable insurance development during the quarter.

Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue was up 4% to a record $1.32 billion. We saw solid revenue growth in rental, full service lease, and supply chain.

Page 5 includes some additional financials for the first quarter. The average number of diluted shares outstanding for the quarter increased by 1.7 million shares to 53.1 million. This reflects the pause of our anti-dilutive share repurchase program last year.

In December 2013, we announced a new 2 million share anti-dilutive repurchase program and started purchases under the program in early February. During the first quarter, we purchased 563,000 shares at an average price of $71.85.

Our first-quarter tax rate was 34.5% and includes the impact of non-operating pension costs and the benefit of a tax law change. Excluding these items, the comparable tax rate is 37.2%, above the prior year of 36.2% and in line with our expectations. The increased rate reflects a higher proportion of our earnings in higher tax jurisdictions.

Fleet Management Solutions' operating revenue, which excludes fuel, grew 4% driven mainly by the growth in our full service lease and commercial rental. Full service lease revenue increased 4% due to growth in the fleet size and higher rate on replacement vehicles reflecting the higher cost of new engine technology. On a year-over-year basis, the lease fleet increased by 1,600 units including the planned reduction of 1,200 low margin trailers in the UK.

Excluding the UK trailer impact, the lease fleet grew by 2,800 units year-over-year. Sequentially from the year-end, the lease fleet grew by 600 units excluding the UK trailers. We've included a schedule on page 18 in the appendix summarizing the changes in our lease fleet, net of the planned UK trailer de-fleeting.

Miles driven per vehicle per day on US lease power units were up slightly compared to the prior year and were impacted by weather conditions. Miles per vehicle have improved since 2011 and are now at normal historical levels.

The average age of our lease fleet began to decline in June of 2012 as a result of high replacement activity. It continued to improve this quarter and was down two months sequentially, or five months since the first quarter of last year.

Contract maintenance revenue declined 5% mainly due to a shift in vehicle and service mix. The comparison should improve going forward due to recent sales activity. Contract-related maintenance increased by 5% from the prior year.

Year-over-year growth was partially offset by activity related to Superstorm Sandy that occurred in the first quarter of 2013. Contract-related maintenance growth was driven by our new on-demand maintenance product line. We continue to see both strong new sales and increased activity with current customers for this service offering. During the quarter, we serviced over 7,100 vehicles under on-demand maintenance agreements more than double the prior year.

Commercial rental revenue grew 10% driven by improved global pricing and higher demand in North America. The average rental fleet increased by 3% from the prior year and remained unchanged from the fourth quarter. Rental utilization on power units was 73.6%, consistent with the prior year and a strong rate for the seasonally low first quarter. Global pricing on power units was up 5% for the quarter, somewhat above our initial plan.

In used vehicle sales, we saw continued solid demand and good pricing. I'll discuss those results separately in a few minutes.

Overall, improved FMS earnings were driven by strong commercial rental performance, better used vehicle results, and improved full service lease margins. Improved lease earnings reflect vehicle residual value benefits, fleet growth, and some deferral of maintenance activity due to weather conditions. This deferred maintenance activity and the related costs totaling about $0.03 are expected to occur in the second quarter. In other words, this is just a timing issue and should have no impact on the full-year results.

Earnings before taxes in FMS increased by 27%. FMS earnings as a percent of operating revenue were 9%, up 160 basis points from the prior year. I'll turn now to Supply Chain Solutions on page 7.

Operating revenue grew 5% due to new business and higher volumes. We saw growth in our industrial, retail and consumer packaged goods, and high-tech industry groups. Operating revenue from our dedicated services increased 7% reflecting continued strong sales activity. Dedicated revenue growth was offset by lost business and volume reductions in certain automotive accounts. Excluding the impact from automotive, dedicated operating revenue increased 12% during the quarter.

Supply chain earnings before taxes were down 11%. The decrease was driven primarily by down time and related costs caused by adverse weather, and to a lesser extent, startup costs on a new account. Segment earnings before tax as a percent of operating revenue were 4.2%, down 70 basis points from the prior year. We expect year-over-year comparisons to improve going forward as we move past first-quarter weather issues.

Page 8 shows the business segment view of the income statement I just discussed and is included here for your reference. I'll turn the call over now to our CFO, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Robert. Turning to page 9, gross capital expenditures for the quarter were about $600 million. That's up $146 million from the prior year. This increase reflects planned investments in our commercial rental and lease fleets. As a reference point, we're making no changes to our full-year gross capital spending forecast of $2.2 billion.

We've realized proceeds primarily from sales of revenue-earning equipment of $128 million, up by $14 million from the prior year. The increase reflects higher sales prices per vehicle. Net capital expenditures increased by $132 million to $468 million.

Turning to the next page, we generated cash from operating activities of $238 million during the quarter, down slightly from the prior year. This decrease was driven primarily by increased working capital needs, partially offset by higher cash-based earnings.

We generated $380 million of total cash during the quarter. It's also down slightly from the prior year reflecting lower operating cash flow. Cash payments for capital expenditures increased by $159 million toll $579 million for the quarter.

The Company had negative free cash flow of $198 million during the quarter below the prior year by $172 million. This decrease was driven primarily by planned higher spending on rental and leased vehicles compared to the prior year. Our full-year cash flow outlook remains unchanged from the original forecast of negative $300 million.

Page 11 addresses our debt-to-equity position. Total obligations of $4.5 billion increased by almost $260 million from year-end 2013. Total obligations as a percent to equity at the end of the quarter were 239%, up from 226% at the end of 2013. Leverage remains toward the lower end of our target range of 225% to 275% and should decline by year-end. Equity at the end of the quarter was $1.9 billion, unchanged from year-end 2013 as increased earnings were offset by share repurchases and dividends.

At this point, I'll hand the call back over to Robert to provide an asset management update.

Thanks, Art. Page 13 summarizes key results from our asset management area. We continue to reduce used vehicle inventories which are at the lowest level in the past two years. Used vehicle inventory held-for-sale was 7,200 vehicles, down from 10,000 units in the prior year and 700 units below the fourth quarter. Used vehicle inventory is in our target range of 6,000 to 8,000 vehicles following higher levels for the past two years due to the lease replacement cycle.

Pricing for used vehicles was strong, particularly for trucks. Compared to the first quarter of 2013, proceeds from vehicles sold were up 2% for tractors and up 12% for trucks. From a sequential standpoint, tractor pricing was up 4% and truck pricing was up 16%. With inventory levels at our target range and strong market demand for used equipment, we've reduced wholesale sales activity and increased retail sales, which benefited pricing.

The number of leased vehicles that were extended beyond their original lease term decreased versus last year by around 130 units, or 8%. Early termination of lease vehicles were 18% below 2013 levels and remained well below pre-recessionary levels. Our average commercial rental fleet was up by 3% versus the prior year and remained unchanged from the fourth quarter. I'll turn now to page 15 and cover our outlook and forecast.

In fleet management, both commercial rental and used vehicle sales performed well during the quarter driven by strong demand and pricing trends. We've seen these conditions continue into early April and expect these trends to remain positive, resulting in improved performance for these product lines versus our original plan. We expect rental pricing will increase 5% for the year versus the 4% increase we had in the original plan.

In addition, we expect our rental fleet to grow by slightly more than the initial plan -- than initially planned as we redeploy some surplus vehicles into rental. For the year, we expect the average rental fleet to grow by 4% versus the 2% in our initial plan, and we expect our year-end fleet to be up 1% instead of flat.

We continue to see improvement in our lease -- in our full service lease results reflecting the benefit from higher residuals and the growth of our lease fleet. Lease sales were up from last year, and our full-year forecast for fleet growth remains on track.

During the quarter, maintenance costs benefited from service activity that was deferred due to poor weather conditions. We expect this deferred activity and the related costs of around $0.03 to occur during the second quarter. We continue to make progress on our maintenance initiatives and are pleased with the continued decline in our lease fleet age.

In contract maintenance, we recently closed a large deal with a new customer and expect to see nice revenue growth for the product line beginning in the second quarter. We're also encouraged by the strong market interest that we're seeing in our new products such as on-demand maintenance and natural gas vehicles. While currently a small part of our business, we believe these products provide us with new ways to approach and penetrate the historically non-outsourced private fleet and for-hire markets. In particular, on-demand sales activity remains robust.

In supply chain, severe weather, and to a lesser extent, higher than planned startup costs on a new account negatively impacted results for the quarter. Although some impacts from this account startup will continue into the second quarter, we expect SCS margin comparisons will improve in the second quarter and for the balance of the year. The new sales pipeline continues to be strong including dedicated.

Based on our outlook, we're increasing our full-year comparable EPS forecast to a range of $5.40 to $5.55, up $0.10 from $5.30 to $5.45. This represents a year-over-year increase of 11% to 14%. The second quarter comparable EPS forecast of $1.35 to $1.40 versus the prior year of $1.25. Despite the impact of deferred maintenance expenses on the second quarter, this is a year-over-year increase of 8% to 12%.

That concludes our prepared remarks this morning. At this time, I'll turn the call over to the operator to open up the lines for questions. In order to give everybody an opportunity, I'd appreciate it if you'd keep it to two to three questions each. If you'd like to get back in the queue, we'll be happy to take as many questions as time permits.

The first question today is from John Mims with FBR Capital Markets.

Hey, good morning.

Good morning John.

Let me ask first, Robert, one of the comments you made was with the used trucks. The inventory being down now was kind of a function of the lease replacement cycle. Is that starting to decelerate? Or, how should we think about when -- with demand going forward, how much you still have left in terms of just pure replacement and where the average age of the lease fleet is now?

Yes, well, in terms of the lease fleet age, we are -- we saw it drop another five months this quarter versus last year. It dropped two months versus year-end. So, we talked about this fleet age continuing to decline through this year and into early 2015, so continue to see some benefits there.

But, we are getting -- we're getting to the latter innings I would say of the replacement cycle. We're currently in the mid-40 months, low to mid-40s in terms of fleet age. We think that could get down to maybe the low 40s, down to the 40, 41 months.

A little bit more.

And then, really taper off. That would be kind of our sweet spot.

The last few quarters you've averaged about a month a quarter, if I recall. Is there anything particular about this quarter that accelerated that de-aging?

No, I'd say that's -- some of that is just rounding. Clearly the growth that we're seeing in the fleet is helping, but most of that is just rounding.

Okay. Let me ask on the rental fleet. Obviously, winter weather helped you. Probably I think you had more lease -- more lease fleets out of -- more lease trucks out of service, which probably pushed demand for the rental fleet. As far as weather -- excluding weather, was the lease fleet kind of where you thought it should be for this quarter? And, is that -- the pricing gains you saw this quarter sustainable for the rest of the year even as you grow the lease fleet, I guess the 4% that you said you'll expand?

Rental fleet you mean, right?

Yes, yes, rental fleet. Excuse me.

Yes, I'll let Dennis expand on that, but yes, I -- the pricing benefits that we saw in the first quarter -- we expect those to hold and continue through the balance of the year. Dennis, you got any other color on that?

Yes, John, the demand was robust. We're seeing an improving economy. Frankly, we're monitoring our turndowns also and trying to ensure that those don't get too high, so we saw that increase. So, it wasn't just the weather. It was also just demand in general was what was higher, so our outlook is fairly strong in rental.

Okay. And then, one final question is on that same line, my sense is you've seen some good new lease growth, but a lot of your existing lease customers are still probably supplementing fleets with rental. Have you started to see that shift where people are willing to commit more into leases? Or, do you expect to see that more this year? And, if so, how does that play into your outlook on the size of your rental fleet?

I'd say we started to see some of that shift since the second half of last year as our lease sales started to pick back up. But, we are -- what we're seeing is the rental market continues to be hot, even with customers that are not lease customers -- pure rental. And, I think as long as we continue to see that we're going to continue to manage that. We're going to rely more this year, I think, on redeployment and rate initially, and that's currently the plan and what we've got built into our updated guidance.

Go ahead.

John, this is Dennis. I would just add that when you look at the macro trends that are playing out right now with the shortage in technicians and drivers and the new technology and the higher expenses that our customers are seeing -- we're also starting to see that private fleet really look to us to say can you help us out because they're feeling the pains of these macro trends right now. So, it's not only existing customers looking at a rental lease decision. You've got the private fleet customers that are starting to look to us for help with these macro trends that are coming into play.

Are you still seeing any of those -- I guess you could describe them as like serial renters, who are keeping rental trucks, paying the daily rate but keeping them for months at a time because they're afraid to turn them back in and lose that capacity?

John, it's Dennis again. Yes, we'll see that, but they're looking at always doing the tradeoffs of is the better economics to go to a leased truck. So, we're obviously encouraging those customers to do that if they have strong enough outlook in their business to make a longer term commitment.

Fair. All right. Well, thanks for the time and terrific quarter. Thanks.

Thanks John.

The next question is from Todd Fowler with KeyBanc Capital Markets.

Great. Thanks, good morning.

Good morning.

I want to make sure I understand the weather comments here in the quarter. Robert, you mentioned $0.04 of weather. I'm trying to get a sense of kind of what you're thinking about, or what's included in that $0.04? And then, I think you said that that was offset by some property gains and some insurance. But, the $0.03 related to the maintenance would be separate from the offset from the weather -- the $0.04 of weather that you mentioned?

Yes, yes. The $0.04 is Company-wide. It includes the impacts from supply chain and FMS, but there's an additional $0.03. You could look at it that way -- there's an additional $0.03 that are being offset that really will carry over into the second quarter. On a full-year basis, I would say the weather impact is more like $0.07, and it's being offset by -- in the first quarter by those other items that I mentioned. And, as you'll see in the second quarter based on the guidance we're giving, we're seeing the business really picking up in other areas.

Okay. And then, the $0.04 of weather, if you had to break it out between FMS and the supply chain, can you get little bit more granular on that? And then, specifically within FMS, was it miles driven on the lease fleet? Or, what were some of the headwinds from weather on FMS?

I think if you -- to keep it simple, it's probably -- depending on where you put the offsets, it's half and half. Maybe a little bit more towards supply chain than FMS. In terms of the negatives though -- the negatives in supply chain were -- included volumes in automotive and dedicated where our customers had planned shutdowns or just routes they did not run. And, that volume impacts our supply chain business.

In FMS, the negatives were really around lease customers not running as many miles. We had deferment of maintenance costs due to the fact that the vehicles couldn't come in for repairs, and those are the ones that are showing up in the second quarter. And then, we clearly had more breakdowns and more maintenance costs associated with vehicles being down due to the weather.

Okay. That makes sense. And then, my follow-up would just be on the 600 units -- the 600-unit growth in the lease fleet sequentially excluding the UK trailers. I think on the fourth-quarter call you talked about 2,000 units on a full-year basis. It seems like you're a little bit ahead of that. Is that the right way to think about it? And, as you think of your original plan, was it something that was more front-end loaded than back-end loaded? Or, have you just started out the year a little bit stronger than maybe what you anticipated on the leasing side?

We're on track with where we expected to be in the first quarter. I had mentioned on the call last quarter that we really didn't -- we didn't forecast that continued same sales activity into the second half of the year as we had in the first. I think it's still too early on that also, so we're kind of holding steady on the lease forecast that's in our -- that's in the guidance we've given you, and probably we will be in a better position to evaluate that after the second quarter.

Okay. That makes a lot of sense. Thanks for the time and congratulations.

Thank you, Todd.

The next question is from Ben Hartford with Robert W. Baird.

Good morning. I guess it wasn't clear -- maybe you said it, I just haven't picked up on it. The -- where are the units coming from -- I think, Art, you had said that the full-year gross CapEx guidance is unchanged, but you're taking the rental fleet higher by a couple hundred basis points. Where are those trucks being sourced from if CapEx is not changing in totality?

Yes, it's really two things. One is we're holding on to vehicles a little longer that we otherwise would be selling, and probably the bigger issue is we're moving vehicles that are coming off of leases. We're moving those into the rental fleet. So, we're flexing. We're taking advantage of the asset management capabilities that we have to really bring the fleet up without any additional CapEx.

Okay. That makes sense. And then, I don't know if John's on the call. John Williford, I didn't hear him.

I'm here.

Okay. Good, just wanted to address Supply Chain Solutions margins. I'm assuming that the first quarter was impacted by elevated expenses from the dedicated fleet. I think you had last said that you expected a similar trajectory of margin improvement in 2014 relative to 2013 so about 40 basis points. I'm assuming we can just ascribe the first-quarter issues here to weather. Nothing has changed to that outlook, and we ought to be able to just quantify 6.7% run rate in 2Q and beyond. Is that fair?

Yes, yes, exactly. I think if you were to adjust for the weather impact and also for the lesser impact of the startup that we called out, we would have been right on track with what we expected and what we guided to for the year before.

Okay. Good. And then, just last one, Robert, thinking about the lease fleet age normalizing in early 2015. Miles per truck within the lease fleet being back to normal levels. You've got a lease fleet that's bigger. Sure, there's some puts and takes in terms of the mix of the profile of that lease fleet, but you've got firm rental demand trends, as well.

No reason to think that you have talked about previous peak margins as being a guidepost. I mean we -- 2015 looks like it's a pretty clean year. That should be the year that we have pretty good visibility to being back to those previous peak margins within FMS, correct?

I don't know if we're ready to give guidance for 2015 yet, but your thinking is right. I think we had talked about this year continuing to make progress towards that 12% to 13%. We ended up last year at 10%, so that would get us into the --.

We're up 160 [basis points] in this quarter.

We're up 160 in this quarter, so, yes, clearly these trends continue that would lead you into -- getting close to those ranges or in those ranges in 2015.

Sounds good. Thanks for the time.

Okay.

The next question is from Jeff Kauffman with Buckingham Research.

Thank you very much. Congratulations.

Thanks, Jeff.

I just want to hone in a little on the tax rate. I thought it would be running a little closer to 35%, 36%. Is 37.2% the right rate to think about for the year now?

Yes, we had guided, Jeff, at the beginning of the year that our plan for the full year was about 35.7% for the comparable tax rate. And, for us, typically what you'd expect is a higher tax rate in the first half of the year and a lower tax rate in the second half of the year really as we file our tax returns, and we're able to take advantage of reversals and things like that.

So, we're looking at -- the tax rate for the first quarter was on plan so that's what we expected. Second half of the rate, the tax rates were probably closer to 35%, I'd say, and then first -- and then you have a higher tax rate in the first half of the year.

Okay, so we're sticking to the 35.7% full year rate.

Yes, that hasn't changed.

Okay. And then, just to follow-up earlier, you talked about how the fleet was getting to about the right age. I know equipment is a little more expensive, but we have been running kind of elevated capital levels. If I look at the non-growth capital outlook, are you saying we may gravitate toward kind of the 1.4-ish, 1.3-ish range over the next two years ex-growth?

Our maintenance CapEx, if that's what you mean?

That's what I'm getting at.

That's probably in the ballpark of what we've articulated, yes, and that's excluding growth. So, remember there's -- we've had pretty big growth element this year for lease we had estimated at the beginning of the year about over $500 million, so we're still on track with that.

Okay. Thanks.

The next question is from Scott Group with Wolfe Research.

Hey, thanks. Good morning.

Good morning, Scott.

I think last quarter you shared that -- a good amount of the fleet growth was coming from private fleet conversion. I don't know if you gave that number for this quarter. And then, just kind of bigger picture. So, it feels like leasing demand is getting better, but leasing fleet is still up 1%. What do you think we need to start seeing closer to mid-single digit growth in the fleet? Or, do you think that's kind of an unrealistic expectation?

Well, no, Scott, I think that's the target. That's what we want to get to, right. It's just this is -- this is going to be -- this is a journey we're on of really dealing with some changes that are going on in the market that as we've mentioned really are favorable to outsourcing around fleets. And, the expansion of our product offerings also. So, we -- the growth could come -- is going to be in full service fleets, but it's also going to be in some of the other products. And, it's hard to pick in any given quarter where you're going to see that more pronounced.

But, no, I think that you're right in that the goal would be to over time be up in that higher single-digit, mid-single-digit number. But, for the short run and really what we're really trying to get to -- we think 2,000 is a really good number in terms of growth year-over-year. And, we're on track to achieve that.

We saw continued activity in sales both in lease and some of the other product lines. We talked about a significant account that we won this quarter in contract maintenance, which is really -- will become our largest contract maintenance account. So, there's another example as we continue to make progress.

And, back to the number that you'd asked a question about the number of customers that had come from private fleet. Last year, we -- last quarter we said that 1/3 of the growth had come from private fleet conversions, and we're generally in that same range now in the first quarter.

Okay. That's helpful.

So, every year in the beginning of the year, you give a really good kind of earnings bridge, and wanted to know if you can help us update that? And, sounds like some things are going better -- maybe gains on sales, weather was a negative. What are the other moving parts that are getting better and worse relative to that initial bridge?

Yes, without going through the -- we haven't updated that bridge, but I would tell you just based on the commentary we've given you, you know that right now commercial rental and UVS are going to be better than what was in the bridge. That's really what's driving the uplift. Supply chain is going to be down a bit because of the weather impact in the first quarter, but really that's -- I guess that's the primary tradeoff.

Okay. And then, last thing, does the -- do you start to think about net buybacks any time soon? Or, is it more just anti-dilutive still going forward?

No, we're going to stick with anti-dilutive for now. As you saw our leverage was up a little bit but kind of in line with where we expected. We expect to end the year in that 225 range, 230 range. So, yes, unless there's a big change from that number, I'd expect us to just continue with the anti-dilutive program.

Okay. All right. Thanks.

Thank you.

The next question is from John Barnes with RBC Capital Markets.

Hey, good morning. Nice quarter.

Thank you.

First question is, given the level of Class 8 truck orders that we've seen thus far this year, can you talk a little bit about where you are in the order queue? How long is it taking you to get equipment? And, do you have any concern that the availability of equipment could make impact the timing of some of the new leases coming on?

Remember, we secure slot dates at beginning of the year with the OEMs, and so those dates are set for us, and they're reserved for us. So, we don't -- it's one of the benefits that we bring to customers during these types of periods when things start to stretch out a bit is that we have the dates that we can sell into.

So, there's been somewhat of an increase in the delivery times. We're probably looking at about a week longer. But, we're -- what we see on our end because of the slot date strategy that we have, it's really turning into more of an advantage during this type of a period.

And, if you needed additional equipment, is it readily available? I mean, can you get -- can you boost the numbers you're taking in those delivery dates?

Well, yes, within certain ranges, we can.

Okay. So, no impact to the timing there. And then, I guess, given -- going back to the fleet age -- just given the forecasted growth you've put on your lease fleet this year, if you were to hit that forecasted growth level, where do you think the age of the fleet is going to be at year-end? And, how do you compare that versus the goal?

We would be really close, right. We're going to be in the -- in the 41, 42 range, which gets us really close to where [we want]. So, I figure this thing will likely stabilize somewhere in the first or second quarter of next year, and we'll be really close by the end of this year.

Okay. And then, should we then begin to see maybe a little bit stronger free cash flow generation because you won't be -- I guess what I'm asking is, you're buying new equipment, obviously, to put with new lease customers. You've gone through kind of a de-aging process in some of your other equipment. Does that result in a little bit better free cash flow generation at that point? Or, do you think the free cash problem would be that the lease business is growing so fast that it doesn't. Am I thinking about that right?

Yes, John, this is Art. We would expect as the replacement cycle really starts to normalize we would spend less on that. We still have that growth element we've been talking about, but even that should start to abate somewhat as we're starting to replace new technology. So, you have that right. You would start to see the replacement piece drop.

Now, we're obviously hoping that we can sell a lot of new lease vehicles into that so we're going to spend a lot of growth capital on that. And then, the other wild card you always have to factor in is rental. We've kind of moved that depending on what's happening in the market at that time.

All right. And, just given the utilization on the rental fleet, are there any further concerns about the age there? Are you comfortable with where you are in terms of the fleet age there?

John, this is Dennis. We're comfortable with where it's at right now.

All right. Very good. Again, nice quarter. Thanks for your time.

Bye.

The next question is from David Ross with Stifel.

Good morning, gentlemen.

Good morning, David.

A couple years ago, or at least for the last few years, you've talked about customers when they renew their contracted full service lease don't always get the same number of trucks. So, say in 2007, they signed up for 12 trucks. Maybe when they renewed they only got 8 or 10. Are you still seeing that lower level of replacement from existing customers when they renew? Or, are they now renewing at the same amounts in terms of trucks as their old contract? Or, are you actually seeing a shift to an increased number?

Yes, I still think -- we haven't gotten to that point, David, where you're seeing that the customer that has 10 needs 11. I think you're seeing them more likely to renew. So, that has improved significantly from previous years.

But, this kind of rising tide of every 10-truck fleeting needing another one --I don't think we're there yet. I'll let Dennis kind of elaborate on that a little bit.

Yes, that's the other thing is, David, a lot of our key customers will utilize our rental fleet to flex with the capacity needs that they have, and then they're making the tradeoff all the time. Once the demand is sustained, and they're renting all the time back to a previous question I answered, you're making the tradeoff between rental and lease.

And, it makes sense to go to lease, so we're at the point now where I'd say it's pretty flat. A customer when they're renewing, it's flat, but then they're using a rental fleet to flex. And then, over time making that tradeoff into a more economical lease unit.

That's helpful. And then, on the used vehicle side, why has truck pricing been so much stronger than track pricing the past couple of years? And again, in the first quarter?

Yes, I think that there's a couple things going on there. One is the shift from wholesale to retail. We talked about with inventory levels coming down, we were going to start to work more the retail channel and less the wholesale, so that's giving us about half of that boost, and then the other half is just the market's up.

Okay. And then, last question is just on dedicated. Very strong at 12% ex-auto. Can you talk about how that 12% growth breaks down in terms of new business wins versus pricing versus maybe existing customer growth?

John?

Yes, sure. Well, it's -- the 12% -- more than 12% is coming from new wins, and then there's some amount that drops out in terms of lost business every year. So, like we've been saying for the past -- more than one year -- our dedicated product is very attractive. The pipeline is strong and dedicated, and our product is very attractive, so we have a very good win rate and a very good pipeline. And, we're seeing that continue and accelerate.

What about pricing on the average dedicated contract, is that up a few percent year-over-year as well?

I'd say the margins on the contract is about stable.

Okay. Thank you.

Yes.

The next question is from Thomas Kim with Goldman Sachs. Sir, please check your mute button.

Sorry about that. Yes, with regard to your conversations with customers, can you just describe how some of those are evolving with regard to the attempts to convert rental to lease?

The attempt to convert rental customers to lease? Yes, those are ongoing discussions that happen every day, and typically it's customers are coming in for what we call a lease extra. It's a lease customer who has an extra unit they're using seasonally. As was mentioned earlier, sometimes that seasonal use is extended for a longer period of time in times of uncertainty.

Typically, it's just part of the normal sales process. Our lease account manager will be in there talking to them. The lease account manager will know how many vehicles they're renting and will talk to them about is there opportunities to convert them. I would say, as Dennis mentioned, in this environment, there's more discussion and more opportunities around that.

Okay. But, have they been sort of trending -- those discussions generally been trending more favorably? Just giving the increased market dynamics presently? And then, to some extent a view that the economy does look like it's maybe a little bit better going forward and with that increased confidence with the economy, there's more inclination to lease instead of rent.

Thomas, this is Dennis. The answer to your question is, yes, they have been trending more favorably. I think as customers have a better outlook on their business going forward, they're making the tradeoff between serving those customers with a rental unit that will have a higher price than if they're able to make the commitment to lease. They're looking at the lease options. So, yes, there's -- the discussions are trending favorably in terms of a rental to lease conversion.

Okay. Thanks. I wanted to ask a question with regard to what you're seeing with regard to the OEMs. Obviously, the new orders have built up. There seems to be a backlog building, and as we look a little bit further forward, should we be concerned about the eventual deliveries of these trucks? And, is there a typical sort of time frame in which the new order activity lags in terms of the impact on -- potential impact on FMS?

Thomas, this is Dennis. At this point, we don't have any concerns. But, we'll see how the year plays out. But, right now, we're not seeing those backlogs impact delivery outside of the one week that Robert talked about earlier. So, right now, we don't have any concerns.

Okay. If I could just ask you a follow-on to that, to what extent of the order book are you able to sort of parse out and sort of figure out what might be replacement versus growth CapEx?

You're talking about for the OEMs, or for us?

Yes, yes on the OEM side.

I think the OEMs have been saying that the majority of their stuff still continues to be replacement. I don't think that we're seeing an environment where the overall truck fleets are growing significantly. That's the one that we've talked about, you'd probably have to see a GDP growth of -- we used to think it was 2%. It's probably more like 3% or 4% because of all the efficiencies that go into the system and the miniaturization of product over time. You need more GDP growth to see the truck fleet's population really rise significantly.

All right. Well, thanks for the detail there.

Okay.

The next question is from Justin Long from Stephens.

Good morning, and congratulations on the quarter. One of the items we heard about from another large dedicated provider in their first quarter print was that they faced a headwind in dedicated due to issues finding drivers. Is this something that you've dealt with in the quarter, as well? And, going forward, do you think a driver shortage in the industry could be a limiting factor to growth in your dedicated business?

Actually, I think there is a driver shortage. There has been for some time. As the economy strengthens, it's going to get a little worse. I think it's a reason to outsource. I think it has driven some part of our growth. It's hard to be sure.

I mean, there's a lot of issues that cause private fleet operators to decide to go with dedicated, but that's certainly one of them. A lot of the customers we're talking to now and in our pipeline and the recent wins have had trouble recruiting drivers.

We think it's a strength we have. So, yes, it's a challenge that everyone faces, but that we view as a strategic benefit that should help drive growth.

Yes, I think Justin just to add to that, I think that's consistent with what you hear on the FMS side. The more challenging what we do becomes, the better it is for us because people are -- we specialize in it. People are trying to do it on their own as a side business are going to struggle, and it gives us an opportunity to sell our outsourcing value prop. So, whether it's driver recruiting or tech recruiting or the new engine technology or additional regulation. Those tend to be over time, favorable for outsourcing.

Right. I guess I'm familiar with that trend to outsourcing and how the driver shortage could help that. Is there something specifically that maybe differentiates your ability to get drivers versus other dedicated providers in the market that could explain why you maybe didn't see this issue in the quarter and someone else did?

I can't speak to our competitors. We're one of the large -- we're not -- we're one of the largest players, if not the largest, and we have a long history. We have very low turnover. We think we're good at dealing with drivers.

A lot of the business we win is coming from private fleet conversions, so it's not like we're trading customers back and forth with our largest competitors. I think we're all seeing this huge market of private fleet operators start to consider dedicated for a variety of reasons, and driver shortage is one of them.

Okay. Great. That's helpful. And, maybe just one last one, sticking with the dedicated theme. When you think about your opportunity to shift customers from a full service lease to a dedicated contract, you've talked about around 2,000 customers where you think it would make sense for that transition.

I wanted to ask about the size of those customers you're targeting. Do those tend to be the larger fleets in your customer base, or would they be more in line with the size of the average full service lease customer?

Yes, it's full range. My partner here is sitting next to me has been really good at working with -- together -- at combing through their customers and their prospects. We've taken different approaches to different types of customers including segmenting them by size, and we've been finding that there are great opportunities with very large fleets, a lot of good project opportunities that are big, and also a lot of medium-sized and then even small deals. We're just taking different approaches, and we're trying to segment the market and attack all of them.

Okay. Great. That's good to hear. I'll leave it at that. I appreciate the time.

Okay.

Okay. Thanks Justin.

The next question is from Art Hatfield with Raymond James.

Hey, good morning, everyone. Most of my questions hopefully have been answered by now. But, just one quick one. I think this is for Dennis. When you talk about private fleet conversion and/or whether it's maybe conversion from a customer who did their own maintenance converting to you or a full service lease, is there any time where -- how do we think about earnings from that, I guess? Are those immediately accretive? Or, do they take time to ramp that business up where it's maybe two quarters out before you see the full accretion from that opportunity?

Art, let me try to answer it this way. First, getting in the door with a lot of these private fleets, a lot of times it's not officially just for the full service lease. We're coming in, and let's suppose their issue is with maintenance for the new technology or technician shortages that exist. We're coming in and solving those problems initially, and those are accretive immediately.

And, just like we talked about 7,100 vehicles that we touched in Q1 for on-demand maintenance. That gets us in the door. Once we're in the door and we get to know the customer, they get to know us, then we're talking contract maintenance. In fact, the large customer that Robert talked about earlier that we just signed up for contract maintenance -- believe it or not, we got in the door talking on-demand, and it led to contract maintenance.

And who knows, you know. Pretty soon you say hey, why not full service lease. Why not dedicated. To answer your question, it's accretive pretty much from the get-go with these deals. But, we're getting in the door.

What I'm trying to say is, it's not just with full service lease. We're coming in with, we call them, on-ramps. Various low-commitment products where we can get in the door and really allow the customer to get to know us. And then, from there, showing the multiple value-added services that we have to sell them up.

Right, that's helpful. One last thing, and you had mentioned this strong order rate we've seen the last several months, have your lead times to get trucks changed at all? Or, are you seeing any pushback at all on your ability to get trucks in the short-term?

Art, we mentioned earlier, it's very little. We talked about maybe seven days, slight shift, but remember we have secured slot dates with the OEMs, so those dates stay firm even as business picks up and we're able to fill those slot dates with the sales that we bring in.

Did your relationship -- do you think as we move forward, does your relationship or your position with the OEMs maybe create a potential -- I don't know how -- I don't know if I want to use the term competitive advantage, but something that can help you in the sale process for a fleet conversion potentially?

Yes, there's no doubt, because we're typically when lead times start to stretch out, we have the advantage of these slot dates that can usually get you vehicles sooner. So, that does become an advantage in a market once it starts to really heat up.

Right. Thanks. That's all I've got today. Thanks.

Thanks, Art.

The next question is from Matt Brooklier with Longbow Research.

Hey, thanks. Good morning.

Good morning, Matt.

Just circling back to a previous question on the dedicated side, you talked to your ability to find drivers in the market; in a pretty tight market. I assume that also comes at a cost. So, my question being, driver pay, is that starting to ramp up at Ryder? And, is it a potential headwind that maybe could get worse as the year progresses if the market remains tighter or gets even tighter?

There are some margin headwinds. They tend to be in areas where it's really hard to find drivers, and we have to put in either lease drivers on a short-term basis or in some cases where we have to provide service no matter what, we provide expensive, say, truckload service until we get a driver hired. Certainly, we had a little of that in the first quarter because of some of the those because of the weather.

But we do see a slight impact. In terms of existing accounts where there's a lot of pressure on driver wages, we work with the account, and we work with our -- make sure we have market-based wages. We have attractive jobs, and we keep our turnover rates are really low, especially relative to other modes of transportation. So -- but, we work on an account by account basis, and when we do have to make an increase that's maybe more than you would expect, we work with the account to pass that on.

Okay. And, how long typically is the lag between having to take up pay, and it probably varies from an account by account basis. But, taking up the driver pay, eating that cost, and then going back to the customer and being hopefully 100% of that cost.

We work to make that lag either zero or very, very short because we try to get out in front of that. We start talking to accounts about the pressure. If we see maybe a little more turnover in a certain -- it's usually a regional issue, and so if we see some region or part -- some DC that they have where we're experiencing a little more pressure, we'll get out in front of that and we'll talk to the customer. We'll really try and time it as close as we can so we're not eating anything.

Okay. That's helpful. And then, we had a nice market on the rental side. We're growing the fleet at this point. We're growing it a little bit more than we previously thought. I guess some concern here: if the market were to decelerate, we don't want to get caught out with a larger fleet. How do you protect yourself from the downside? If the rental market does decel, all of a sudden you feel like you're too big, what are some of the levers that you can pull to right-size the fleet?

Dennis?

Yes, Matt, we feel really good about what we can do. We've got a centralized asset management function that's proven to be very effective. We put that in place over a decade ago, and what we'll do for example, and we did it back in 2012 when we faced the very issue you're describing is -- we looked at our rental fleet. And, we opened it up to selling used equipment into the lease -- into a lease application, and we were able to right-size the fleet in three or four months by not backfilling the unit.

Today, what we do is we allow our lease sales force to sell the used equipment out of rental, but then we backfill it immediately. What we do is we just shut off the backfill, and we would continue to then sell in the lease application. In addition, we'd turn up the outservicing more for older units that we have.

As Robert mentioned earlier, right now we're expanding the fleet by taking units coming off of lease and putting them into rental. We obviously wouldn't do that. Instead, we'd outservice the units and outservice older units within rental. We feel really good about our ability to match supply with demand and to respond pretty quickly.

Matt, just to add to that -- wanted to be clear that we are not buying more units into rental. We are simply redeploying some units from other applications into rental, and as Dennis mentioned, we have numerous avenues to get out of vehicles and bring that fleet count down if the market were to turn.

Okay. And, just to follow up, when you got a little bit over extended in rental in 2012, were you buying new equipment? Or, were you doing what you're doing now?

Yes, we had placed a very large order for rental equipment that year, and unfortunately when the market turned, we had just placed the orders, and they were all committed and coming in. The timing wasn't very good, and when that happened, it happened in February, so we're past that time frame. We certainly don't have an order anywhere near the size we did back then, and this uplift in fleet is just redeployment of equipment.

I would tell you we learned during that process. We turned on some additional avenues for getting out of rental vehicles. One of them, which Dennis mentioned about, a real robust program for leasing vehicles out of our rental fleet which we're comfortable we can use again. It was very helpful in 2012.

Okay. That's what I was getting at. Appreciate the time.

Thank you.

Our final question today is from John Mims with FBR Capital Markets.

Hey, thanks. Just one follow-up. I was sitting here looking at when people have talked about your relationship with OEMs and ability to grow the lease fleet. When you reference the shift of -- for more outsourcing and kind of the pie of outsource market growing, and you provide some numbers in your K. But, if I do a little back-of-the-envelope math, I get like a 1% shift from private ownership into lease fleet would equate to about a 20,000 truck growth number for you.

And, those numbers get pretty astronomically big fairly quickly. Is that -- are you seeing that much of a shift where you could be talking in terms over the next couple years in the 20,000, 30,000, 40,000 truck growth just based on that outsource opportunity? Or, is it coming much slower than that?

I think the way to look at it -- it's actually larger than what you stated. 1% -- there's 7.4 million commercial vehicles in the US. So, 1% is actually 74,000 vehicles. So, we don't need to move the market a whole lot in order to really significantly grow the business. So, yes, what we see as the long-term opportunity is that. If we can just get 1% more -- so one more vehicle out of 100 would bring us a fleet growth of over 50%.

Yes. And, I was taking that 74,000 and assuming you had a 25% to 27% market share of that is the 20,000.

Okay. Oh, market share within what's already outsourced.

Yes, so right. I guess with that background, I mean from a network facility standpoint, from an OEM ordering standpoint -- if the opportunity was there for, let's say, 70,000 trucks. Is that something that's obviously much larger than your fleet now. So, is that growth that you can absorb in any sort of realistic fashion?

We believe we have capacity with our current network, Dennis, correct me if I'm wrong, is somewhere in the 50,000 to 60,000 vehicles that we could absorb with the current network without making significant investments in more facilities.

Just technicians.

You're just adding technicians and adding shifts. So, obviously exactly how that plays out, we'll see as we get there, but the point is we've got plenty of capacity for really growing the fleet from the levels that we're at now.

Right, absolutely. Okay. Well, thanks for the clarification. Again, great quarter.

Thank you.

I would now like to turn the call over to Robert Sanchez for closing comments.

Great, thank you. Well, we're at the top of the hour. I think we answered -- we got a lot of calls so that's good news. Thank you for being on the call, and have a safe day.

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