萊德系統 (R) 2014 Q3 法說會逐字稿

Good morning, and welcome to the Ryder Systems, Inc., third-quarter 2014 earnings release conference call.

(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.

Thanks very much. Good morning, and welcome to Ryder's third-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 the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations, and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political, and regulatory factors. More detailed information about these factors is contained in this morning's earnings release, and in Ryder's filings with the Securities and Exchange Commission.

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

With that, let me turn it over to Robert.

Good morning, everyone, and thanks for joining us. This morning, we'll recap our third-quarter 2014 results, review the asset management area, and discuss the current outlook for our Business. Then, we'll open the call for questions. With that, let's turn to an overview of our third-quarter results.

Comparable earnings per share from continuing operations were a record $1.63 for the third quarter of 2014, up from $1.46 in the prior year. This is an improvement of $0.17, or 12%. Third-quarter comparable results exclude non-operating and other pension-related costs. We came in at the top end of our third-quarter forecast range of $1.58 to $1.63.

Our performance was driven by fleet management, where we realized strong used vehicle sales and commercial rental results, as well as higher full-service lease results. Strength in FMS was partially offset by supply chain, which was expected to be down this quarter.

Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up by 5% to a record $1.42 billion in the third quarter. Revenue growth was driven by fleet management, which accelerated to 7% growth.

Page 5 includes some additional financial information for the third quarter. The average number of diluted shares outstanding for the quarter increased by 800,000 shares to 53 million. This reflects the pause in our anti-dilutive share repurchase program last year. In December 2013, we announced a new 2 million share anti-dilutive repurchase program, and started buying under the program in early February. During the third quarter, we bought 143,000 shares at an average price of $89.85. To date, we've purchase 1.2 million shares at an average price of $78.90 under this program.

Excluding non-operating pension costs, the comparable tax rate was 35.4%, above the prior year of 34.1%. The increased rate reflects the lower non-deductible items in the prior year, as well as prior-year tax law change benefits. The higher-than-expected tax rate resulted in a negative $0.01 impact versus our forecast.

Page 6 highlights key financial statistics on a year-to-date basis. Operating revenue was up 5% to $4.1 billion. Comparable EPS from continuing operations were $3.98, up 13% from $3.53 in the prior year.

The spread between adjusted return on capital and cost of capital narrowed to 90 basis points; down from 100 basis points in the prior year, driven primarily by lower leverage. On a full-year basis, we now expect the spread to widen to 100 to 110 basis points, above our prior estimate of 100 basis points. The improvement in the outlook is driven primarily by higher projected earnings and lower capital.

I'll turn now to page 7 to discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions' operating revenue, which excludes fuel, grew 7%, driven mainly by growth in full-service lease and commercial rental. This is the highest organic revenue growth rate we've seen in FMS in over a decade.

Full-service lease revenue increased 5% due to higher rates on replacement vehicles, reflecting the higher cost of new engine technology and growth in the fleet size. On a [year-over-year] (corrected by company after the call) basis, the lease fleet increased by 2,400 vehicles, including the planned reduction of 800 low-margin trailers in the UK. Excluding the UK trailer impact, the lease fleet grew by 3,200 units year over year. Sequentially, from the second quarter, the lease fleet increased by 500 vehicles.

We remain on track for full-service lease fleet growth, excluding UK trailers, of 2,500 vehicles. We continued to see strong lease sales activity in recent months, providing nice momentum for lease fleet growth into 2015.

Miles driven per vehicle per day on US leased power units were up 2% compared to the prior year, and are running 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 by one month sequentially, or five months since the third quarter of last year.

Contract maintenance revenue increased 3%, primarily reflecting the benefit of a significant new contract signed earlier in the year. Our contract maintenance fleet grew organically by 2,700 vehicles from the prior year, reflecting this sales activity.

Contract-related maintenance increased 14% from the prior year, reflecting higher ancillary maintenance work. Included in contract-related maintenance are 6,200 vehicles serviced during the quarter under on-demand maintenance agreements. This represents a nearly 60% increase from the prior year. With 30 customers signed to date, we continue to see strong interest in this service.

Commercial rental revenue was up 11%, driven by improved global pricing and higher demand in North America. The average rental fleet grew by 7% versus the prior year, and 2% sequentially. Rental utilization on power units was 78%, below the prior year of 79.7%, but a strong absolute level. Global pricing on power units was up 4%, which is slightly below our expectations. This is primarily due to a higher number of rental vehicles used by national accounts, and customers waiting for new leased equipment to be delivered, both which are typically rented at lower rates.

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

Overall, FMS earnings increased due to significantly higher used vehicle pricing, strong rental performance, and better full-service lease results. Commercial rental performance benefited from solid demand and higher pricing on a larger fleet. Better lease results reflect vehicle residual value benefits and fleet growth.

Earnings before taxes in FMS increased 25%, reflecting better used vehicle pricing and leverage on revenue growth. FMS earnings as a percent of operating revenue were 13%, up 190 basis points from the prior year.

I'll turn now to Supply Chain on page 8. Operating revenue grew 3% due to higher volumes and new business. New business benefited our CPG & Retail, Industrial, and High-Tech industry verticals. We saw volume improvement across all industry verticals and in dedicated services.

Excluding the impact of lower fuel cost, operating revenue growth would be up 4%. The third-quarter growth rate reflects the impact of the lost automotive dedicated business we discussed last quarter.

SCS earnings before taxes were down 9%. The decrease reflects lost business, including shut-down cost. We also incurred additional start-up costs on the international distribution management account we highlighted earlier this year, although the impact was significantly less than in the second quarter. Segment earnings before taxes as a percent of operating revenue were 6.6%, down 90 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 reflects 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 $212 million, up 15% from the prior year.

At this point, I'll 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 $1.74 billion, up nearly $240 million from the prior year. This increase reflects planned investments in our rental fleet, in light of strong demand. We realized proceeds, primarily from sales of revenue-earning equipment of around $400 million, up by $60 million from the prior year. The increase reflects higher sales prices per vehicle.

During the third quarter, we also realized proceeds of $126 million from a planned sale-leaseback of revenue-earning equipment purchased earlier this year. We executed a larger-than-planned transaction this quarter, due to attractive lease financing rates. Year-to-date net capital expenditures increased by $55 million to $1.2 billion.

Turning to the next page, we generated cash from operating activities of $975 million year to date, up $85 million or 10% from the prior year. This increase was driven primarily by higher cash-based earnings and lower working-capital needs, partially offset by the timing of annual pension contributions. We generated $1.54 billion of total cash year to date; up about $250 million from the prior year, primarily due to the sale-leaseback, higher operating cash flow, and higher sales proceeds. Cash payments for capital expenditures increased by almost $250 million to $1.74 billion year to date.

The Company had negative free cash flow of $197 million year to date, compared to negative $206 million the prior year. Higher planned spending on rental vehicles compared to the prior year was offset by the sale-leaseback transaction, stronger used vehicle proceeds, and higher cash from operations. Our full-year outlook for free cash flow is unchanged at negative $300 million.

Page 13 addresses our debt-to-equity position. Total obligations of $4.7 billion increased by almost $420 million from year-end 2013. Total obligations as a percent to equity at the end of the quarter were 237%, up from 226% at the end of 2013. We now anticipate that leverage at year end will increase to around the midpoint of our target range of 225% to 275%. This primarily reflects a higher pension equity charge due to recent market conditions. Equity at the end of the quarter was just under $2 billion, up by $86 million from year-end 2013, as increased earnings more than offset share repurchases and dividends.

As many of you know, Ryder's pension plans were frozen by the Company several years ago. We continue to take actions to reduce the size and potential future volatility of our pension plan obligations. As part of this strategy, we recently offered approximately 11,000 former employees a one-time option to receive a lump-sum distribution of their vested benefits by the end of 2014. The offer covers approximately 20%, or $370 million, of our US pension plan obligations.

As a result of this offer, Ryder will incur a non-cash pension settlement charge during the fourth quarter, which will be excluded from comparable earnings. The amount of the actual charge will depend on the acceptance rate of the offer, but is estimated at approximately $0.75 to $1.00 per share, assuming an acceptance rate in the 40% to 50% range. The funded status of the plan is not expected to materially change following the distribution. The cash distribution will be funded by the assets of the pension plan, and will not impact Ryder's balance sheet leverage.

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 from our asset management area. Used vehicle inventory held for sale was 5,800 vehicles; significantly down from 8,200 units in the prior year, and 500 units below the second quarter. Used vehicle inventory is at the low end of our target range of 6,000 to 8,000 vehicles.

Pricing for used vehicles was strong for both tractors and trucks. Compared with the third quarter of 2013, proceeds from vehicles sold were up 16% for tractors and up 14% for trucks. From a sequential standpoint, tractor pricing was up 1% and truck pricing was down 2%. We saw improved pricing in all used vehicle sales channels. We've also shifted more of our sales to retail instead of wholesale, now that inventories are at normalized levels following elevated inventories in the prior years.

The number of leased vehicles that were extended beyond their original lease term decreased versus last year by around 360 units, or 7%, and remain below recessionary levels. Early terminations of leased vehicles increased slightly by about 100 units, and also remain well below recessionary levels.

I'll turn now to page 17, and cover our outlook and forecast. Our full-year earnings outlook remains on track due to strong performance from Fleet Management Solutions, partially offset by lower Supply Chain results. We are seeing strong performance in both used vehicles and rental in October, and we expect these trends to continue.

As previously announced, we increased rental capacity in vehicle classes with high demand by purchasing a modest number of new units. We expect our full-year average rental fleet to grow by 6%, up from our previously forecast 5%. Our year-end fleet should grow by 5%, up from our prior forecast of 4%. In terms of pricing, we now expect full-year rental rates to be up 4%.

We're seeing strong and early demand for rental trucks to support the holiday shipping season. As such, fleet utilization is up in October, and we expect improved year-over-year comparisons for the full quarter. We continue to expect improvement in our full-service fleets results, largely reflecting the benefit of higher residuals and growth in the lease fleet. We're on track with our prior forecast for lease fleet growth of around 2,500 vehicles, excluding UK trailers. New lease sales remained strong in recent months which provides nice momentum for continued fleet growth next year.

In contract maintenance, we saw nice revenue and fleet growth in the quarter as a result of the large deal signed earlier in the year. We're also encouraged by the strong market interest in our new products, such as on-demand maintenance. This year, we've continued to selectively add new on-demand customers as we develop the processes and technology needed to support this product. We're targeting a broader rollout of on-demand in 2015, which should result in stronger revenue growth for this product in the second half of next year.

We continue to expect full-year FMS operating margin to approach pre-recessionary levels of 12% this year. This partly reflects strong used vehicle pricing, which doesn't impact revenue, but benefits earnings. Looking ahead, we expect less benefit from used vehicle gains, but continue to believe there's further upside at FMS margins driven by stronger residual values, fleet growth, cost management, and other items.

In Supply Chain, we expect revenue and earnings to continue to be impacted by business lost earlier in the year. Fourth-quarter operating revenue growth should be slightly below the third-quarter growth rate, reflecting a delay in some new business signing, but is expected to improve as we move through 2015. Although revenue comparisons will be down in the fourth quarter, earnings comparisons are expected to improve from the third quarter as we get past recent start-up and shut-down costs.

Based on our outlook, we're raising the low end of our full-year comparable EPS forecast to a range of $5.55 to $5.60 from the prior forecast of $5.50 to $5.60. The new forecast represents a year-over-year increase of 14% to 15%, and is above the original forecast from February of $5.30 to $5.45. Our fourth-quarter comparable EPS forecast is $1.56 to $1.61 versus the prior year of $1.35, an increase of 16% to 19%.

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

(Operator Instructions)

Todd Fowler, KeyBanc Capital Markets.

Robert, I just want to make sure I understand the comments on the lease fleet expectations. The guidance is still for 2,500 units organically, excluding the UK trailers. Our math is that you've got about 1,000 on the books through the third quarter, so that implies 1,500 into the fourth quarter. Can you talk about the timing of that, and why it's kind of a little bit more fourth-quarter weighted than maybe what we were expecting in the middle part of the year?

Yes. Good morning, Todd. Your math is right. We're 1,000 into the 2,500. We're expecting 1,500 in the fourth quarter. It really has to do with the timing of new business signed and when the lost business comes in. If you recall, last year fourth quarter, we also had a pretty big uplift at the end of the year. I can't say that happens every year, but it just has to do with the timing of when customers sign the new business.

So, nothing unusual or no kind of change in what you're seeing, it's just the timing of kind of when it actually gets into the fleet?

Yes. If you recall, throughout the year, we talked about -- the second quarter was a very strong sales quarter. We talked about that last quarter, and remember we said that June was a record sales quarter. So, you do have some of that, that kind of usually takes 90 days to kick in, and we'll see that kicking in, in the fourth quarter. That would be probably the only data point that you could look at. Other than that, we still saw very healthy sales in the third quarter, and we're expecting also continued healthy sales in the fourth.

Okay. My second question, on the rental pricing commentary, it sounds like that, from the prepared remarks, that there were some mix issues here in the quarter. I know that you've increased the rental fleet with the vehicle types where there's the most demand. It feels like that the rental pricing expectations for the year are a little bit lower than where they were previously. Is that mostly mix, or can you talk about what's happening with the rental pricing environment? Thank you.

Yes. It's really all mix. As we mentioned, it's that we are renting more to national customers, which, with those customers, you're going to have a slightly lower rate, but you're going to have better utilization because they're going to take the units for a longer period of time. That's really the primary -- Dennis, I don't know if you want to add any color around what we're seeing in rental today and how that's shaping up?

No, it's just the national customers, Todd -- we're seeing strong demand from them, and you'll tend to have higher utilization, but a lower rate with them. Also, the lease support activity is strong. These are customers who are waiting their lease product to come in, and we've got rental units with them, and they'll be renting at lower rates, also. It's mix that's driving it.

Dennis, is there any color as to why the national customers have been so strong recently?

It's seasonal. We're seeing a lot of the major national customers who are taking units sooner, as we prepare for the holiday season. So, that's really what we're seeing is just an uptick in national, in general.

Okay. That makes sense. Thanks a lot for the time this morning.

Ben Hartford, Robert W. Baird.

If we could just think about 2015 for the moment: I'm just interested in terms of learning how you're going to balance the dynamics between rental and lease into 2015. It sounds pretty clear that you have momentum on the full-service lease fleet side. But what is an early approach or just kind of a summary of how you think about the business, Robert, thinking about this cycle, balancing rental demand, which remains healthy, but certainly there's probably a bias toward converting rental customers to longer-term leases.

Plus, you have marketing campaigns and several initiatives to help grow that lease fleet in 2015 and beyond. So, maybe just talk about how you think about those two products commingled as we head into 2015, and kind of look through the balance of however long the cycle may be.

Yes. I'd say, Ben, without getting too deep into 2015, I think it's clear that we're going to be really looking for growth in both. We're going to be looking for, as the economy continues to move at least in the right direction, rentals should continue to be pretty healthy going into 2015. We still haven't made our pick yet of exactly what we're going to do in terms of growth, but if things continue the way they are, I would expect continued growth in rental.

In full-service lease, it's what we've seen the last, now, year and a quarter, at least, where lease sales have really strengthened. Customers are feeling more confident about being able to sign up to longer-term leases because they're a little more confident in the economy, and also, the fuel efficiency benefits that they're getting from the vehicles is helping us.

Marry that with the efforts we have around converting ownership accounts and non-outsourced accounts into full-service leasing. Those things are just in the early stages still. So, I would expect us to really continue to see increased growth in full-service lease and in our other product lines. I guess the simple answer is: We're going to be looking for growth in both.

Okay. That's helpful.

John, congratulations on the announced retirement. Robert, can you give us an update in terms of what you're thinking about the leadership transition within SCS -- maybe just an update from the announcement a couple of months ago?

Sure. We're fortunate that John has given us an extended time to be able to make sure that we make the right decisions around that. We are interviewing external candidates and also internal candidates. We feel confident that we'll have a person in place certainly well before John's retirement date of end of March. But we're still trying to find a clone for John, but haven't found that technology yet.

Well done. Thanks for the time.

Art Hatfield, Raymond James.

Robert, looking at FMS, the EBT margin's at 13% in the quarter. Very strong, but you're kind of -- the last couple of quarters, back to those pre-recession levels. How do we think about FMS going forward? Are we kind of at a peak margin level, and we're going to be reliant on top-line growth? Or is portions of that business still underperforming and can raise that level of performance?

Yes. No, I think growth is certainly going to be a factor going forward on earnings expansion. As we look to the fourth quarter and certainly to 2015, we expect less of the benefit to come from gains, and more of it to come from the core business -- the core product lines, if you will. But you also have to keep in mind that as used vehicle sales has continued to strengthen, that is going to translate into more depreciation benefit as we raise residuals into 2015, because we're going to clearly be adding a very strong used vehicle sales year to our five-year look back, while we are going to be dropping off a pretty weak year. You're going to certainly get some earnings impact from that.

As we continue to refine our maintenance expertise around the new technology, we expect to continue to see benefits each year from that. And then the new products. As Dennis and his team really finalize the changes that we're making for on-demand, and we start to see that product really get launched next year, and customers start signing up for that, we are very encouraged. We think that, certainly, the testing we've done with customers in the marketplace for acceptance for this product is very high, and we would expect to see benefits that are going to help the margin on the FMS side there. So, we expect that we will, over the next several years, be able to get beyond our current levels.

Okay. My second question: I want to go to the pension thing -- a couple things about that. If I can understand, the number, Art, that you gave out, the $300 million-plus, is that the vested portion or is that the accumulated or projected liability portion for those employees? Secondly, can you address why you're only offering this to 20% of the pension fund participants, as opposed to a higher number or even conversely a lower number?

Right, yes. The $370 million, Art, represents the pension benefit obligation for those employees, which are the terminated vested employees. We're really offering it, effectively, to all of our term vested employees, and that represents just about 20% of our obligation. The rest is associated with current retirees, and then also active employees.

Okay. Very good. That helps me out a lot. Thank you.

Scott Group, Wolfe Research.

You mentioned a couple of times less benefit from gains. Just wanted to make sure I understand: Are you saying less of an increase in gains or you think gains turn negative year over year? I'm thinking more about 2015?

No, no, less of an increase. Because if you think about last year, we started to see gains kick in last year, and then the year-over-year comps now are going to get tougher in the fourth quarter. As we get into next year, it could come down, but that should be offset by a benefit we're going to get in depreciation expense. So, I would see those two as maybe being a slight net positive next year.

So, the reduction in depreciation but gains on sales maybe come down as a net positive?

Should be a net positive.

Yes. We expect the benefit around residual value changes to exceed any impact from reduced gains on a year-over-year basis.

Okay. That makes sense.

On the fleet growth -- so, I think there's a lot of hope that it's going to show up. What's a realistic pace of growth to expect? I think the fleet's up 2% year over year. If this works -- your strategy of getting more growth -- should we be thinking 2% kind of fleet growth, or couldn't this get to a 4% or 5% fleet growth in a year?

I think, longer term -- I don't know if it's next year or the following year, but certainly, our goal here is to get the fleet growth up, certainly beyond the 2%, whether it's 3%, 4% or 5%. You've got a huge segment of the market -- this 90% that is out there. If we can start chipping away at that, it's certainly realistic to expect that the numbers would look more like a 3%, a 4%, maybe even a 5% over time.

When do you think that happens or can happen?

I think continued progress. Last year, we grew -- if you exclude UK trailers, last year Dennis and his team grew the lease fleet 1,700 units. This year, we're targeting 2,500. So, I would expect that 2,500 next year to be greater. Not into yet exactly what that number's going to be, but continued progress. Dennis and his team have done a great job of beginning to focus the sales force in this area.

We're still selling about a third of what our growth is from private fleet conversions, but we expect that over time to continue to be greater. Dennis has a Total Cost of Ownership tool that he's rolled out to the sales force -- more recently have made some adjustments to the commission plan to encourage more of the conversions. I think all of these things, over time, are going to lead to more focus and more growth in that side of the Business.

Okay. Thank you, guys.

Jeff Kauffman, Buckingham Research.

Can I focus a little bit on the CSS, because between the allocated [and the unallocated costs, it was up about $3.5 million] (corrected by company after the call), and it looked like there was a big jump in the unallocated. Can you talk a little bit more -- I know you said technology investments and some other things, but talk a little bit more about what is driving those numbers up and kind of where we should be thinking in terms of where they level out.

Yes. Jeff, it reflects what we talked about in the release. It's a combination of higher sales and marketing costs, as we've started the initiatives, really, that we announced over the last few months, as well as the investments in technology that is really key to our business going forward. So, it was maybe a little more pronounced this quarter, since some of the marketing was maybe more centralized in the third quarter.

As we look out, I mean, over the near term, we would not expect those kind of year-over-year comps to play out in the fourth quarter. We expect it to be much more in line with the prior year, from an unallocated spending perspective.

Okay. So, I guess you are saying I should probably see 62 fall back a little bit as the unallocated normalizes?

Yes.

Okay. On the dedicated side, you gave us a little glimpse into what was going on in the Supply Chain, but it looks like the revenue per vehicle on the dedicated side was down about 2%. Is that fuel related? Is that mix related? What would be causing that type of change, because that number has been a positive number?

Fuel represents about 2 percentage points of growth, so the fuel price being down would represent 2% of that.

Jeff, I think if you back that out, it's flat, and the rest of it's mix, because we have different revenue per vehicles at different types of accounts. The rest of the variation is going to be mix. And then, of course, if the lost business is a slightly different type of project, which it was, then that will also affect the total. (multiple speakers)

Cost increases that we see -- if what you're getting at is: Are we passing on cost increases? We are. To the extent that we're experiencing wage rate increases, we are able to pass that on to our customers, by and large.

No, I'm seeing the margin better, but the dedicated growth rate's a little bit slower than the rest of the industry; historically, a little stronger than this. Is this a function of: We're slowing our growth because the drivers are tough to get, so we're slowing down sightings, or is it just more kind of seasonal mix/customer related?

Yes. We definitely don't see ourselves as growing slower than the market or growing slower in dedicated, in general. You are seeing lost business that we're coding to dedicated here, what's really automotive trucking.

Okay.

That's definitely putting a dent in what we're reporting as the dedicated growth rate. If you look at our new sales in dedicated, they're more than double what they were a few years ago. That's the market that you're seeing with other companies as well. And it's also from the efforts of working with FMS on converting private fleets to dedicated, and I think we will continue to see that going forward.

Okay. Thanks, John. So, what you're saying is it's mostly optics is what I'm seeing?

You're seeing a lot of -- the auto is kind of messing with the optics a little bit, yes.

Just to add to what John said, Jeff, there is strong sales activity in dedicated. I think it's also a matter of timing of when the new business ramps up versus the lost business that we saw in auto. Once we start to get some of these new accounts ramped up and implemented, you'll start to see that growth start to pick up again in 2015.

Okay, guys. Thanks.

David Ross, Stifel.

Robert, with the strong used vehicle sales and good pricing right now, can you remind us how you're estimating residual value in new contracts that are signed? Is it assumed the current used price or rolling average?

Yes. No, it's -- remember, it's the same thing we talked about for depreciation. It's a five-year rolling average, so we certainly aren't putting the current pricing in there. We're using a five-year. Although it has been coming up, as you might imagine, which is helping us get more competitive on the leases. But it's the same methodology we've used for a long time, which is a five-year rolling average.

Okay. And then, as far as the new contracts that are being signed for full-service lease, is the average contract in terms of number of trucks moving significantly one way or the other? Put another way: Are you attracting more smaller customers or more bigger customers?

Yes, I don't think there's been a big movement. I think, the one thing we are seeing, and we talked a little bit about it in the second-quarter call, was we had a big account that we signed in contract maintenance. So, we are seeing both large and small customers. Some may go to full-service lease, some may go to contract maintenance, and some may go to on-demand.

So, I think the one thing we're just getting our arms around here, and I think over the next few years it'll play out is what products customers decide to go to. I think the important thing is that we're expanding the number of offerings, so we have a broader selection and we can attract more customers, and each of those products will be profitable. But, no, we're trying to be broad about who we go after, and some of these new products that we're coming out with are really to target some of the larger fleets.

Excellent, thanks.

Thomas Kim, Goldman Sachs.

Can I ask your thoughts on rising interest rates and your ability to pass along the higher cost to borrow to customers? How dynamic is your pricing when you sign new contracts, in an environment where, over the next five years, the probability of rates going up would seemingly be high?

Yes, we update our interest rate in price, and we get updated on a real-time basis almost. So, as interest rates change, we make updates to our cost of capital. That gets priced into the next lease. Remember: We don't buy a truck until we have a signed lease. We really do match the interest rate that we're charging the customer with the interest rate that we're getting in our MTN, so it's really pretty tightly match-funded.

What percentage of your debt is on variable?

25%, Tom.

25%. Okay, all right, great. That's very helpful.

Can I just touch on some of the questions with regard to driver shortages? Obviously, this isn't necessarily a huge problem or challenge for you, per se, but kind of going back to one of the earlier questions that was kind of alluding to possibly seeing maybe a bit of damp in growth because maybe your customers are facing driver shortages? To what extent can you comment on that being a potential headwind for either -- obviously specifically related to FSL or even on the rental side?

I'll let John elaborate on this in a second, but I do want to reiterate the fact that, in a lot of ways, this driver shortage is actually a good thing for us. The harder it gets to hire drivers for private fleets, the more likely they are to look at outsourcing.

Some of the things that we're seeing in dedicated sales, even with customers that are leasing and decide to also go to dedicated, is because they're having some of these challenges, and we have a very extensive driver recruiting network. It's an area that we really can excel in, even though it is tougher for us. We have 6,000 commercial drivers that work for Ryder, and we are very good at recruiting and retaining drivers.

I'll let John talk about some of the challenges that we are seeing in the market.

Yes, that's the main factor. It drives more outsourcing because some private fleets are having more trouble hiring drivers, and they look to us for that. A smaller factor that I guess is kind of a secondary impact is truckload carriers. Most private fleets have to decide, or most private shippers have to decide which shipments go on for hire and which shipments go on their private fleets. There's kind of a breakpoint; oftentimes there's like a mileage breakpoint. If it's more than 200 miles, it goes for hire, et cetera.

As the for-hire trucking capacity has gotten really tight, some of these big fleets are looking at expanding the scope of their private fleet or of their dedicated fleet versus the for-hire. We're seeing that lead to customers take a higher percentage of their transportation, and move it either on a dedicated fleet or a private fleet versus for-hire. That's also helping growth.

So, just given that, should we expect the dedicated side to really ramp up and accelerate, just given the dynamics we've seen and are likely to persist?

Yes. Like I said, we've seen Ryder-dedicated new sales more than double. It's on track this year to be more than double what it was a couple years ago. When we look out in our strategic planning over the next three years, we're expecting to see pretty good growth in Ryder dedicated, certainly at least 1 point or 2 higher than, say, SCS in total.

Okay. That's helpful. Thanks a lot.

Kevin Sterling, BB&T Capital Markets.

Robert, I know it might be early, but given your strong lease pipeline, can you maybe tell us directionally how we should think about your CapEx spending for 2015? Is that possible?

There'll be less replacement CapEx next year -- slightly less.

Okay.

Really, the unknown is still how much growth. As I just mentioned earlier, I would expect us, without knowing yet what the number is, we want to build on what we did this year, so we'd like it to be more than the 2,500. But we'll be providing more information on that in February.

Okay. Then, kind of switching gears here, your maintenance-only product, it seems you've had some pretty good success growing that. Have you had some success converting those maintenance-only customers to full-lease customers?

Yes, I think it's still early. We're -- as I mentioned, we haven't really fully rolled it out. We've got now 30 customers, and we're beginning to get some business from them.

But I'll let Dennis give you some more color on what we've seen with those customers.

Yes. What I would add to that, Kevin, is that what we're seeing initially is: When these customers are coming in, they're renting from us and buying things like fuel. So, we haven't necessarily seen any of these customers expressing interest in leasing, but they're getting more comfortable where they're buying ancillary services from us, and we expect, over time, for there to be leasing opportunities with those customers.

Okay. I guess the goal there is to kind of get your teeth more into those customers, and eventually convert them to full leasing, is that correct?

Yes, but really what it gets down to is it's them getting comfortable with us, getting exposure to us, and that relationship building. We're addressing the major pain point that people are seeing out there, which is, with the new technology, both -- primarily the maintenance cost is increasing. Now, the acquisition cost they're seeing -- with the maintenance costs, they're seeing the training challenges, the tooling challenges. And when they can come to Ryder for a one-stop solution, a one-stop shop, if you will, it's very helpful. So, once we get in the door with them, there's a lot of comfort that's built, a lot of trust, and then we're able to sell additional products to them.

Got you. Okay. Great. Thanks so much for your time this morning.

Justin Long, Stephens.

First question, I just wanted to ask if you could help put some more color on the backlog or the pipeline in both the leasing business and SCS? Have you seen things improve on a sequential basis thus far in the fourth quarter? Is there any way to quantify the visibility you have on growth potentially accelerating going forward?

Yes. I would say, in leasing, the pipeline has continued to be strong. The sales in the third quarter were strong. We're expecting fourth quarter to also end strong. A lot of interest as the economy continues to heal and as we get more fuel-efficient vehicles, and as we're doing a better job of converting some ownership accounts, that pipeline continues to be at a strong level.

In terms of Supply Chain -- same thing. There's still a lot of -- John mentioned the amount of sales that we've had in Supply Chain over the last year and the last two years. We've had some lost business that has kind of hurt us a little bit here in the last few quarters, but as we implement that new business, that'll really start to show up in 2015. So, we're encouraged by that.

I do want to be clear that, certainly, we have seen no slowdown in our end markets, whether it's rental, lease, Supply Chain, dedicated. Even through this month in October, I'd tell you it continues to be a relatively strong market. As you know, we're primarily North American; over 90% of our revenues are in North America. So, we're very tied into the North American economy, and we're seeing continued strength in our end markets.

Great. That's good to hear. As my second question, I wanted to ask about margins in the FMS segment. Going forward, how should we generally think about the incremental margin profile of that business as you return to pre-recession margin levels and start trying to improve beyond that 12%?

Yes. This year, we've had a bit of a boost from used vehicle sales. I would tell you about 1 percentage point of what we're seeing is going to be from the gains that we experienced this year -- the really very, very strong used vehicle market. As we get into next year, we're still expecting used vehicle market to be relatively strong because there's still going to be tight supply. We're selling now vehicles that were manufactured in 2008 and 2009, which were really relatively soft OEM production years.

So, as we look into next year, I would expect that tight supply to continue to help solidify pricing. But definitely, we're going to see some headwind in terms of margin percent from that into next year. However, the offset is, we're going to see depreciation expense benefits. So, we're up 190 basis points, I think, in FMS?

Right.

I wouldn't expect 190-basis-point improvement next year, but I would expect us to go back to probably that 70 to 80 basis points.

We're 90 basis points up, excluding the UVS gains. So, next year, as you kind of look out, you may have some headwind because if gains are -- do decline, you may see some decrement, but you're in that range -- in that 60 to 90 type of range.

And then you're getting the earnings improvement through growth in each of the product lines.

Great. That's really helpful color. I appreciate the time.

Matt Brooklier, Longbow Research.

I know it typically doesn't, but did the swing in fuel prices -- did that have any impact on the quarter?

I think the only place is in the total revenue line. I know there was some write-ups this morning about us missing the consensus total revenue. That would've impacted total revenue because fuel prices are down. But other than that, if you look at the operating revenue line, there really isn't one.

Okay.

And on the bottom line, there isn't either.

Okay. So, no impact on the bottom line.

Art, could you maybe talk to what's baked into gains on vehicle sales for fourth quarter? It sounds like it may be down sequentially, but ahead of last year's fourth quarter. Maybe just add a little bit of color there?

Yes. It should be down. We're expecting, Matt -- obviously, we had a very, very strong third quarter. Still, we'll be up year over year, so, I mean, directionally maybe say 10% down sequentially, in that target range.

The other thing to keep in mind is: This is where we'll start to see less year-over-year benefit we expect from used vehicle gains. We started to see the ramp up, like Robert said, earlier in the fourth quarter of last year. So, gains will be up, but it's not going to be to the extent we've seen in the first three quarters.

Okay. Helpful. Appreciate the time.

Casey Deak, Wells Fargo.

If I look at the spread to the cost of capital, 100 to 110, you've talked about getting to 150 basis points in the past. Is that still the goal? What gets you there? Is it going to be the pricing on the new leases? Is it growth in dedicated offerings? Is it going to be more on the on-demand maintenance? If you could delineate that a little bit? Would that ultimately get you above 150 down the road?

I guess it's yes to all of those. What is going to get us there is growth in the FSL, because as we grow, we'll be able to leverage the overheads. Certainly, these new services of on-demand maintenance and some of the things that Dennis's team is bringing on is going to help expand that ROC spread. Growth in dedicated and growth in supply chain -- those are high-ROC product lines with limited capital required, so margin improvement and margin recovery there is going to help get us there.

It's just really -- beyond that, it's just that continued growth story. As we look to bring more of the non-outsourced market in, and we start to grow the top line, we start to leverage the overhead, leverage the infrastructure that we have, and drive that spread.

Okay.

150 is our target. Obviously, once we get there, we'll raise the target, but right now that's our target.

Also, maintaining within our target leverage range.

That's great. Second question: On on-demand maintenance, are you guys able to quantify kind of repeat visits you're seeing? I know that 6,200 is going to be unique visits in the quarter, but trying to get a sense of how sticky is the business? Are customers coming in when there's only a problem with the truck or are they coming in for preventative? Are they coming back in? Are you seeing them multiple times in a quarter? If you could talk a little bit about that?

I'll let Dennis give you color on that.

Yes. What I would say, Casey, is we're seeing, for a unique vehicle, two to three visits. For the vehicles we're seeing, we're seeing them two to three times over the period since we've launched on-demand.

Okay.

That kind of gives you a rough ballpark for what we're seeing right now.

Okay. The guys that have signed on, and that are coming in, you haven't seen where somebody's coming in and then they're dropping off and you don't see them again?

You'll see that some, but once a customer gets comfortable, we're seeing repeat business from them.

Okay, great. Thanks, guys.

David Campbell, Thompson Davis.

I'm just curious about the supply chain business. I'm seeing revenue increases for that business around the world and domestically, and I'm just sort of surprised that you're not seeing it either, or at least not much, considering the fact that you're also trying to convert, as I understand it, some full-service leases into dedicated business. Is the macroenvironment not as strong as it looks, or what's going on?

Yes. David, I certainly understand the question, and I would tell you that we are seeing a healthy external environment. The reason that our growth rate has come down in the quarter -- in this quarter and into next quarter -- is primarily some lost business, pretty significant in terms of revenue, that hit us in the second quarter, really. We got new business coming on that, over the next several quarters, will begin to offset that, but we're in a little bit of a soft patch here. It really has to do with the timing of when we lost the business, and the timing of the new business coming back on.

But overall, I agree with your statement. The market is good and growing. We have seen supply chain grow nicely over the last several years. Their earnings between 2009 and 2013 grew at a CAGR of 14%. So, we're in a little bit of a soft patch this year with SCS, but we expect to get back on track in 2015.

Okay. Thank you very much.

Thank you. I'll now turn the call back over to Robert Sanchez for closing comments.

Okay. Thank you, everyone. Thanks for being on the call. Great questions, and we certainly look forward to seeing you out on the road shows and conferences as we get out there in the quarter. So, everyone, have a good day.

Thank you. This does conclude the conference. You may disconnect at this time.