萊德系統 (R) 2014 Q4 法說會逐字稿

Good morning and welcome to Ryder System, Incorporated fourth quarter 2014 earnings and 2015 forecast 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 fourth quarter 2014 earnings and 2015 forecast conference call.

I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities and 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 fourth quarter 2014 results, review the asset management area, and discuss the current outlook and forecast for 2015. Then we'll open up the call for questions.

With that, let's turn to an overview of our fourth quarter results. Comparable earnings per share from continuing operations were a record $1.60 in the fourth quarter of 2014, up from $1.35 in the prior year. This is an improvement of $0.25, or 19%. We came in towards the top end of our fourth quarter forecast range of $1.50 to $1 61. Fourth quarter comparable results exclude charges of $1.38 primarily for pension buyout costs, as well as restructuring and other charges.

The pension settlement costs totaled $1.29 and relates to our previously announced lump-sum pension distribution made to approximately 6,000 former employees during the quarter and, to a lesser extent, the buyout of certain multi-employer pension obligations. We'll discuss these pension-related items in more detail later. Fourth quarter comparable results also exclude $0.06 of restructuring and other costs, primarily for severance.

Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up 5%, to a record $1.42 billion for the fourth quarter. Revenue grew in both business segments. Growth in FMS was driven by full-service lease and commercial rental, while SCS benefited from new business and higher volumes.

Page 5 includes some additional financial information for the fourth quarter. The average number of diluted shares outstanding for the quarter increased by 300,000 shares to 53 million. This reflects the pause of our anti-dilutive share repurchase program during 2013. In December of 2013, we announced a 2 million share anti-dilutive repurchase program and began buying under the program in February of 2014. During the fourth quarter, we bought 153,000 shares at an average price of $91.20. To date, we've purchased 1.3 million shares at an average price of $80.32 under the program.

Excluding pension costs and other items, the comparable tax rate was 34.4%, above the prior year of 33.3%. The increased rate reflects increased earnings in higher tax jurisdictions.

Page 6 highlights key financial statistics on a full-year basis. Operating revenue was up 5%, to $5.5 billion. Comparable earnings per share from continuing operations were $5.58,up 14% from $4.88 in the prior year. The spread between adjusted return on capital and cost of capital increased to 110 basis points, up from 100 basis points in the prior year, driven primarily by higher earnings and lower capital.

I'll turn now to page 7 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions' operating revenue, which excludes fuel, grew 6%, driven mainly by growth in full-service lease and commercial rental. 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. We're encouraged by the organic growth in our lease fleet during 2014, which was our third consecutive year of organic lease fleet growth and the highest growth rate in the past decade.

On a full-year basis, the lease fleet increased by 2,600 vehicles, including the planned reduction of 600 low-margin trailers in the UK. Excluding the UK trailer impact, the lease fleet grew by 3,200 units for the full year, which exceeded our prior forecast of an increase of 2,500 vehicles. Sequentially from the third quarter, the lease fleet increased by 2,200 vehicles. In addition, we had record lease sales in the fourth quarter, which provides nice momentum for additional lease fleet growth in 2015.

Miles driven per vehicle per day on US leased power units were up 3% 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 continues to improve this quarter and was down by one month sequentially from the prior quarter, or 4 months for the full year.

Contract maintenance revenue increased 10%, primarily reflecting the benefit of a significant new contract signed earlier in the year. Our contract maintenance fleet grew organically by approximately 3,700 vehicles from the prior year, reflecting this sales activity. Contract-related maintenance increased 4% from the prior year, reflecting higher ancillary maintenance work. Included in contract-related maintenance are 5,600 vehicles serviced during the quarter under On-Demand maintenance agreements. This represents a 12% increase from the prior year. With over 30 customers signed to date, we continue to see strong interest in this service.

Commercial rental revenue was down 10%, driven by higher demand and improved pricing in North America. The average rental fleet grew by 6% from the prior year and was down 1% sequentially. Rental utilization on power units was 80.1%, exceeding our prior year level of 78.9%, reflecting strong holiday shipping demand. Global pricing on power units was up 3%, which was in line with our expectation. In used vehicle sales, we saw strong demand in pricing. I'll discuss those results separately in a few minutes.

Overall, FMS earnings increased versus the prior year, due to strong rental performance and better full-service lease results. Commercial rental performance benefited from better than expected 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 leverage on revenue growth. FMS earnings as a percent of operating revenue were 13.2%, up 200 basis points from the prior year.

I'll turn now to Supply Chain Solutions on page 8. Operating revenue grew 4%, due to new business and higher volumes, partially offset by automotive business lost earlier in the year. In addition, SCS revenue growth was negatively impacted by 2 percentage points from fuel cost pass-throughs and foreign exchange. We returned to year-over-year earnings growth in the segment this quarter, following declines earlier in the year. SCS earnings before taxes were up 2%, reflecting revenue growth, partially offset by higher insurance cost. Segment earnings before taxes as a percent of operating revenue were 6.2%, down 10 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 full-year results by business segment. In the interest of time, I won't review these results in detail, but I want to highlight that FMS operating margin reach 12% for the full year, returning to the low end of our pre recession range. Comparable full-year earnings from continuing operations were $297 million, up 16% 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, full-year gross capital expenditures were $2.3 billion, up $114 million from the prior year. This increase reflects planned investments in our rental fleet in light of strong demand, partially offset by lower lease replacement activity. We realized proceeds primarily from sales of revenue earning equipment of nearly $500 million, up 10% 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 in the year. Full-year net capital expenditures decreased 3%, to $1.68 billion.

Turning to the next page, we generated cash from operating activities of $1.37 billion for 2014. That's up $147 million, or 12%, from the prior year. This increase was driven primarily by higher cash-based earnings and the timing of cash payments. We generated over $2 billion of total cash during the year, up $300 million from the prior year, primarily due to higher operating cash flow, the sale-leaseback, and higher sales proceeds.

Cash payments for capital expenditures increased by 6%, to $2.3 billion for the year. 2014 free cash flow of negative $202 million improved from negative $386 million in the prior year. Higher cash from operations, the sale-leaseback transaction, and stronger used vehicle proceeds more than offset higher growth capital spending.

Page 13 addresses our debt to equity position. Total obligations of $4.7 billion increased by $419 million from year-end 2013. Total obligations as a percent to equity at the end of the year were 258%, up from 226% at the end of 2013. Leverage at year-end is within our target range of 225% to 275%. Year-end leverage was above our earlier expectations, due to a year-end pension equity adjustment.

This adjustment reflects annual pension assumption updates, such as mortality and discount rates, and is determined each year as of December 31. This year's pension equity adjustment increased leverage by 23 percentage points. Equity at the end of the year was $1.82 billion, down by $78 million from year-end 2013, as earnings were more than offset by pension charges, currency translation adjustments, share repurchases and dividends.

Earlier in the call, Robert mentioned pension buy-out costs that were excluded from fourth quarter comparable earnings. The majority of this charge was non-cash and related to the acceptance by over 6,000 former employees of a lump-sum buy out offer of their vested benefits. The 60% acceptance rate we saw from this offer exceeded our expectations and covers approximately 12%, or $259 million, of our US pension obligation.

Also included in the charge are settlement costs associated with the withdrawal from two multi-employer pension plans during the quarter. These actions are consistent with other steps we've taken to reduce the size and potential future volatility of our pension obligations. The funded status of the US plan remained materially unchanged following the lump-sum buyout. The cash distribution was funded by assets of the pension plan and did 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 for our asset management area. Used vehicle inventory held for sale was 5,500 vehicles, significantly down from 7,900 units in the prior year and 300 units below the third quarter. Used vehicle inventory is just below our target range of 6,000 to 8,000 vehicles.

Pricing for used vehicles was strong from both tractors and trucks. Compared with fourth quarter 2013, proceeds from vehicles sold were up 17% for tractors and up 19% for trucks. From a sequential standpoint, tractor pricing was up 2% and truck pricing was up 1% versus the third quarter of 2014. 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 year.

The number of lease vehicles that were extended beyond their original lease term decreased versus last year by around 480 units, or 7%, and remain below recessionary levels. Early termination of leased vehicles increased slightly, by about 280 units, and remain well below recessionary levels.

I'll turn now to page 17 and cover our outlook for 2015. Pages 17 and 18 highlight some of the key assumptions in the development of our 2015 earnings forecast. Our 2015 plan anticipates moderate growth in the overall economy. We're assuming foreign exchange rates remain stable at their current levels, which will result in a negative year-over-year impact to both revenue and earnings.

In Fleet Management Solutions, we're expecting growth in all product lines. In lease, strong sales should drive an acceleration in fleet growth. For 2015, we're forecasting to grow our lease fleet by over 4,000 vehicles, excluding UK trailers, as market demand improves and we make meaningful progress on our initiatives to penetrate the non-outsourced market. In rental, we're forecasting improved results, due to higher pricing and demand on a larger fleet.

We expect to expand our new On-Demand maintenance offering during the first half of the year, which should drive increased revenue growth in the second half. We expect higher maintenance costs associated with new engine technology to be partially offset by the implementation of maintenance cost initiatives. The strong used vehicle pricing results that we realized in 2014 will benefit depreciation rates this year, as these results our blended into our vehicle residual value calculation. These benefits will more than offset lower expected gains on used vehicles sold with higher book values.

We expect used vehicle pricing to increase in 2015, with sales volumes relatively unchanged compared to 2014. Sales proceeds are expected to be negatively impacted by the mix of vehicle types sold. Overall, we expect higher FMS earnings, due to growth in the full-service lease, better performance in commercial rental, increased contributions from our new On-Demand maintenance offering, and depreciation changes. These improvements will be partially offset by higher strategic investments and overheads.

Turning to page 18, in Supply Chain, we expect revenue growth due to new sales, partially offset by foreign exchange impacts. Dedicated revenue is forecast to benefit from strong new sales activity, including continued convergence of lease customers to Dedicated solutions. Dedicated earnings will benefit from revenue growth, as well as from productivity improvements in driver recruiting and retention.

We plan increased overheads in all segments, primarily due to strategic investments to drive long-term growth in the business. We expect to continue offsetting any employee share activity through an anti-dilutive share repurchase program, so that the share count remains generally unchanged. We're forecasting an EPS headwind due to a higher tax rate resulting from increased earnings in higher tax jurisdictions. Finally, we've planned a $250 million sale-leaseback transaction this year to finance a portion of our vehicle capital expenditures.

Page 19 provides a summary of some of the key financial statistics in our 2015 forecast. Based on the assumptions I just outlined, we're expecting another record year in operating revenue and comparable EPS in 2015. We expect revenue growth to accelerate, with operating revenue increasing 7%. Comparable earnings per share are forecast to increase 12% to 15%, showing nice operating leverage on our revenue growth. Comparable earnings per share is forecast in a range of $6.25 to $6 40 in 2015, as compared to $5.58 last year.

Our average diluted share count is forecast to be roughly flat, at 52.9 million shares. We project a comparable tax rate of 36.4%, up 0.5% from last year's rate of 35.9%. The spread between our return on capital and cost of capital is forecast to expand nicely to 1.3% to 1.4%, up by 20 to 30 basis points from last year. This is the strongest capital returned spread we've seen in over a decade. Our 2015 return on equity forecast is 17%.

The next page outlines our revenue expectations by business segment. With the change in leadership in our logistics business this year, we're going to start reporting three business segments. While there is no change in the FMS reporting, we'll report our Supply Chain and Dedicated Activity separately, starting in the first quarter.

In addition, we're going to exclude fuel revenue from our operating revenue numbers in all three segments. Historically, fuel was only excluded from FMS operating revenue; however, the cost is passed through to customers in all segments in a very timely manner. The new reporting will help focus on the fundamental growth of our service offering in all segments. We'll provide historical financials for the two new segments in March, so that have time to update your models prior to our first quarter earnings release.

In Fleet Management, operating revenue is expected to increase by 8% in 2015, up from 6% last year. Longer term, we now expect that FMS can deliver operating revenue growth in the high single-digit range, up from our earlier expectations for mid-single digit growth. The higher long-term growth rate is supported by both market trends and our initiatives to drive increased rates of outsourcing.

Full-service lease revenue is forecast to grow by 7%, which would be the highest organic growth rate in over a decade. This is driven by higher fleet count due to stronger new sales, higher lease rates reflecting increased vehicle investment costs, and CPI rate increases.

We're forecasting a 9% increase in rental revenue. Rental growth is due to 4% higher pricing on a 4% larger fleet with stable utilization.

Supply Chain operating revenue is expected to grow 2%. Revenue growth from new sales is forecast to be partially offset by volume declines and network redesigns with some current customers. We expect revenue growth in Dedicated up 10%, reflecting strong new sales activity.

Page 21 provides a chart outlining the key changes in our comparable EPS forecast from 2014 to 2015. We plan to continue making strategic investments to drive long-term growth in our business. These investments fall mainly into the areas of sales and marketing and technology to improve our customers' experience. Strategic investments and other overheads are expected to cost $0.23 this year. Higher compensation expense is expected to lower earnings by about $0.20 per share this year. This includes the cost of merit increases, higher medical costs, additional headcount, and upfront commission expenses, partially offset by lower plan bonus.

Lower used vehicle sales gains will reduce EPS by $0.07, as vehicles are sold with higher book value following several years of residual value increases. On-Demand maintenance and other smaller products are expected to contribute an additional $0.15 to EPS this year. Growth in Dedicated revenue combined with margin expansion should add $0.17. In Supply Chain, we expect an additional $0.25, driven primarily by margin improvement as we move past the challenges of 2014. Commercial rental is expected to increase EPS by $0.35, based on increased demand and pricing, as well as higher residual values.

The largest driver of 2015 EPS improvement is growth and increased return in our contractual FMS product lines, totaling an additional $0.50 this year. This results from fleet growth and higher residual values, partially offset by increased maintenance costs on new technology.

The net result of the operational items I've mentioned so far would result in an EPS of $6.50. In addition, however, we're forecasting a negative $0.10 impact from foreign exchange rates and higher tax rate. This brings the high end of our comparable EPS to $6.40, with a range of $6.25 to $6 40 forecast for this year. I'll turn it over to Art now to cover capital spending and cash flow

Thanks, Robert. Turning to page 22, we're forecasting total gross capital spending of $2.5 billion for the year, about $250 million over last year, with higher spending in both Lease and Rental. Lease capital is forecast to grow by over $200 million to support increased fleet growth on stronger sales, as well as higher purchase costs per vehicle, due to inflation and EPA-mandated emission standard requirements. We plan to spend $450 million on rental vehicles, primarily to refresh the fleet, as well as for 5% growth in the average fleet size. Our outlook for improved rental demand and pricing remains favorable through January.

Proceeds from sales of primarily revenue earning equipment are forecast to decline by about 10%, to $450 million. This mainly reflects a change in the mix of units sold, with relatively more trailers versus power vehicles as compared to the prior year. We're planning a $250 million sale-leaseback transaction this year. As a result, net capital expenditures are forecast at $1.85 billion. This represents a 10% increase from 2014.

Free cash flow is forecast at negative $300 million this year. Please note that free cash flow would be strongly positive, excluding growth capital spending in Lease. We expect total obligation to equity to remain flat, at 260% at year-end, and within our target range of 225% to 275%.

We've talked in recent years about the impact that higher growth capital spending has on the business. Page 23 highlights the amount of growth capital spending we've had by year, driven from both fleet growth and higher vehicle investment cost per unit and its impact on cash flow. For 2015, we expect to spend just over $1 billion on growth capital, $850 million in Lease and $180 million in Rental.

In 2010 and 2011, growth capital spending was focused primarily on the rental fleet, as we started to move past the recession and experience very strong rental demand. Starting in 2012, the largest part of our growth capital spend is for contracted lease units. This amount has been steadily increasing as we execute on our strategy to penetrate the historically non-outsourced market.

The box on the right-hand side of the page highlights 2015 growth spending in Lease. A greater number of lease vehicles will require $450 million of capital, while higher per unit cost will require an additional $400 million. Both our earnings and cash flow will benefit from this contracted growth over the typical 5- to 7-year life of these vehicles. In the near-term, free cash flow is negatively impacted, since we're spending an increasing amount up front to purchase vehicles.

As you can see in the bottom line of the page, however, this growth capital spending is significantly benefiting operating cash. Operating cash flow is projected to be close to $1.5 billion this year, up 50% from 2009. At this point, let me turn the call back over to Robert to recap our EPS forecast

Thanks, Art. Turning to page 24, we're expecting EPS to grow 12% to 15%, to a range of $6.25 to $6.40 versus a comparable $5.58 last year. This improvement is despite a $0.10 negative impact from a higher tax rate and foreign exchange. We're also providing first quarter EPS forecast of $0.95 to $1.00 versus comparable prior year EPS of $0.92. The growth rate of earnings in the first quarter is somewhat below the full year, due to challenging first quarter rental comparisons and a lesser benefit coming from supply chain early in the year.

That concludes our prepared remarks this morning. Before we move to Q&A, I'd like to take a minute to think John Williford for his many contributions to Ryder. As you know from our prior announcement, John will be retiring from the Company in March and so this will be his last earnings call here. John has provided tremendous leadership to the overall company and significantly shaped the vision of Ryder's Supply Chain business. I greatly appreciate the depth of logistics expertise John brought to the Company and the work he's done to develop our team here.

Given John's work on development and succession planning, as we previously announced, I'm pleased that we've got two long-term Ryder employees stepping up to take over the leadership roles in this area. Steve Sensing will be running our Supply Chain business, and John Diez will be running our Dedicated business after John's retirement. I want to personally thank John again for his support and leadership and wish him all the best in his future endeavors.

We had a lot of material to cover today, with both our fourth quarter results and 2015 outlook. As a result, I'd like to ask that you limit yourself to one question and one related follow-up, if clarification is needed. If you have additional questions, you're welcome to get back in the queue, and we'll take as many calls as we can. At this time, I'll turn the call over to the operator to open up the line for Questions.

(Operator Instructions)

John Barnes, RBC Capital Markets.

Good morning, guys. Nice quarter. Could you talk a little bit about -- if I look at 1Q guidance versus the full year, the 1Q guidance is spelling out a mid-single digit earnings growth in your upper range versus the 12% to 15% you've talked about. And I recognize the couple of limitations you're talking about. But it just seems like 1Q is a lot more conservative than what you're laying out for the full year. Can you talk about, is there anything else besides those couple of things you've thrown out that has you concerned about 1Q? And then more importantly, given that 1Q is the slower of the growth quarters, it looks like, can you talk a little bit about how you think the progression through the year plays it out?

Yes. I think the two items that we mentioned, John, that sort of lay out what some of the headwind in the first quarter as it relates to this growth. First is, remember last year during the polar vortex, we had a lot of rental activity that really has created some more difficult comps in Rental. And then more importantly, I think in Supply Chain, you remember a lot of the challenges we had, especially around the startup, where a lot of that came in the second quarter. So the comparables really start to improve for Supply Chain in the second quarter. And then you see that through the balance of the year. So I think those are the two big ones, that you pull those two out and you start to get closer to our full-year growth rate.

And what about the progression through the year?

John, this is Art. It's going to improve much more in line, obviously, with the full year. It just becomes the magic of numbers, to a certain extent. So we're expecting -- to what Robert said -- especially on the Supply Chain side, we're going to get much better results starting in the second quarter, because the comps are a little bit easier with the headwinds we had in 2014.

Okay. All right. And then my other question, given your comments around -- outside of the growth capital, you're talking about being free cash flow positive. And yet if I look at the balance sheet, you're still well within the parameters you've laid out for yourself, in terms of your debt to cap or debt to equity. Can you talk a little bit about the decision on the sale-leaseback, and is there something in the market that makes that attractive, at this point? Is there some other demand for capital that you see, or can you just elaborate a little bit on the need for that?

Obviously, we're spending a lot. We're planning to spend a lot in 2015. And from a tax perspective, we're in an NOL position right now, with bonus depreciation that was enacted for 2014. So really, there's other providers that can more efficiently use the tax benefits right now, and so we're going to avail ourselves of that. And that's really one of the benefits of this transaction is we can get more cost-effective funding than otherwise.

Okay. Does the sale-leaseback then have some implications for the margin -- do you sacrifice anything on the EBIT margin and gain it back on lower debt cost?

No, not really. Remember, this is done after the fact. So we're going to lease to our customers under the same terms that we always would. This is just a little more cost-effective financing tool for us.

All right. Very good. Thanks for all the color today. I appreciate it.

John Mims, FBR Capital Markets.

Good morning, guys. And John, wish you all the best moving forward. Robert, let me ask you, on the lease lead guidance. Last year, you had guided to about 2,000 trucks in growth and ended up being 3,200. The guidance this year is obviously much stronger than that. But based on that 4,000 truck number, what do you know right now? How sticky is that number now, as far as what's committed, what kind of sensitivity there may be to the upside or also to the downside of that 4,000 truck growth?

We feel really good about the 4,000. A lot of that is driven by what we saw in the fourth quarter. We had a record sales quarter in the fourth quarter. So that's going to give us a nice boost going into 2015. As you saw, we ended the year strong, too, with the 3,200 coming in.

So if you think back, we've been talking about this for several years, right? We believe that Ryder can become a growth company and a growth story, primarily because -- there's two reasons. One is as the economy improves. And the second thing is that there are trends that really favor outsourcing. The things that we do continue to get tougher, because of regulation, because of more complexities around technology. I think what we're beginning to see here is that start to come to fruition. We had not had organic lease fleet growth for a long time. We started to see it a few years ago. And now we're seeing it accelerate.

So I feel great about the progress we're making. I feel really good about the prospects for continued growth rates in FSL. And this 4,000, I think, is a nice milestone to hit. Is there upside? Obviously. The whole year hasn't -- we don't know what the sales are for the full year. We certainly know what we did in the fourth quarter. We know it was great. But we have some estimates of what we think we're going to do in the year, but we could always do better.

I guess then, is visibility any different at this point this year than it was at this point last year? And the reason I ask is I'm just trying to see if there was some anomaly in 2014 -- and it's a great problem to have, when you beat your guidance by 60% -- but is there something in particular about 2014 that allowed that to happen, or is it theoretically possible for that to happen again this year?

No, it's theoretically possible that it happens again this year. We have about the same visibility. If you look at our lead times, it's not much different than it was last year, stretched out a little bit. But there's a lot of things going on. You've got what's going on with the economy, as freight demand begins to improve, all the initiatives that Dennis and his team have around converting the ownership accounts and the do-it-yourselfers and the good progress they're making there.

We take an estimate of what we think the pace of that is going to be. If it comes in better, then you're going to see that number improve, which is really what happened in 2014. We had given an estimate of 2,500 and ended up at 3,200. So right now, we think it's going to be north of 4,000 vehicles. And we'll see how that evolves as sales continue to come in over the next few quarters.

Perfect. And if I could add just one follow-up for John. And Robert, you had mentioned it before, but the 2% SCS growth -- and I know that's excluding fuel -- but what's the driver of why it's that low? Is that inclusive of customer specific volume throughput, or is that just a new business type of number?

It's a little lower than our long-term target. We've been saying for the business, 7% to 10%. We still believe that for the combined that's the right target, and we've been saying our Ryder Dedicated expectation is a little higher than the non-Dedicated piece. And you can see from our guidance that Ryder Dedicated expectation is still very strong. So we're a couple of points below for the non-Ryder Dedicated from our targets. And that's what we describe.

It's a couple things. It's the lost automotive business that was lost in mid-year; that effect is going to persist for the first half of the year. And then, as we pointed out in the information, is that there's a couple of -- actually about two or three accounts that are large-ish accounts that we're doing network redesigns for that's going to lower our revenue a little bit, a couple of points below our target, in the second half.

All right. Well, fair enough. Thank you so much

Thank you, John.

Ben Hartford, Robert W. Baird.

Good morning, guys. Could you provide some perspective on the full-service lease fleet growth in 2015 and some of the components where you're seeing demand, either from a vertical standpoint, from a customer standpoint, class types? Is there anything of note as it relates to the trends as you look at adding 4,000 vehicles in 2015?

And then could you step away. You talked about, Robert, I think in the prepared remarks, you talked about long-term growth within FMS trending toward high single digits as opposed to mid-single digit revenue growth. I'm assuming that comes on the back of fleet growth as opposed to pricing. Can you talk about how you see the cadence of fleet growth this cycle? Are we still in a situation where you can see momentum build in 2015 and potentially accelerate in 2016 from 2015 levels? I know a lot in there, but I'll let you tackle it.

Let me address first the sector growth. I think it's broad growth that we're seeing across all industry sectors. Clearly, it's what you would expect. As we've always said, we touch a lot of different industry sectors in the economy. So as you might imagine, we are probably seeing a little bit of pressure on some of the oil and gas stuff; but overall, where it comes to things related to consumer and end market spending, we're seeing growth there. I think as fuel prices have come down, that puts more money in our customers' pockets and allows them to maybe do some things that they otherwise wouldn't be able to do, so that's translating also into a positive.

And I think we're also beginning to see continued improvement in our efforts to convert the ownership accounts. As I mentioned, we've been doing about 30% of our growth has come from first-time customers to full-service lease. We saw that tick up a little bit in the fourth quarter. So we're encouraged by that. We made some adjustments to our own internal compensation plan for our sales folks to further encourage going after some of these ownership accounts. So we think all of those things are really helping to drive this really shift or change in the growth trajectory of the business.

So I think to your second question about is there an opportunity for accelerated growth beyond that? Yes, that's the plan, is that we are still in the early innings of making these conversions. Remember, it's 90% of the overall market that has still not outsourced. So the extent we continue to move and make progress on those conversion efforts, which I feel really good about, we're going to see that growth continue to accelerate for years to come.

That's good, helpful. Thank you.

David Ross, Stifel.

Yes. Good morning, gentlemen.

Good morning, David.

Dedicated's showing some nice growth. And I wanted to talk a little bit about the pricing of Dedicated contracts. For a while, one could say that they were under priced, in terms of earning an adequate return over the life of the contract. Where do you see pricing in the Dedicated segment right now? Is it where you want it? And then how long are the average deals that you're signing today?

The average deal is typically 3 to 5 years, with then they go evergreen after that. We tend to be able to hang on to customers, though, if we do a good job for them. I would say the pricing is always competitive in Dedicated. But I wouldn't say it's any more than what we've seen historically. Remember, we try to compete in the areas where we can really bring more value. It's not just dock door to dock door-type Dedicated. And we continue to see a lot of opportunity. Remember, as driver recruiting has gotten tougher, as all the regulations around private fleets continue to increase, we are seeing more companies that have been doing it themselves looking to outsource the Dedicated solution. And our unique position of having over 13,000 customers that we do business with on the fleet side and being able to convert those customers to Dedicated, I think gives us a real advantage and a leg up in that effort.

And have you seen driver pay pressure from your own recruitment to satisfy these Dedicated fleets? And if so, have you been able to pass that along to the customer pretty easily?

There's a little bit of pressure. But we have been able to pass along the increase -- we've been able to put through increases that we need to get the drivers we need. And by the way, our openings is down quite a bit from a year ago. And we've been able, for the most part, to pass through the wage increases in CPI, or rather price increases.

Excellent. Thanks.

Scott Group, Wolfe Research.

Thanks. Good morning, guys I wanted to ask about FMS margins. So with this acceleration in fleet growth, how are you thinking about margins at FMS this year? And Robert, if you're right that there's a few years of this accelerated leasing growth, where would you think FMS margins could peak at this cycle relative to last cycle?

Scott, I think it's hard to tell where they're going to peak. We said our goal here for the last several years had been to get back to that 12% to 13%. We hit 12% this year probably a little earlier than we expected, primarily due to the used vehicle sales benefit on the gain side. We won't have that going into next year. So you're not going to have anywhere near that type of an improvement. It was a 200 basis points, I think is what we saw in the year. So you're going to be way short of that. But again, continued improvement, though, in FMS earnings percentage and driven now more by fleet growth and improvements in the core product lines of FSL and Rental, as opposed to more of the used vehicle gains side.

So I think that's probably the change. You're not going to see a big jump up of 200 basis points anymore, but you're going to see continued progress and continued upward movement in margins.

Maybe a better way of asking that would have been, what do you think are the incremental margins on that fleet growth?

You talking about incremental margin percent?

Yes.

I think what we've talked about in the past is that if you take out gains from the equation and the impact of that, you're looking at 60 to 80 basis points improvement year-over-year. In this year, we're going to get some headwinds from gains, so it will bring that number down some. But I think as you get into more of a steady state, that's what I would be looking for.

Okay. And then the other question I had was, there's been some of the spot data that we can see in the first quarter, January wasn't particularly strong. And I know you guys have a good feel on near-term changes in the rental business. Are you seeing any changes, slowdown, acceleration? Are you seeing anything out there?

Scott, this is Dennis. The answer to your question is no. As we look forward, demand is remaining strong, utilization is strong. So we feel good about the way the year is starting.

Okay. All right. Thank you, guys.

Art Hatfield, Raymond James.

Good morning. Most of my questions have been answered, and all my other ones are actually on pension-related stuff, and I figure I'll just wait until the K comes out. But one question. Given the success of the buyout that you had this year, is that something that you guys would consider going forward to continue to reduce that long-term pension exposure?

Yes, absolutely, Art. It's going to depend on the funded status of the plan at the time, as well as what are the discount rates you have to use in the buyout offers. Here, there was an opportunity -- you've seen a lot in the marketplace now, because the discount rates that you could make in the offer were advantageous versus the current rate environment. So right now, that's probably not there, as we sit here today in 2015, but who knows down the road. And obviously, the pension plan has been impacted by the mortality and discount rate changes I talked about earlier, so funded status has dropped somewhat. So we need to see that come up a little bit before we look forward to doing more of these. But I think on an ongoing basis as part of our strategy, as we're putting more money into the pension plan, we want to be in a good spot 3 to 5 years down the road.

Sure. Can you explain real quick what you mean by the differential in the discount rate that is currently out there and the discount rate you use to do a buyout?

The current environment was about, let's say, low 4% discount rate environment for the liability. But in 2014, you were allowed to offer a settlement using, say, a 5% discount rate.

Okay. That's helpful. Thank you.

Thank you, Art.

Todd Fowler, KeyBanc Capital Markets.

Great. Thanks. Good morning, everyone. I wanted to make sure I understand what's going on with maintenance cost. That's been a tailwind as the fleet age has come down for the past several years. But in some of the commentary around the assumptions, it implies that the maintenance on the new technology might be shifting towards more of a headwind. Is maintenance now a year-over-year headwind, or is it just that the maintenance is going to step up but you're still getting a benefit from the lower fleet age?

I think we've been talking the last several quarters -- I really think most of 2014 -- that we feel we've gotten to the end of the benefit, if you will, as the fleet got younger. And I would say certainly in the second half of the year, if not for a good portion of 2014, maintenance costs have been more of a headwind on margins offset generally by maintenance initiatives that we have to get more efficient.

This is all tied together. Customers are coming to Ryder because this maintenance is getting more complex, it's getting more difficult. That's a great thing for our growth prospects. On the flip side, it's making our life harder. But Dennis and his team, I think, are doing a great job of dealing with it and managing it, and we've got plans to continue to do that here next year and into the future. We work very closely with the OEMs on this. And we think we're in the best position to deal with this added complexity. But yes, you've got it right. As we move forward, maintenance will be more of a headwind, as it's been in 2014, and we'll continue to work on initiatives to make sure that we keep it under control.

And then Robert, do you have the ability to adjust some of the lease pricing, as you get more information about your own internal costs to maintain the fleet and then can you go back and try and, as new leases are coming on, price the leases accordingly?

Yes, we do that prospectively on an ongoing basis. So as we learn more about maintenance, we adjust the pricing in the model. Clearly, you have the deals that you've signed. But I can tell you, over the last several years, each year -- and in some cases, even more than once a year -- we've made adjustments to the pricing to account for some of the maintenance cost increases that we've seen.

Okay. And then just my follow-up is, what should we expect from the cadence of the lease fleet additions in 2015? 2014 was obviously very back-end weighted. T sounds like you have good momentum based on what you saw in the fourth quarter. Is 2015 more consistent throughout the quarters, or should we expect the same sort of hockey stick on the lease fleet growth? Thanks.

I think if you look at the last couple years, we've seen the lease fleet really grow heavily in the last quarter and really grow the least in the second quarter. As we look at 2015, we're viewing it more flat. Probably second quarter still less than the other three quarters, but more level across first, third and fourth quarter. And again, we'll see how the second half evolves as sales come in in FMS.

Sure. Okay. That's all helpful. Thanks for the time.

All right. Thank you.

Jeff Kauffman, Buckingham Research.

Hello. It's actually Ryan Mueller on for Jeff Kauffman. How's it going?

Good.

I wanted to ask about the high utilization rates at Rental and how much of that high rate is lease customers waiting for their vehicles to become available?

With the growth that we've had recently, obviously, the await new lease, as we call it, has been strong. But we're also seeing, as we call it, pure rental that is strong. So as the economy has picked up, and as Robert said earlier, across all segments, you're getting both, frankly. You're getting increased demand that's coming from our lease fleet as it's growing and sales are strong, but you're also seeing, as we call it, pure rental that's increasing. So it's really both that's growing.

Okay. With the strong industry orders that we've seen over the past year, how do you view that in light of the strong demand you're seeing for lease growth, and then do you think these strong orders are driving more capacity into the market? I know it's driver constrained, but when you see these large orders numbers coming in, what do you think about it?

I think -- and I'll hand it over to Dennis -- but I think there's really strong correlation historically between the two. As more trucks are built, we're getting our fair share of those. So people are either buying trucks or they're leasing them, but as demand picks up, it picks up for everybody. And certainly, a good portion of what you see it from the OEMs, we're the largest purchaser, so we're certainly placing our orders, also.

I'd just add to that that when you look at our new orders, about one-third of them are coming from the private fleet conversions. So it's not necessarily capacity that's being added, it's a shift to leasing from the ownership market that's really driving a portion of our sales. And we expect to see that continue to increase.

Great. Thank you.

Okay. Thanks, Ryan.

Thomas Kim, Goldman Sachs.

Hello. In the back of the deck, you provide some good analysis on extensions and early terminations within the asset management side. And I'm wondering, can you talk a bit about the decrease in extensions and the increase in early terminations?

Yes. The decreases in extensions, I think as some of these vehicles have aged out and also as the new more fuel-efficient technology that the OEMs are bringing out, I think they're making it more attractive for customers to get into new equipment. So that may be a little bit of that. And on the early terminations, I would say it's not a meaningful increase sub. I think that's noise in the machine here. Because we have not seen anything that would alarm us on the early termination side

Okay. Thank you.

Kevin Sterling, BB&T Capital Markets.

Thank you. And John, congratulations on your pending retirement.

Thank you.

Robert, the growth in e-commerce we've seen the past couple of years, is this possibly making your fourth quarter maybe a little bit stronger than years past? How are you guys thinking about that impact on your business?

Yes, I think, clearly, when you look at our rental performance in the fourth quarter, certainly a portion of that was these parcel companies that really had a push for rental equipment in the fourth quarter. Go I would say, yes, in the fourth quarter, we benefited from that. But if you look at the whole year, Rental was strong through the entire year, and different sectors really driving different quarters. So I would say, yes, it has contributed to the fourth quarter, but I think the overall story is that we are seeing strength in the rental market really across most all sectors, with maybe recently a slowdown a little bit in the oil and gas area.

Okay. Thank you. How much exposure to you have to the oil and gas industry?

2%? I think 2% of our business is oil and gas, so not a big exposure.

Not big. Okay. And last question here, are you seeing any impact in maybe SCS or any other of your business lines from the West Coast ports disruptions?

The port disruptions, John?

No. We see some customers have routed around the West Coast, either to Prince Rupert and the Pacific Northwest or to Mexico. And we help some of our customers do that, and we arrange transportation and help provide a solution to get their inventory to where it needs to be. But it's not a big driver in our financial results one way or the other.

Okay. Thank you for your time today.

Thank you.

Justin Long, Stephens.

Thanks and good morning. I'll just ask a quick one, because I know we're about out of time. But I was curious on the SCS segment, could you speak to the margin expansion that you're assuming in the 2015 guidance? And looking ahead, do you have a longer term margin target for this business?

Well, the margin expansion is driven by two things, primarily, recovery in the Supply Chain sector from some of the challenges we had in 2014, and then the growth in Dedicated, on the Dedicated side, and better productivity. So you're going to see improvements there. We have historically said that our goal for margins, as the way we were measuring for Supply Chain, was 6.5% to 7%. And that was using our old definition for operating revenue which included fuel. If you back out fuel, you probably have to add 100 basis points to that, so we're probably more like 7% or 8% under the new measure. And I think that's going to be our target, really, across both. You'll see Dedicated and Supply Chain, not huge differences in the profitability percentage of those two. You'll be getting that here in the next month or so. So our targets really remain the same, just adjusted for eliminating fuel from the top line.

Okay. Great. That's helpful color. Thanks, Robert. Appreciate the time

Matt Brooklier, Longbow Research.

Thanks. Good morning. I'll squeeze in a quick one here. I think John may have alluded to it earlier in the call, but trying to get a sense for if the overall driver market has improved? And is that part of, it has improved, part of the more optimistic outlook in terms of your growth at Dedicated this year?

I would say it's kind of settled down over the last few months. The driver shortage we've seen is a long-term thing, and it's been more or less severe almost over 20 years, in different periods of time. Right now, it's not so bad. Like I mentioned earlier, our number of openings is down and our time to fill jobs is improved, as well. We don't really expect any major change, though. I would expect in the summer, if the economy stays strong, we're going to see the driver shortage heat up again. We've done a lot so that we can improve our recruiting and make that a competitive advantage. We think a tough driver market, while it's a little bit of a cost pressure, it's a good reason to outsource. And so I think the driver market for a long time will be an incentive to outsource and drive growth.

Okay. And then just to dig into a little bit the improvements that we are seeing right now, do you think that it's more seasonal and that things are going to get tight again as we move through this year, or do you think part of it's structural and maybe part of it's the wage increases that we've seen throughout 2014 that's helping the driver market settle a little bit and maybe attracting incremental employees?

I can just give you my sense, because I can't really prove any of it. But my sense is the wage increases pushed through by truckload carriers led to some movement earlier in the year, and that's kind of settled down. And then there is always a seasonal impact this time of year, with construction being down, that removes some of the pressure from driver hiring and driver turnover. And it could be maybe there's some oil and gas impact. It's not clear. And then we also saw earlier in the year, we saw rail shortages spill over into truckload, and that also creates tension in the driver market. So all of that is kind of settled down. But like I said before, I think that's temporary and I do think we're going to see driver shortages for some time, and it will flare up and get much worse when the economy's stronger.

Appreciate the color. Thanks.

Casey Deak, Wells Fargo.

Thanks for getting me in. The $0.23 headwind you guys are seeing in strategic investments and other for 2015, how much of that can you relate to the rollout of On-Demand maintenance, any systems integration that you're doing there, getting the billing practice straightened out?

I think a small part of it. I would say on the IT side that we've spent some money this year and will have a little bit of continued spending in 2015. But no, I think a lot of it is if you really break it down, there's some additional IT work we're doing, primarily in FMS around our maintenance system to make us more efficient and make it more seamless for our customer. There's more money that we're spending on salespeople, adding folks to our sales force to help drive some of the growth, and then also some of the marketing spend. As you know, we've ramped up our marketing efforts here over the last year and half, and we're beginning to see some nice benefits from that. So we expect to continue to make some investments there. So it's really investments in things that are going to help drive growth

Okay. That seems that still remains pretty much incremental on top of your network. So with the On-Demand maintenance, the contract-related maintenance growth at 4% this quarter, I was expecting a little better from there. Can you give an update on the customer count that you're seeing in On-Demand maintenance and what you expect in 2015 and if you're ahead of schedule or not?

Yes. Casey, this is Dennis. And the answer is we're ahead of what we expected for this year. I think we had told you around 20, and we're north of 30, in terms of customers. We haven't been driving it real aggressively, because we wanted to make sure that the billing process was in order. And we expect mid-year this year to really put a push on. And the interest, especially from larger fleets out there who are running units across the country and looking for somebody they can go to to give them consistent quality, consistent pricing for outsourced maintenance, we're real attractive to those customers. So we're seeing a lot of demand, and you're going to see us really push aggressively in the middle of the year. So we see it as being a favorable environment for On-Demand growth

All right. Thanks, guys.

Thank you.

John Mims, FBR Capital Markets.

Thanks. I had a follow-up, but I'm good. I'll let you go. Thank you, guys

All right. Thanks, John

Todd Fowler, KeyBanc Capital Markets.

Thanks for taking the follow-up. The question is on the cash flow guidance and really the CapEx. In 2015, are you getting towards the end of lapping the two emission standards for upgrading the fleet, or do you have more of that to go into 2016 and going forward?

Yes. There's a little bit more to go, I guess. Obviously, we're going to start replacing more 2007s and 2008s, as we go forward. But I would tell you that there has been decent OEM inflation on the costs even outside of the big changes in 2007 and 2010, so there's still a decent amount of inflation we're going to be seeing on vehicles. Obviously, it will be less than what we have now if we're replacing an 2006, but there's still going to be some decent inflation there.

Is there a way to think about the $400 million of higher per unit investment, how much of that's related to emissions versus cost inflation?

It's probably two-thirds is emissions, I'd say. We may say it come down by one-third.

Okay. Good. That's what I was looking for. Thanks for the additional time.

Thomas Kim, Goldman Sachs.

Thanks for letting me have another one here. Robert, I think the last time we talked about how national accounts were reducing your commercial run rates during the course of the year. And you're spot on, the overall run rates came in at about 4% for the year. And then specifically looking at the fourth quarter, it was sub 3%. And so as we think about your rental pricing momentum, should we assume that fixed rental rates will continue to hover around this 2%, 3% range and then see an acceleration after some of these national accounts lap in the fourth quarter?

Yes, remember, we talked about -- in the fourth quarter, we talked about something unusual was happening, in that we had extraordinary demand from some of our large national customers, a lot of these parcel companies. And we said that we were going to be muting a bit of the pricing growth rate because of that. But we were going to have higher utilization, because the customers took the vehicles early. That is exactly what happened. If you look at our utilization, it was north of 80%. So I would say that's a bit of a one quarter issue. For the balance of the year, though, expect to see continued pricing increases into 2015, probably more like the 4% rate, I think, for the year is what we're looking for for 2015. So again, continue to clip, if you will, that we saw in full year 2014.

Great. Thanks for that additional color

All right. Thanks, Tom.

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

Okay. Well, we're 10 minutes past the hour. I think we were able to get everybody that was in the queue, along with the follow-up questions. So hopefully we've got all the questions answered and got clarity around the results. So I appreciate everybody being on the call and look forward to seeing you here in the next several weeks as we get out to conferences. Bye-bye.

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect at this time.