萊德系統 (R) 2015 Q1 法說會逐字稿

Good Morning, and welcome to the Ryder System, Incorporated first-quarter 2015 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 now 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 first-quarter 2015 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 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; John Diez, President of Dedicated Transportation Solutions; and Steve Sensing, 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 first-quarter 2015 results, review the asset management area and discuss the current outlook for our business. Then we'll open up the call for questions.

With that, let's turn to an overview of our first-quarter results. Comparable earnings per share from continuing operations were a record $1.08 for the first quarter, 2015, up from $0.92 in the prior year. This is an improvement of $0.16 or 17%. Our results came in above our first quarter forecast range of $0.95 to $1.00. The beat was driven by better-than-expected rental demand and execution on our maintenance productivity initiatives, partially offset by foreign exchange and higher insurance costs.

Also contributing to first-quarter outperformance was a net benefit of $0.03 from an atypical fuel margin benefits and other one-time items, as well as $0.02 in planned marketing spending that was delayed to later in the year. First quarter comparable at results exclude nonoperating pension costs of $0.06 and professional fees of $0.02 associated with cost savings initiatives. Operating revenue, which excludes fuel and subcontracting transportation revenue, was up by 5% to a record $1.3 billion for the first quarter and grew in all business segments. As a reminder, beginning this quarter operating revenue now excludes fuel revenue for all three business segments.

Excluding the impact of foreign exchange, operating revenue grew at 7% for the quarter. Total revenue declined primarily due to lower fuel costs passed through to customers. Page 5 includes some additional financial information for the first quarter. The average number of diluted shares outstanding for the quarter was consistent with the prior year at 53.1 million.

During January we bought 69,000 shares at an average price of $88.84 under a 2 million share anti-dilutive repurchase program announced in December of 2013. To date we've purchased 1.4 million shares at an average price of $80.74 under this program. Following January's repurchase activity, we temporarily paused additional share repurchase through at least midyear, as our balance sheet leverage is nearing the high end of our target range. We are evaluating the timing for resuming anti-dilutive share repurchases in the second half of the year.

Excluding pension costs and other items the comparable tax rate was 37%, slightly below our prior year. The spread between adjusted return on capital and cost of capital increased 30 basis points to 120 basis points. On a full-year basis we now expect this spread to be in the range of 140 to 150 basis points, which is above our prior forecast range of 130 to 140 basis points.

I'll turn now to page 6 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions operating revenue, which excludes fuel, grew 5%, driven mainly by the growth in full-service lease and commercial rental. Excluding the impact of foreign exchange, FMS operating revenue was up 7%. Full-service lease revenue increased 5%, or 6% excluding foreign exchange, due to higher rates on replacement vehicles, reflecting the higher cost of new engine technology and fleet growth. On a year-over-year basis, the lease fleet grew organically by 4200 vehicles including the planned reduction of 400 low-margin trailers in the UK.

Excluding the UK trailer impact the lease fleet grew by 4600 vehicles year over year. Sequentially from the fourth quarter the lease fleet increased by 2000 vehicles, which exceeded our expectations. In addition, we had record first quarter lease sales, which provided us with continued momentum for lease fleet growth. Based on the strong sales activity in our pipeline we are increasing our full-year forecast for lease fleet growth by 1000 to 5000 vehicles.

Miles driven per vehicle per day on US leased power units were unchanged versus the prior year and continue to run at normal historical levels. The average age of our lease fleet has leveled off as expected, following declines over the prior two years. Contract maintenance revenue increased 5%, reflecting sales activity from last year. Our contract maintenance fleet grew organically by approximately 4800 vehicles from the prior year, and is up 1000 vehicles sequentially.

Contract related maintenance revenue decreased 5% from the prior year, reflecting lower levels of ancillary and transactional maintenance work. Included in contract related maintenance are 6500 vehicles serviced during the quarter under on-demand maintenance agreements.

This number is up 16% sequentially, although it declined year-over-year due to less activity with an individual on-demand customer. We continued to see good market receptivity to this service and have good potential for future revenue growth, as we further develop activity within already signed accounts. We're finalizing the implementation of system and process enablers to support the broader rollout of this product and remain on track for our planned midyear launch.

Commercial rental revenue was up 8% for the quarter, or 10% excluding FX. The increase was driven by higher-than-expected demand and improved pricing in North America. The average rental fleet grew by 5% from the prior year. Rental utilization on power units was 73.4%, which is consistent with the prior year and reflects ongoing favorable demand trends in rental. Global pricing on power units was up 5%, which is above our expectation of 4%.

In used vehicle sales we saw strong demand in pricing. I'll discuss those results separately in a few minutes. We realized an atypical benefit in fuel margin in the quarter, due to the rapid and significant fall in fuel prices, as wholesale prices fell more quickly than retail prices. We do not expect a similar earnings benefit in the coming quarters.

Overall, FMS earnings increased year-over-year due to strong rental performance, higher full-service lease results and increased fuel margin. Commercial rental performance benefited from higher than expected demand and higher pricing on a larger fleet. Better lease results reflect residual value, benefits and fleet growth. Higher year-over-year earnings were partially offset by one-time benefits in the prior year.

Earnings before tax in FMS increased 17%, reflecting nice leverage on revenue growth. FMS earnings as a percent of operating revenue were 10%, up 100 basis points from the prior year and better than expected.

I'll turn now to Dedicated Transportation Solutions on page 7. Operating revenue grew by 6%, due to new business and higher volumes. Total revenue was down due to lower fuel costs passed through to customers. Operating revenue is being impacted in the first half of the year due to the timing of new sales and the ramp-up period of some accounts. We anticipate operating revenue in the second half will be at or near double-digit levels.

DTS earnings increased due to new business and higher volumes, partially offset by higher insurance cost. Segment earnings before tax as a percent of operating revenue were 5.4%, down 20 basis points from the prior year. Higher insurance costs negatively impacted EBT margins by 100 basis points. Longer-term, we are now targeting DTS pretax margins on operating revenue to be 8% to 9%, up from the prior target of 7% to 8%. We anticipate margin improvement to come from growth and leverage on our infrastructure, opportunities to drive efficiencies in the Dedicated model and addressing a handful of low-margin accounts.

I'll turn now to supply chain solutions on page 8. Operating revenue grew 4% due to new business and higher volumes, primarily in technology in the Technology and CPG industries. Higher-than-expected volumes were partially the result of rerouted shipments due to the West Coast port disruption. Partially offsetting these increases were lost business from the prior year in the automotive industry, and FX.

SCS operating revenue grew 6% excluding foreign exchange. SCS earnings before taxes were up 20%. The increase was primarily due to new business, higher volumes and lower startup costs partially offset by higher insurance costs. Segment earnings before tax as a percent of operating revenue were 5.3%, up 70 basis points from the prior year.

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

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 10, first-quarter gross capital expenditures were just over $650 million, up $57 million from the prior year. This increase reflects planned investments in our commercial rental fleet in light of strong demand. We realized proceeds primarily from the sales of revenue earning equipment of nearly $100 million. That's down about $30 million from the prior year. The decrease reflects a lower volume of vehicles sold, while pricing remains strong.

Net capital expenditures increased by 19% to $556 million. Based on strong demand in rental we plan to invest an additional $80 million for growth of an additional 1000 vehicles, or 2% in our rental fleet. This will increase our forecast for gross capital expenditures to $2.63 billion for the full year, up from our prior outlook of $2.55 billion.

Turning to the next page, we generated cash from operating activities of around $280 million for the quarter, up by $40 million from the prior year. This increase was driven primarily by higher cash-based earnings. We generated approximately $390 million of total cash during the quarter, up $11 million from the prior year as higher operating cash flow was offset by lower sales proceeds.

Cash payments for capital expenditures decreased by $25 million to $553 million for the quarter. The Company's free cash flow was negative $162 million for the quarter, above the prior year of $198 million. With the additional rental fleet growth now planned, free cash flow is expected to be negative $380 million for the year, as compared to our prior forecast of negative $300 million.

Page 12 addresses our debt to equity position. Total obligations of $4.9 billion increased by $184 million from year-end 2014. Total obligations as a percent to equity at the end of the quarter increased to 270%, up from 259% at the end of 2014. Leverage increased due to vehicle investments and a currency translation adjustment of $57 million during the quarter. Which resulted in lower equity.

With leverage currently toward the higher end of our target range of 225% to 275%, we elected to temporarily pause our anti-dilutive share repurchases during the quarter and will evaluate the timing to resume repurchases in the second half of the year. We now forecast leverage at year end in the 260% to 270% range, as compared to our prior forecast of 260%. This includes the impact of our increased capital expenditure forecast and the timing of anti-dilutive share repurchase resumption. Equity at the end of the quarter was $1.81 billion, down $7 million from year-end 2014, primarily impacted by currency translation adjustments offsetting earnings.

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

Thanks Art.

Page 14 summarizes key results from our asset management area. Used vehicle inventory held for sale was 5800 vehicles, down from 7200 units in the prior year, and 300 units above the fourth quarter. Used vehicle inventory was slightly below our target range of 6000 to 8000 vehicles. Pricing for used vehicles was strong for both tractors and trucks. Compared with the first quarter of 2014, proceeds from vehicles sold were up 14% for tractors and up 11% for trucks.

From a sequential standpoint, tractor pricing was up 2% and truck pricing was up 8% versus the fourth quarter of 2014. We saw improved pricing in all used vehicle sales channels. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by 55 units, or 4%, and remained below recessionary levels. Early termination of leased vehicles increased by about 80 units and also remained well below recessionary levels.

I'll turn now to page 16 to cover our outlook and our forecast. We are pleased to start 2015 with such a strong quarter. We're particularly encouraged by continued momentum in lease sales and fleet growth, strong rental demand trends and good execution in our maintenance initiatives. In full-service lease we've had 2 consecutive record sales quarters and with a robust pipeline we are raising our forecast for fleet growth by 1000 units, to 5000 vehicles. We're continuing to see a modest uptick in the percent of lease sales coming from first-time outsource customers, with the average over the past year at around one-third of new trucks sold.

In rental we plan to modestly increase the size of our fleet based on strong demand conditions. We now expect our full-year average fleet to grow 5%, while our outlook for rental pricing remains at about 4% for the year. In on-demand maintenance we are pleased to continue strong maintenance receptivity in our new service. We are completing the implementation of IT and process related work to support a broader launch of this product. We continue to sign new fleets under on-demand maintenance agreements, with over 40 customers signed to date, and are focused on driving increased levels of maintenance activity with fleets already signed.

We are pleased with the progress we've made in our maintenance productivity initiatives and continue to find ways to mitigate higher maintenance costs associated with new engine technology. The strong used vehicle pricing results that were realized in 2014 are benefiting depreciation rates this year, as these results have blended into our vehicle residual value calculation. We continue to see strong proceeds across all sales channels and good demand conditions.

In supply chain we saw stronger than anticipated revenue in the first quarter. We're focused on driving higher sales to offset some of the customer network redesigns that were forecast to pressure revenue later in the year. We continue to expect strong earnings improvement in SCS, as we moved past some of the challenges from last year in that segment.

In the Dedicated segment we continue to see good sales activity supported by macro trends and Company specific initiatives. We expect DTS operating revenue to grow in the mid-single digits for the first half and at or near double digits in the second half of the year. Our second-quarter comparable EPS forecast is $1.58 a to $1.63, versus the prior year of $1.44, and reflect the impact of higher expected insurance costs in DTS. Based on our strong first quarter performance and outlook, we are increasing our full-year comparable EPS forecast to a range of $6.40 to $6.55, up $0.15 from $6.25 to $6 40. This represents a year-over-year increase of 15% to 17%.

That concludes our prepared remarks for this morning. At this time I'll turn the call over to the operator to open up the line for questions. In order to give everyone an opportunity, I'd ask that you limit yourself to one question and one related follow-up if clarification is needed. If you additional questions you are welcome to get back in the queue and we will take as many calls as we can.

Operator?

(Operator Instructions)

Todd Fowler, KeyBanc Capital Markets

Great thanks, good morning everyone and congratulations on a good start to the year

Thank you Todd.

Robert, maybe just to start with the increase in the guidance and you've given us some broad brushes, but if we think about the $0.15 at both ends, can you help us think about the buckets that are driving that? How much of that will be rental, how much of that would be FMS? And it also sounds like there's some headwinds on the insurance side. How much is insurance working against you in the $0.15 increase?

The beat in the forecast, or the raise in the forecast is primarily coming from FMS. And I would say that's really spread across rental, which we continue to see benefits there, and full-service lease where we're seeing the lease fleet increase. As well as we're also getting better than expected maintenance cost improvements.

So really the combination of those three, you can almost look at them as evenly spread across those, what's driving the benefit. There is some headwind for insurance. That's TBD, but we're probably looking at, for the next quarter, $0.01 or $0.02.

Okay that helps. And it looks like the gains are at least maybe up a little bit, kind of flattish year-over-year. I think in your original guidance you actually had them being about a $0.07 headwind. Are gains now, used equipment gains, trending better than what you were expecting with your initial guidance and it is that factored into the updated guidance here?

They're really not trending a whole lot better, it's really the balance of the year where we expect to get more headwinds. We still think that's coming, that's baked into our forecast.

And just for my follow up, with the leverage where it's at right now it's a good problem to have or least the reason why are having that problem is good on the CapEx side. Are there any other levers you can pull with respect to cash flow, other than you suspending the anti-dilutive share repurchase to adjust the leverage on a near term basis? Is there anything else you can do from a balance sheet or from a cash flow perspective, sales leasebacks or anything that can help the leverage near-term?

While we have some sale leasebacks certainly planned, but that's not going to affect it significantly. I think also as you might imagine, a lot of our capital is really for vehicles, for lease and for rentals. There aren't too many other levers, I'll ask Art if there's anything else

Todd, Robert's right. Sale leasebacks shouldn't affect the leverage metric overall. As we look forward it depends what happens with pension. That maybe a lever if it turns in our favor, as we look forward. And also just the business itself around working capital, the better we can manage working capital that will also help leverage.

Okay but it's timing for now, it's investing in the fleet and the cash flows come later on

Absolutely. This is all good stuff because we're really seeing record lease sales and that's what driving the capital, along with strong rental demand, which is also driving some additional capital

Okay thanks for the time this morning, congratulations

Scott Group, Wolfe Research

Thanks, good morning. Wanted to ask you about the on-demand, and I know I think you said you were planning a broader rollout in the middle of the year. Can you tell us how big of a market is this potentially for you and how quickly do you think the revenue can ramp? And any color you have on the margin profile of the business?

Let me just answer briefly, so you know where we're at, we've been talking about a midyear rollout here probably since last year. There's a lot of IT and process work we need to get done. The IT work is done, it's been rolled out and were now really working on the process and making sure we've got the right engagement from the field on all of this. We feel we're pretty well-positioned for a midyear rollout.

The market for this we think is pretty significant. And if you think about 8 million vehicles, there's only about 10% that are currently outsourced. The rest of those are doing maintenance somewhere with somebody. They are either doing it themselves or they're going to a dealership and that's the market that we can tap into for this. And I'll let Dennis elaborate on it, but because we're really focusing initially on some of the very large fleet that otherwise would not be doing business, would not be full-service leasing. So we think there's an opportunity to get in with them.

Scott, I would just add that there's a lot of interest in these large fleets. When you think about running your fleet across North America and dealing with hundreds, if not thousands, of other vendors and being able to go to more of a one-stop shop with Ryder where you've got consistent quality and potentially lower cost in getting better uptime, there's a lot of interest. So we've been preparing ourselves to handle that demand, we're pretty excited about it and we'll be rolling it out in a larger way here midyear.

You asked a question about how quickly we think it can ramp up, one of the things that we are learning we've been working on this for a couple years, is that you have to first sign the customer and then you've got to get the trucks to come in. We think we're pretty well-positioned for that, because we've got a pretty broad field operation. We've got people locally that can speak to the local managers to get the vehicles in.

But it is a two-phase type process that we are currently working on, even for the 40 customers we have to get that volume. So we think the volume for the 40 still has a lot of opportunity and we're going to be working on that and really hoping to drive some in the second quarter. I'm sorry, the second half, increase in on-demand.

And margins?

Margin is, without getting into the details, I would expect it slightly higher than what you see in our current, which is 30%. If you look at our rental and lease margin, gross margins are about 30%. So we would expect this to be higher.

But obviously less commitment from the customer and also less revenue per vehicle, because we aren't going to be doing all the maintenance on the vehicle. We're just going to be doing smaller pieces of it.

Okay. And then in terms of the rental fleet, I understand things feel really good, this is historically a segment where things can turn quickly and maybe we're getting a little bit later in the cycle. Talk us through the rationale of why you feel comfortable adding to the fleet now and then how quickly you think you could turn off that spigot if you need to?

Let me address first the cycle issues. I think this cycle is been very different than any other cycle, at least since I've been with the Company. It's been a much slower recovery since 2009, and much more elongated. I would tell you even though we have had a pretty good economic environment, it still feels like we haven't really had a strong recovery yet. So we're seeing very good demand trends across many sectors. I wouldn't say it's not even just one.

And we're seeing broad increases in demand, so I think that's what's making us more comfortable. We do some econometric modeling and that econometric modeling shows even with we're now 2.5% to 3% GDP growth that we should have the demand to cover the vehicles we're adding.

Dennis, can you add more color?

Yes. Scott, first let me address the demand side in what we are seeing. With the lease fleet growth above what we had originally forecast, we've got to support those vehicles with rental vehicles. So that's one driver of the demand.

Next you've got on-demand that we just talked about; as it increases you've also got a need by those customers for rental vehicles. And finally, as we looked at our turn downs in the first quarter they were above where we like them to be. And we wanted to lower those for customer satisfaction purposes and revenue we were leaving on the table, so that's the demand side.

In terms of turn down, being able to respond to that, we've got two major levels to pull. First is to outservice or get vehicles prepared for the used vehicle sales when they are older in the rental fleet and we've been delaying a lot of that because the demand has been so significant. When you look at used vehicle inventory, it's at the low end of the range, it's below our target range of 6000 to 8000.

We thought we could quickly defleet through the out serving process. In addition we're able to take those used vehicles in rental and sell them into a lease application if we want to defleet, and not backfill the rental unit. So we've got those two levers to pull. And in 2012 when we saw a downturn in demand, we did just that. And it took us well under six months to get the fleet right-sized. So we feel pretty comfortable with our position to rightsize the fleet quickly.

Okay, thank you.

Thank you, Scott.

Thomas Kim, Goldman Sachs

Thanks. I wanted to ask a follow-on with regard to rental. It's great to see that this business is doing well, I'm curious in terms of the timing of delivery of the CapEx and where the trucks you are planning to deploy them in terms of region or industries?

Thomas, it's Dennis. First, in terms of delivery we will see a few of them in the third quarter and the majority will be in the fourth quarter, in that third and fourth quarter so we will see the impact in the second half. In terms of the demand, we're seeing it across the US and Canada. So we'll be deploying them to all of the regions and we're seeing it, as Robert mentioned earlier, across several industries. So it's broad brush in terms of the demand increase.

You'll see it really help us during the peak holiday season

Okay, that's helpful. And I guess I'm just wondering what is your theoretical maximum utilization rate? I'm wondering how much could you actually continue to sweat the assets and maybe drive-up utilizations to an 80%, 85% and then perhaps try to keep your CapEx down? I think we've talked about this before, but if you could remind us what you could potentially due to maybe drive utilization higher?

Let's talk about utilization over the whole year. I think you've seen when we get up in that high 70%s utilization, that's when turn downs that Dennis just alluded to start to get too high. So our existing customers aren't able to get access to our rental trucks, that becomes a problem for us. We think that high 70%s is probably the upper limit. High 70%s, once you start touching 80% you're probably getting too high and the turn downs are too much.

Great, thanks so much, I'll get back in the queue

Thanks.

David Ross, Stifel

Good morning gentlemen.

Good morning David.

Can you talk a little bit of SCS, how much of the lease fleet growth is due to better than expected growth at SCS and Dedicated, or just overall how much the growth in supply chain and Dedicated are driving the lease fleet growth? And just a clarification question, in SCS on the insurance costs I would've thought insurance costs was a bigger issue in Dedicated, not supply chain, so where those are coming from, whether it's BID, Worker's Comp or something else?

Lease fleet growth, supply chain and Dedicated combined are about 10% of the FMS lease fleet, so I think it's been growing proportional, I don't think there's been a disproportionate amount. When you combine the two I don't think there's been a disproportionate amount of growth. And Art, can you answer the question on insurance?

Yes, around the insurance, David, it's more a function of supply chain of the prior-year we had favorable development in prior year claims, whereas this year we didn't see that same favorable development. So it wasn't so much that the current year was going the wrong way we just didn't have as much of a positive, year over year.

It was in both vehicle liability and workers comp

Okay thanks

Ben Hartford Robert W. Baird

Good morning.

Good morning Ben

With regard to the leverage, in the comments around the leverage here, does it preclude any sort of acquisition? We haven't spoken about acquisitions in a little while, we've been focused on the lease fleet growth, obviously you have momentum there. Just wondering if there were an opportunity for an acquisition within FMS to materialize, does the current state of the balance sheet preclude that type of opportunity? Can you address that?

Ben we don't see it as really being a constraint. Remember, the FMS acquisitions are typically accretive immediately, there's low integration risk. There's not a whole lot of risk in those and we don't see leverage levels that we're at now to be an issue.

Okay. And are we any further or closer to a potential deal on the FMS side? It's been a little while since we have addressed it, so I know they come as they come, but how do you feel about potential acquisitions?

Well, you know Ben, I can't comment on anything like that. But I can tell you they do come as they come and we are certainly always the first -- we're typically the first one that's going to be called when one is available, and we're pretty good at doing these deals when the time is right. We're certainly ready for them, it's just a matter of when the sellers are ready

Okay. If I can get one quick follow-up on the used the truck sales side. What is the mix of retail versus wholesale disposal this quarter at relative to a year ago? And maybe can you give us a target as to what you're expecting for the full-year? And what is embedded in guidance?

Dennis?

Ben, we were at 74% for the quarter and that's up 500 basis points year-over-year. Our target is north of that 70%, in that range, so we are right there right now and obviously with inventory being low, we continue to push more of a retail mix and benefit from the proceeds.

Okay that's helpful thanks

John Mims, FBR Capital Markets

Hi, thank you, good morning

Good morning John

Robert, let me ask you on the lease fleet guidance opening it to 5000 trucks, how are you thinking about the sales pipeline? So if you did 4600 in the first quarter, just trying to conceptualize if that's a front end loaded sales cycle to see the benefits over the course of the year, or if that's a number that could theoretically just keep ticking up every quarter as you get closer to closing these deals in the back half?

Remember that if you think about last year it was pretty lumpy. You had some growth in the first quarter, then we were down in the second, slightly down, and we really started growing in the second half of the year. So the year-over-year comps get tighter in the second half. But the 5000 is based on what we have seen today and some expectation for the balance of the year. Could it get better? Absolutely, but we're early in the year, so we still have to let the year evolve.

John, also keep in mind the 4600 I think you are referring could be the year-over-year increase in our fleet. So the fleet itself is up 2000 units in Q1 and our full-year target is 5000, so we still has some work to go to get to the 5000

Sure, that's fair. And let me ask you too on the guidance in regards to the on-demand rollout at some point in the middle of the year. Is that included, is any kind of accretion from that included in the guidance now, or is any ramp-up you that would see in the back half of the year gravy on the guidance?

That's included. Remember, if you remember on the last call we had a waterfall, we had about $0.15 coming from on-demand and other things, so that's consistent. We are still consistent with that amount.

Okay, so no changes there?

No changes

Great, thanks a lot

Thank you.

John Barnes, RBC Capital Markets

Good morning.

Good morning, John.

On the maintenance side, have you been approved yet to do any warranty work for the OEMs. Or is the third party maintenance going to be non-warranty oriented stuff?

Dennis?

John, we have been approved for warranty work.

Can you elaborate on which OEMs?

No. I don't want to get into that, but we have been approved for warranty work and we're doing that today

The OEMs that you have been approved for is that more or less than 50% of the nameplates that are out there?

I would answer it this way: the majority of the nameplates that we have in our fleet and that we typically do business with.

That's helpful. Thank you.

Can you talk a little bit about, in terms of the rollout of this, can you talk about how you do it, number of locations at a time? Is it kind of a phased in deal? Is it the entire network that you are doing this through? Can you elaborate a little more on that?

John, what we do is, again we are targeting large fleets and we'll negotiate with the given customer a labor rate and a parts rate and the labor rate is based on geography. And once that's established we open up literally the entire network.

Now some of our shops are more prepared than others and that's exactly what we've been working on. And then it gets down to working the change management if you will on a decentralized basis, where you get fleets comfortable with using our shops versus the vendors that they were using historically.

We liken it to what we did with national rental several years ago, where we would sign a national rental agreement and then you need to literally sell locally those customers to utilize your rental capability, even though you have a national headquarters negotiated agreement, you've got to drive demand locally and that's literally how it works with on-demand. We find a national headquarters-driven agreement and then we need to get folks comfortable with our maintenance on a local basis, and that's exactly what we are doing.

Very good. Good color. And then my last question, on the rental you were talking about taking delivery, most of the increase in rental equipment some in 3Q, but a lot in 4Q, what tides you over between now and then to meet those needs? Do you anticipate maybe slowing down the number of vehicles being pumped through the sales channel? Do you put any of that equipment coming off a lease into rental for a short period until you take delivery of this equipment? How do you go ahead and start not missing some of the revenue opportunities that you talked about?

You read our playbook. We do just that. We take units coming off the lease and we won't out service them; we'll put them in the rental fleet if they've got more life.

We will delay the out servicing of units, which we're very cautious of, because we've got demand, obviously, in the used vehicle side, and at the lower-end of the inventory target range that we've got. But that's exactly what we do. To increase units available for rental we'll do a lease to rental, so units coming off lease we'll put them in the rental fleet and we'll delay the out servicing of older pieces of equipment in the rental fleet.

Should we then slow down the amount of forecasted truck sales given that? I'm just trying to get an idea on the gives and takes in the model if you are keeping more for rental, then maybe slowing down on the sales side. How best to model that?

John that's in the math already. Used vehicle point of view, we've already factored that in.

Very good, nice quarter, thanks for your time

Thanks John.

Matt Brooklier, Longbow Research

Thanks and good morning. Can you just remind us the fuel service revenue and the profits related to that? Is that all reported within FMS, or is there some fuel profits that get booked as SCS or DTS?

Well, in terms of where they get booked there is some that gets book in DTS and supply chain and it gets eliminated total. But it all runs through FMS. And in terms of what happened in the quarter, I'll just elaborate a little bit on that, is that there was a big drop in fuel pricing. When there's a significant drop that quickly, usually wholesale prices drop quicker than retail.

We do have some of our customers that are on more of a market-based price, think about our rental customers and things like that, and we got a benefit, a one-time benefit I would say because of that rapid drop. But we don't expect that to recur. And typically when it goes the other way, retail moves up more quickly in line with wholesale.

Okay. And then Robert, I think you mentioned there was some benefit from West Coast port congestion situation and what you do in SCS. I'm just curious to hear that was meaningful in terms of SCS margin in the quarter?

I wouldn't say it's very meaningful. It certainly had some benefit because of the disruption. When things get a little hairier in our Business it usually gives an opportunity to show what we can do, and this was one of those cases. No. I wouldn't say it was a meaningful number and I'd say we really expect that to be primarily behind us going forward.

Okay. And then you touched on it in terms of the rental fleet maybe getting a little bigger this year. Part of that is to support what's going on in the on-demand push that is going to pick up as the year progresses. So it sounds like we're getting some opportunities to cross sell the commercial rental product into these on-demand customers. Maybe if you could just touch on some of the other products that you potentially see as a good fit for these on-demand customers and the cross-selling opportunities there?

You have the right idea. It's really increased demand, not only from on-demand but also from our new lease customers also have been driving that. In terms of cross-selling opportunities, Dennis do you want to go through some of the --?

As you have customers coming in for our maintenance, Matt, we also could sell them fuel, for example, and then as they get comfortable with the quality of our maintenance, they get to know us. Then we look at contract maintenance and even selling up the full service lease, where maybe they weren't interested in it before. It really is an opportunity for us to open up the door to that 90% of the market that doesn't outsource today and sell them on our variety of services.

Excellent, I appreciate it.

Thank you Matt.

Justin Long, Stevens

Congratulations on the quarter. This is actually Brian Colley taking the call for Justin today. I was wondering, switching over to Dedicated, could you provide an update on the pipeline you are seeing in that business? I know a focus area has been trying to convert full-service lease customers into Dedicated contracts and do you think that conversion activity can accelerate in the next few quarters?

Let me just give you an idea of where we're at and then I'll pass it over to John Diez. One of the exciting drivers for growth in Dedicated for us has been the opportunity to upsell customers who are in full-serve lease to Dedicated. We saw great activity in 2013, we saw, we had another great year actually beat 2013 in 2014 in terms of the amount of these collaboration type sales or upselling. So we think there's still more opportunity to do even more.

And Dennis's team, along with John's team are working collaboratively to find where we can help customers by having them outsource more of this activity, which in this case would include the driver to Ryder. So we think we're still probably early in the process of continuing to grow that business. It's not going to happen overnight. It's going to be a multi-year effort, but I think now John's team working with Dennis' have got a lot of opportunity to continue to build on that.

So John?

Brian, this is John. Just a few things to add there.

One of the things we continue to see is the macro trends out there in the industry are really helping us. So if you look at the paying points around drivers, you look at the paying points around capacity, as well as safety performance for some of our prospects that continues to drive higher levels of sales activity for us.

So the pipeline has grown and continues to grow, but going back to what Robert said around collaboration, we do continue to see good momentum. We've seen two consecutive years of increase growth from collaboration sales. We expect that to continue in 2015, and as we gain momentum we'll see that continue to accelerate.

Great. Thanks and just as a follow-up, I know you recently rolled out the improved cost of ownership tool, but could you frame out how this has improved your ability to reach out to potential customers? Maybe if you could just speak to the cost of ownership events that you had last year and how many trucks that would represent. Or any other way you could help us get some perspective on the additional touch points it has created?

We've talked about one-third of our growth coming from private fleet conversions, I would tell you that a good chunk of that is really as a result of our TCO model or TCO tool. Because what it does is it allows our salesperson to have a discussion around the facts with a customer that's an ownership, as opposed to an emotional discussion of what they think it should be versus what it is. So there's a lot more of a fact-based discussion around what the ownership costs are versus what Ryder could potentially do the activity for. And we're finding that we typically can find ways to bring value cost savings to customers early on, in addition to the incremental service.

So I would say that we are still early in the process in terms of continuing to leverage that tool, but we have seen meaningful benefits from it, certainly in 2014. And I would tell you that a good portion of that growth business that's coming from ownership is as a result of the TCO tool. So Dennis, do you want to add to that?

I'd just add to your comments here, Robert. That we found with our customers that as the acquisition price and the maintenance costs have increased for the new technology vehicle, this is becoming a more significant part of the cost base that our customers are seeing. So you've got the finance departments and CFOs that are seeing this and are concerned about it.

And so when we come in and typically, historically had a sale to the transportation department of the Company, now we're elevating the discussion with the TCO tool to the CFO and the finance group, and as a result the dialogue is different than we've had in the past. It's a richer discussion around the total cost of the vehicle. We're seeing a lot of opportunities from ownership customers that we didn't see before.

Aright. That's really helpful, thanks a lot

Thanks Brian

Casey Deak, Wells Fargo

Thanks. Just to go back to the lease fleet guidance, the increase you have there, how much of it would you say comes from existing customers versus any competitor conversions, versus what you've been talking about with the new outsource clients? I'm really just trying to get a take on the health of your core client base as it looks for the remainder of the year?

Remember one-third of it is customers that are new to outsourcing and the rest of the two-thirds I would tell you, the larger percentage is with new customers. On a net basis, our existing customer base, I would tell you is beginning to grow a little bit, but still not a meaningful part of the growth. Because we're looking at 2.5% to 3% GDP growth. I wouldn't expect there to be growth in the existing customers' fleets. We've always said we're probably, along with the OEMs, we're looking at 3% to maybe 4% GDP growth before you would see something like that. So I would say the majority of it is customers new to outsourcing and then new customers that we're winning from competition.

Okay and a quick follow up on that, where would you say the biggest impact you are getting from your enhanced marketing efforts? Is it in the Dedicated area? Is it lease customers coming over? Can you comment a little bit on that, where it's helping you the most?

I'd say it's really across the board because remember, this campaign is an awareness campaign. It's to help the market understand all the different services that Ryder offers. If you look at total number of leads, the majority of them -- the larger percentage are going to go to FMS, but that's where the larger customer base in the market is.

It really is helping all three segments and helping to explain all the services that Ryder can offer and all the ways that we can help companies with their fleet management and supply chain activities. So I would say it's really having an impact, from a lead standpoint it's having an impact across all three.

Thanks, Robert

Jeff Kauffman Buckingham Research

Thank you very much, congratulations

Thank you

Just some quick detail questions. Of the 42,000 rental vehicles, how would you ballpark how many of those should be supporting full-serve lease, and what is that number today? Whether you look at is percentage or how you think about it?

That number fluctuates, but I will let Dennis give you the stats of where we are at now.

Thank you.

Jeff, if we look at what we call lease support and then we call it pure rental for customers, it's not related to lease support. For first quarter 41% was for lease support and 59% was for the pure rental customers. And we are seeing growth in both, so we are seeing demand for pure rental and for lease support and obviously the lease support is being driven by the lease fleet count that we discussed earlier. But again 41%, 59% respectively.

Where will we see those ratios hover, and what do you consider to be the normal level of lease support?

It's in that target, that 40% to 60% range.

It could go to 30% or it could go the other way depending on how much demand we have from our lease customers. Look at it from the standpoint of the first call, if you will, is with lease customers that we have a lease agreement and their using rental vehicles to support that. The pure rental market is a very big market and we use that really, not only to grow as the market grows, but also to fill-in when vehicles are available from a lease customer.

And just to follow up on that. Vehicles and revenue per vehicle and I think one of the few things that surprised me the other way this quarter was it looked like that average revenue per vehicle dropped in terms of the growth rate I've seen most of last year versus first quarter this year. Closer to between 1% and 2%, depending on whether it was rental or lease, could you help me understand whether that was more the optics of the numbers because you added a lot of vehicles? Or were there maybe unusual circumstances, because you did mention in your comments that you thought the average revenue per vehicle would be up about 4% for the year?

Are you talking about on the rental fleet or lease fleet?

I'm throwing both of them in there, but I've got about 2% on lease and 1% on rental and I was just a little surprised by that.

That could be a lot. It could be mix. If you look at our rate FX as another piece, our rate per vehicle and rental we know was up 5%. That's just what we're charging per vehicle per day. And then in terms of what else could be affecting it, it could be mix. You could have more light duty or trailers versus trucks in any one period. You could have some of that. But other than that it's not something that we are honed in on or worried about.

So when you talk about the 4%, you're talking about the rate per vehicle and you're not making any call on the mix of vehicles?

Correct. Rate per vehicle, per day in rental. So if you think about what's the cost to rent a truck for a day, it is up 4%.

Okay. Thanks.

Thank you.

Kristine Kubacki Avondale Partners

Hi, good morning. Most of my questions have been answered, but I just wanted to follow up and forgive me if I missed this, but on the contract related maintenance and the decline there, you mentioned in your comments about an individual customer that did not repeat this year. I was wondering if you could you give us more color there and was that expected in the quarter?

Kristine, we're in the pilot phase still if you will on this, so we have a handful of customers, we're now 30 or 40 customers that we are dealing with. This is one of the earlier customers and there's just been a volume drop off as they've done different things with different parts of their fleet. It's not really something of much concern. Our focus is really going after all the additional customers that we have added and bringing more of their vehicles into our facilities, and this customer over time could bring those vehicles back also.

Okay, that was my follow-up question, I appreciate that, thank you

Thank you.

I'm currently showing no questions. I'd now like to turn the call over to Robert Sanchez for closing remarks.

Okay, thanks everyone for being on the call. We're right near the top of the hour. Hopefully you got a good flavor of where things are at. It's a great quarter and things are looking pretty favorable for us at this point, so we're excited about the balance of the year. Anyway hopefully see you in the next few months and have a safe day. Bye-bye.

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