Ryder System, Inc.
Q1 2009 Earnings Call Transcript

Published: 22 Apr 2009

[Operator:]

Good morning and welcome to Ryder System, Incorporated First Quarter 2009 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. (Operator Instructions) Today's call is being recorded. I would like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

[Bob Brunn:]

Thanks very much. Good morning and welcome to Ryder's first quarter2009 earning conference call. I'd like to begin with a reminder that in this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations, due to changes in the 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 Gregory T. Swienton, Chairman and Chief Executive Officer and Robert Sanchez, Executive Vice President and Chief Financial Officer. Additionally, Tony Tegnelia, 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 Greg.

[Gregory T. Swienton:]

Thank you Bob and Good morning everyone. This morning we'll recap our first quarter 2009 results, review the asset management area and discuss our current outlook. After our initial remarks, we'll open up the call for questions. So let me begin with an overview of our first quarter results, and we'll begin on page four for those of you who are following in the PowerPoint presentation. Net earnings per diluted share were $0.12 for the first quarter 2009, as compared to $0.96 in the prior year period. EPS in this year's quarter included a $0.13 charge related to restructuring and other items. The charges related primarily to an increase... previously announced estimates for initiatives and actions undertaken in the fourth quarter 2008. Excluding this item, comparable EPS was $0.25 in the first quarter 2009, as compared to the $0.96 in the prior year. Comparable EPS came in slightly above our most recent forecast of $0.22 to $0.24 but was below our original forecast provided on February 4th of $0.40 to $0.50. The economic environment significantly deteriorated throughout the first quarter beyond our original expectations, resulting in lower overall freight volumes. This resulted in lower than anticipated FMS results, primarily due to customers down sizing their contracted fleets and fewer miles driven with existing fleets. Total revenue for the company was down by 22% from the prior year. Total revenue reflects lower fuel services revenue, unfavorable foreign exchange rate movements, and lower operating revenue. Operating revenue, which excludes FMS, fuel and all subcontracted transportation revenue, declined by 14%. Operating revenue was negatively impacted by lower automotive volumes, unfavorable foreign exchange rates, lower SCS and DCC fuel revenues and lower commercial rental revenue. Turning to page five, in Fleet Management, total revenue decreased 22% versus the prior year. Total FMS revenue was down primarily due to a 53% decrease in fuel services revenue reflecting both lower fuel costs and fuel volumes. Operating revenue, which excludes fuel, declined 7% due to foreign exchange rates and lower rental revenue. Contractual revenue, which includes both full-service lease and contract maintenance, was down 2% but was up 2%, excluding foreign exchange. Commercial rental revenue decreased 25% or 21%, excluding foreign exchange, reflecting a worsening slowdown in the economy. Gains from the sale of used vehicles declined by $8 million, reflecting fewer units sold and lower pricing. Net before tax earnings in Fleet Management were lower by 67%. Fleet Management earnings, as a percent of operating revenue, decreased by 780 basis points to 4.4%. FMS earnings were negatively impacted by commercial rental results, used vehicle sales, higher pension expense and lower contractual business performance. These negative impacts were partially offset by our cost reduction initiatives. Turning to the Supply Chain Solutions segment on page six, both total revenue and operating revenue were down by 28%. The revenue decline was due to lower automotive production volumes, unfavorable foreign exchange rates and both lower fuel volumes and fuel prices. SCS reported the first quarter net before tax loss of $1.9 million. Net before tax earnings, as a percent of operating revenue, declined 320 basis points to a negative 0.8%. Supply Chain's earnings were negatively impacted by lower automotive results and losses in our South American and European operations, which we previously announced are being discontinued. In Dedicated Contract Carriage, both total and operating revenue was down by 16%. The revenue decline was related to lower fuel costs passed through to customers and lower overall freight volumes. Net before tax earnings in DCC decreased by 9%. Earnings in the quarter were negatively impacted by lower revenues, but benefited from improved operating performance and lower overhead spending. DCC's net before tax earnings, as a percent of operating revenue, improved by 70 basis points to 9.1%. Page seven highlights some key financial statistics for the first quarter. I already reviewed our quarterly revenue results. Comparable EPS was $0.25 in the current quarter, down from $0.96 in the prior year. Comparable EPS for the first quarter 2009 included pension costs of $0.20 which were $0.17 in EPS higher than in the prior year. The average number of diluted shares outstanding for the quarter declined by 2.7 million to 55.3 million shares compared to the first quarter 2008. In December 2007, we announced both a $300 million discretionary share repurchase program and a 2 million share anti-dilutive repurchase program. During the first quarter this year, we didn't repurchase any shares under either program in accordance with our prior announcement that these programs were temporarily paused due to unusual credit market conditions. To date, we have not resumed these programs, and we continue to monitor market conditions for potential continuation in the future. The remaining availability under the $300 million program totals approximately $130 million, and the remaining availability under the 2 million share program totals 637,000 shares. As of March 31st, there were 55.9 million shares outstanding. The first quarter 2009 tax rate was 62.3%, and reflects the impact of non-deductible restructuring charges. Excluding these items, the comparable tax rate would have been 47.4% as compared to 39.1% in the prior year period. The adjusted return on capital was 6.6%, down from 7.5% in the prior year reflecting lower earnings. I'll now turn to page eight to discuss our first quarter results for the business segments. In Fleet Management Solutions, total revenue declined by 22%, primarily due to lower fuel costs and volumes. Operating revenue, which excludes fuel, decreased by 7% including a negative 4% impact from foreign exchange. Lease revenue was down 2%, but was up 2%, excluding foreign exchange, driven primarily by our recently closed acquisitions. Miles driven per vehicle per work day on U.S. leased power units decreased 9% in the first quarter 2008. This represents the largest decline in lease miles we've seen in this decade. We also saw an increase in the number of leased units that are no longer earning revenue due to customer fleet downsizing. Contract maintenance revenue grew by 2% or by 5% when excluding foreign exchange. The increase reflects continued new sales to the private fleet market which resulted in an increase in a number of units under contract maintenance agreements. Rental revenue was lower by 25% or 21% excluding foreign exchange on a 9% smaller average fleet. We have accelerated our rental fleet downsizing plan within this year in light of weakened market demand. Global pricing on power units decreased by 11% and was in line with our expectations. Global commercial rental utilization on power units was 61.3%, down 740 basis points from 68.7% in the first quarter 2008 and was somewhat below our expectations. Fleet Management Solutions' earnings declined 67% due to lower commercial rental and used vehicle results, higher pension expense and lower contractual business performance. These items were partially offset by cost reduction initiatives. In Supply Chain Solutions, total and operating revenue decreased 28% in the quarter. And as anticipated, automotive volumes were dramatically down with the plants we served for our top couple of customers experiencing volume declines of 50% to 65% Volumes in January and February were significantly down while volumes in March leveled off. Revenue was also negatively impacted by unfavorable foreign exchange rates in both lower fuel volumes and fuel prices. SCS reported a net before tax loss of $1.9 million for the quarter compared with earnings of $8.3million in the prior year. The earnings variance is due to a $7.2 million impact from lower North American automotive results and an operating loss of $3.5 million in our South American and European operations which are being discontinued this year. In Dedicated Contract Carriage, total and operating revenue declined 16% due to lower pass-through fuel costs and lower overall freight volumes. DCC's net before tax earnings were down by 9%, but were largely in line with our expectations. Net before tax margin was actually up by 70 basis points to 9.1%. Excluding the impact of lower fuel, NBT margin was largely unchanged versus the prior year. DCC earnings were negatively impacted by lower volumes, but benefited from improved operating performance and lower overheads. Total Central Support Services costs were down by $8.6 million, reflecting lowest spending across all functional areas due primarily to cost reduction actions. The portion of Central Support costs allocated to the business segments and included in segment net earnings was down by $4 million. The unallocated share, which is shown separately on the P&L, decreased by $4.6 million. Net earnings were $6.8 million, including restructuring and other items of $6.9 million. Comparable net earnings were $13.7 million as compared to $56.1 million in the prior year. And at this point, I'll turn the call over to our Chief Financial Officer, Robert Sanchez to cover several financial items beginning with capital expenditures.

[Robert E. Sanchez:]

Thanks Greg. Turning to page nine, first quarter gross capital expenditures totaled $225 million, down by $107 million from the prior year. This was driven by planned lower spending on rental vehicles of $50 million and leased vehicles of $43 million. We realized proceeds primarily from sale of revenue earning equipment of $47 million, declining by $28 million from the prior year. This decrease reflects both fewer units sold and lower used vehicle pricing. Including proceeds from sales, net capital expenditures were $178 million, down by $79 million from the prior year. We also spent $85 million in acquisitions, primarily on Fleet Management's acquisition of Edart Leasing in the Northeast U.S. Turning to the next page, you'll see that we generated cash from operating activity of $254 million in the quarter, which was $46 million below the prior year. The decrease was mainly due to lower net earnings and lower deferred taxes, partially offset by higher depreciation. Depreciation increased largely due to higher adjustments in the carrying values of used vehicles, the impact from acquisitions and the impairment of an SCS facility being marketed for sale. Including the impact of used vehicle sales, we generated $322 million in total cash, down by $71 million from the prior year. Cash payments for capital expenditures were $252 million, a decrease of $22 million versus the prior year. The decline in CapEx cash payments was not as great as that for reported capital expenditures, due to the timing of cash payments to vendors. Consistent with our normal vehicle payment timing, some leased vehicles ordered and recorded in CapEx in the latter part of 2008 were not paid for until the first quarter of 2009. Including our cash capital spending, the company generated $70 million in positive free cash flow in the current year. This is a decrease of $49 million from the prior year due primarily to lower cash based earnings. First quarter free cash flow did not reflect the benefit of lower vehicle purchases that we anticipate for the full year of 2009 due to the timing of cash payments to vendors. We expect free cash flow comparisons to significantly improve throughout the remainder of the year primarily due to lower cash capital expenditures. On page 11, total obligations of approximately $3 billion are up by $31 million as compared to the year-end 2008. The increase in debt levels is largely due to spending on acquisitions. Balance sheet debt-to-equity was 214% as compared to 213% at the end of the prior year. Total obligations, as a percent of equity, at the end of quarter were 226% versus 225% at the end of 2008. Our equity balance at the end of the quarter was $1.33 billion, down by $17 million versus the year end 2008, reflecting foreign exchange adjustments and dividends which more than offset earnings in the quarter. The equity was down much more substantially in the first quarter of 2008, however, reflecting a decline of $546 million. This decline was due to an increase of $330 million in the pension equity charge largely as a result of the decline... declining market values in our pension investment portfolio. The equity decline versus the first quarter of 2008 was due to the share repurchases of $162 million, currency translation losses of $197 million and dividends of $52 million. These combined items more than offset net earnings. At this point, I'll hand the call back over to Greg to provide an asset management update.

[Gregory T. Swienton:]

Thank you, Robert. Page 13 summarizes key results in our asset management area. I want to point out that beginning this quarter, we are reporting asset management statistics on this page for our global FMS operations, so that includes the U.S. and Canada and the UK. Previously, this information was only presented for U.S. operations, and we have included U.S. stats in parenthesis for historical comparative purposes. At year-end, our global used vehicle inventory for sale was 9500 vehicles, up by 3000 units from the prior year or up 1800 units from the end of the fourth quarter. The increase is due to a softening of rental and used vehicle demand trends and was largely in line with our expectations. We sold 4500 units during the quarter, down 21% from the prior year but up by 22% or 700 units from the fourth quarter 2008. Used vehicle sales were relatively softer in January and February but improved significantly in March. Proceeds per vehicle sold decreased from the prior year by 11% for tractors and 19% for trucks, due to softening overall pricing levels. As planned, we also sold modestly more units of wholesale prices as we are focused on keeping our used inventory at targeted levels. At the end of the quarter, approximately 14,000 units were classified as no longer earning revenue. This was up by 4600 units from the prior year or up by 3400 units from the fourth quarter. And this reflects both an increase in the number of units held for sale and surplus non-revenue earning units, many of which we are actively working to re-deploy into other applications. Our global commercial rental fleet in the first quarter declined on average by 9% from the prior year. We are continuing to reduce the size of our rental fleet to meet weaker demand condition and have accelerated the timing of our planned fleet reductions within the year. In closing, let me turn to page 15 to summarize our current outlook. We saw overall economic conditions and freight volumes deteriorate in the first quarter, significantly beyond our initial expectations. As we have yet to see any material indications to the contrary, we anticipate these worsened conditions will continue throughout 2009. We expect that these unprecedented market conditions resulting in overall weak freight demand as well as specific unpredictable automotive industry issues will primarily impact earnings in our FMS and SCS segments. Because the degree of this extended economic decline is considerably more severe than in historical cycles, the overall environment has become significantly less predictable. Due to the unprecedented market conditions and the uncertainty and volatility in the current economy, we're suspending our EPS and related forecast. While we've seen and anticipate a significant impact to earnings from the current environment, we continue to expect to generate strong and positive free cash flow this year. In fact, free cash flow is expected to increase from our prior forecast midpoint of $363 million by at least $100 million additional due to two specific items. First, a reduction in our previously anticipated pension contributions this year due to pension legislative changes and second, reduced cash taxes resulting from accelerated tax depreciation benefits that were extended into 2009 in the government stimulus package. In addition, because of the nature of our business model, free cash flow should improve further due to reduction in expected leased vehicle capital spending in this weaker environment. The reduction in capital expenditures is expected to more than offset the impact of lower earnings. Therefore, free cash flow is expected to further improve beyond the $100 million additional that I just mentioned. We continue to focus on delivering strong free cash flow as it is an important differentiator for the company and provides stability in the current environment. That does conclude our prepared remarks this morning. So at this time I'll turn it over to the operator to open up the line for any questions.

[Operator:]

Thank you. (Operator Instructions). Our first question today is from David Ross. You may ask your question and please state your company name.

[David Ross:]

Hi good morning. Stifel Nicolaus.

[Gregory T. Swienton:]

Good morning.

[David Ross:]

First, I'll start with FMS. I guess we are surprised by the lower miles driven by the existing customers, and also maybe existing customers downsizing their fleet. Our saying has always been that you're protected by contracts now on the downside, when they do downsize their fleet versus last downturn, can you comment a little bit about whether or not you did get the appropriate pricing, when they did reduce their fleet maybe 20 to 15, for example?

[Gregory T. Swienton:]

I would say that reductions in fleet have primarily come at the end of the contract of those leases. So, if they were renewed, I think those prices tend to hold up but that's not the problem that we are talking about right now. The issue was the number of units that actually come out of service. If you realize that these leases are on average going to be 5, 6, 7 years depending on the miles that are anticipated in their service, we are now into the third, third and a half year of a lot of contracts that have been on the books for a while. So at the time those were created those were all solid leases and solid contracts. A lot of those are beginning to time out and run out, some of them are running out now in a very weak environment. So, the issue is not that we are getting a lot turned back early or that we are taking them back early that really is an issue of timing in which many of these contracts are just terming out and things are so soft that many customers are choosing either not to do renewals or not to do extensions. The lower miles, I think that's been another bit of evidence that for the contracts that are under lease and that we are still being paid for, clearly a lot of customers are just parking those vehicles right now or they are putting a lot fewer miles on them in consolidated routes.

[David Ross:]

Okay. In terms of the mileage that's about 20% of the variable revenue component for the contract. At what point do they run few enough (ph) miles where Ryder is no longer making money on that contract?

[Gregory T. Swienton:]

Well first, the number we've used is actually about 15% relative to the entire portion paid to us rather than 20. So it's not quite as significant. In the short run, the impact on the reduced miles tends to rapidly fall to the bottom line. That doesn't mean we are not making money on the lease and the financing and the maintenance, but a lot of that reduction falls to the bottom line. What happens over time is when you start running fewer miles your maintenance costs start going down but that takes a longer period of time to happen, because you are putting less miles on units and therefore less wear and tear. So in the short run, more of that mileage drops falls to the bottom line. If it's an extended period of less miles then we're going to save in the maintenance cost, but we don't save it immediately.

[David Ross:]

Okay, that's helpful. And has there been a difference between the large fleet and the small fleet you service in the full service leasing side in this environment?

[Gregory T. Swienton:]

Maybe I'll ask Tony Tegnelia to comment whether he sees any difference in size of customers.

[Anthony Tegnelia:]

Dave, what we are seeing is that the significant number of downsizing units is obviously coming from the larger fleet where they may have had 100 units, let's say 85 or 80 in some cases, 500 units to 1000 units, you are seeing some downsizing. It's predominantly the larger fleet. If you have a fleet of five units, then if you downsize two units it's 40% of your fleet. So what we're seeing contribute the most to the number of units in downsizing, clearly is the large fleet. And we can see that's continuing. We continue to see request for downsizing to the fleet. We work with our customers, when we have those requests and in many instances the earlier term fees are paid or be-rated. So we are working with them in that regard. It's also an opportunity to solidify relationships with them.

[David Ross:]

Understood and then if the large fleets are downsizing, what percent of your small fleets might have gone out of business over the past year? Is there a lot of that... I mean greater than five to three but maybe they are well together?

[Anthony Tegnelia:]

We are not seeing our number of bankruptcies really decline materially. We protect our assets very well within the company. We have a surplus (ph) group that really works with customers if we see ageing and in many cases. And in many cases, we will initiate the early terming of those units where we do see some of the receivables really growing, where we feel they may not be able to pay. So we're not seeing the bankruptcies rise.

[Gregory T. Swienton:]

And to add a further point to that, that was not a material significant impact on the P&L because of bankruptcies in the first quarter. And in fact, in terms of payment, our days receivable outstanding actually improved from the fourth quarter.

[David Ross:]

That's certainly a good sign. And then last question on FMS, you do have such a broad customer base in terms of industry represented or is there any positive signs out there, any signs of strength in different sectors?

[Anthony Tegnelia:]

David, I'll tell you what we are saying on the request for fleet downsizing and what we're seeing with regard to the utilization rate of our customers' private fleet the decline in the mileage as Greg had covered earlier, we don't see any improvement in those trends at all.

[David Ross:]

Thank you very much.

[Gregory T. Swienton:]

You're welcome.

[Operator:]

Thank you. Your next question is from John Barnes. You may ask your question and please take your company name.

[John Barnes:]

BB&T Capital Markets, sorry, if I missed this. I was couple of minutes getting on the call late. But just in terms of the equipment left, it looked like, as I was trying to bake into the numbers, you have actually a little bit of equipment not earning revenue that was bought for something new equipment that's sitting idle at this point?

[Gregory T. Swienton:]

I'll let Tony clarify that for you.

[Anthony Tegnelia:]

No. Our non-revenue earning equipment is up because of our early terminations that those units still on average are generally half-way into the lease. We do not have any brand new units that were purchased in advance of a lease commitment on the ground at all. Our surplus rise is due to early terms and those are typically half-way through their lease. We have no new units sitting on the ground not generating revenue.

[John Barnes:]

Okay and then in terms of the -- in terms of prices paid for used equipment and the like, have you seen any change in or stabilization in used equipment values at this point?

[Gregory T. Swienton:]

No. I think in my comments I quoted that with tractors prices down 11% and trucks were down 19, I don't think any of us are seeing any stabilization or any improvement.

[John Barnes:]

Okay, very good. And then lastly, as you look at the maintenance side of the business, obviously there is going to be less maintenance work with fewer miles driven and that type of thing. Are you doing anything to right size the network? Or is it just necessary to maintain those facilities and the personnel? I would imagine technicians aren't the easiest thing to hire and train and the like, so you just try to keep them at working through this or is there some attempt to right size that service network?

[Anthony Tegnelia:]

John, two points that you raised, first of all, as Greg had mentioned over time with the absence of those mileage, those miles we do anticipate recovering some previously anticipate running costs. But a lot of our maintenance work is done on a time basis to support the safety of the equipment. So that portion of the running costs would be incurred generally anyway. We are always looking at profitability by location as we look at the network and also the impact on customers, if we decide to eliminate a location depending upon where another location may be in proximity. We are very sensitive to closing locations for the fear of losing a customer, but we are always looking at profitability by location. Regardless this economic environment, that's a standard asset management test that we do. And if there are locations nearby where customers won't be materially inconvenienced and the profitability is down, we do look at closing those locations. We do that regardless of the economic environment. We do that even in good times.

[Gregory T. Swienton:]

I think generally our position is that our network is about right where it needs to be, in terms of locations for customer service. And we're in this for the long term. When things rebound, we want to make sure that we're in the right places still with the customers and the potential customers we'd like to attract. I think the other general thing is in terms of productivity, the productivity we measure is improving even in this environment. So that means that the hours worked are being watched. You're obviously not going to have as much over time, and we're certainly not sending out any equipment for other work. We're doing it in-house to take advantage of the existing better cost from our own maintenance set.

[John Barnes:]

Got you. All right guys. Thanks for your time. I appreciate it.

[Operator:]

Thank you. Our next question is from Jon Langenfeld. You may ask your question and please state your company name.

[Jon Langenfeld:]

Robert W. Baird. Greg, if you look at that trends by truck, have you guys gone back and looked at all in terms of the trends your truck that you've organically grown, have experienced versus the trucks you've added though acquisitions?

[Gregory T. Swienton:]

That's the level of detail I might know. I am not sure that Tony would know that distinction either. If we don't, we can certainly try to figure that out but I don't know we have that readily available now.

[Jon Langenfeld:]

I'm sorry. Yes, so I mean I guess the question is --

[Anthony Tegnelia:]

What trends especially (ph) do you mean?

[Jon Langenfeld:]

Yes, so I'm just wondering if --

[Anthony Tegnelia:]

Lot business or?

[Jon Langenfeld:]

Yes, I am thinking that, I am thinking miles per truck, I am thinking retention levels as the contracts come up for renewal. Just wanted to kind of back check on how well the acquisitions have done now that we are in an extreme environment?

[Anthony Tegnelia:]

Generally speaking, the companies that make our acquisition lists are very high quality companies and were known to us as very good competitors. So we liked their customer base when we purchased them. We still like their customer base. The mileage trends are pretty much consistent all across the country actually and therefore all across our customer base including the acquisition customers. And we are seeing retention rates largely the same. They were quality companies with good reputations with their customers. We don't think any trend is really different in the acquisition companies when we do in our base business.

[Gregory T. Swienton:]

And I think I'd probably also add to that Jon that, when Tony talks about good customers and well-run companies that they probably had pretty good market-based pricing, so they're not going to have sticker shock when it comes time to renew. So, they are really more influenced by the economy than anything specific to us or that acquisition.

[Jon Langenfeld:]

And so how does that -- with that as the backdrop then, any thoughts on the acquisition environment. I would think there are more opportunities out there today than there were over the last two years given the financial markets.

[Anthony Tegnelia:]

Well Jon, there is more opportunity out there. But given this economic environment and also our desire to preserve capital, we want to make certain that as we go into this environment that we have the right values assigned to the companies. So we have our acquisition list, we are excited about some of those companies. We are being very careful about valuation. We're watching how they perform during this a window time. And at the right time, we believe that there will be more.

[Jon Langenfeld:]

Is there any reason on the cash balance side... I mean you're going to generate maybe close to 500 million of free cash, calls on that cash I guess are simply the pension payment over the next 4 or 5 years and then supporting growth when things turn around. But are you feeling as though with that free cash you're generating, you are going to be able to deploy as acquisition opportunities come up?

[Gregory T. Swienton:]

I would say the answer to that would be yes. And especially when you've got a healthier environment, we're going to be as interested as during this period.

[Jon Langenfeld:]

Okay. And then what about the share buyback side, at what point given this additional free cash you were talking about, at what point you'll say, look this is enough to get us comfortable at least start buying some shares?

[Gregory T. Swienton:]

I'll let Robert comment on that.

[Robert Sanchez:]

Hey Jon, this is Robert.

[Jon Langenfeld:]

Hi Robert.

[Robert Sanchez:]

Yeah, how are you doing, Jon? The free cash flow is obviously a real positive for us. The other issue we've got there was leverage. And in this environment, we don't want to be running -- really the purpose of the share purchase was really to try to get the leverage back up to our targets. In this environment, having taken such a run-up in leverages we took at the end of the year due to the pension equity hit, we want to make sure that we can show that leverage can come down over the next several months before we could consider doing something around share repurchases. But obviously that's something that we will continue to watch. Certainly with the share price where it is, as we look at trade-offs between acquisitions and share repurchases long term that will come into play also.

[Jon Langenfeld:]

Okay. Good. And then on the miles per truck, I understand you can't necessarily adjust the maintenance cost structure as quickly. Greg, you made the comment that that takes some time.

[Gregory T. Swienton:]

Yes.

[Jon Langenfeld:]

I mean is that a matter of months or quarters or years? Can you just maybe put that in perspective, if volume miles per truck stay at the current level down 9, 10, 11% and don't come back, what actions would you take that -- reduce that supporting maintenance costs?

[Anthony Tegnelia:]

Well John, it does depend on the asset class as to how frequently the vehicle comes in and that would determine how much money would be saved within a certain period of time whether it'd be several quarters or whether it'd be several months. I would say a number of quarters would have to pass before you saw a meaningful recapture or savings in running costs as a result of the reduced miles. Generally speaking, regardless of economic times, we are always looking at productivity for our technicians and based upon knowledge, based upon fleet level, we always are adjusting the tech count. And we are constantly monitoring productivity ratios of their hours worked on vehicles and also as it relates to the number vehicles per tech. So, all those productivity metrics remain very intense, and we do believe over time we'll capture some of the revenue in the lower running costs.

[Jon Langenfeld:]

Okay. And then a last question, in terms of miles per truck, how do you track that? Is that something you just can remotely track in every vehicle or do you look at that as the vehicles come in for service? And is there any catch-up that, that would occur because you haven't seen a truck for a while and then the miles per truck are actually lower than what you thought?

[Anthony Tegnelia:]

Generally Jon, all of the above. We check the mileage every time the vehicle comes in to fuel. We also check at every time it comes for maintenance and on occasion there's also a true-up on mileage with the actual odometer reading.

[Jon Langenfeld:]

Okay great. Thank you.

[Operator:]

Thank you. Our next question is from Ed Wolfe. You may ask your question and please state your company name.

[Ed Wolfe:]

Thanks. Wolfe Research. Good morning everybody.

[Gregory T. Swienton:]

Good morning.

[Ed Wolfe:]

Can you talk a little bit about the depreciation? Excluding the write-down 218.6, up from 260 a year ago and CapEx coming down and up from 212 in the fourth quarter, what's going on with depreciation? How do we think about that going forward?

[Robert Sanchez:]

Okay. Ed, this is Robert. You've got -- as you mentioned you've got acquisitions in there. You also have the additional write-downs at the used vehicles centers due to the lower proceeds that we are seeing. And naturally driving those two are really driving most of the increase in depreciation.

[Ed Wolfe:]

So, is it a good run rate 218 a quarter or are we ramping up to something higher, how do I look at that?

[Robert Sanchez:]

No, you would probably want to back down. There is also the one other thing I did mention is $4 million, due to that supply chain facility that we're trying to market that we had to write down.

[Ed Wolfe:]

I took --

[Robert Sanchez:]

That's in that number.

[Ed Wolfe:]

I took that out, you had reported it at 220, 225, I took out the 4?

[Robert Sanchez:]

Okay, yeah. Then you are in yeah that will give you a good number then.

[Ed Wolfe:]

And out of that, how much of that roughly is acquisitions? Year-over-year what's -- or even from quarter-over-quarter, you closed one deal. Is there a goodwill involved there, what am I looking at that's in there?

[Gregory T. Swienton:]

We are looking in the book now Ed though, we'll get the answer in just a moment.

[Ed Wolfe:]

Okay, you want me to keep asking Greg in the meantime, rather thanks.

[Gregory T. Swienton:]

You can ask another thing while I am looking up that in the book.

[Ed Wolfe:]

Just trying to understand the consistency of the leased business because you guys have always talked about it, and I always thought about it as kind of 90% of your business doesn't change that quickly. It takes a little while to see the fall off and now we're seeing. I understand it's historically unprecedented times. But outside of learning that some percentage of the business miles do matter, what's the other biggest issue that all of a sudden hurting the leasing margins as you see it?

[Gregory T. Swienton:]

Tony?

[Anthony Tegnelia:]

Ed, this is Tony. The second largest issue impacting the quality of earnings of lease in this quarter was our non-revenue generating earning units. They are up and the way our model works is generally to go to full term, the vehicle will be sent to the UTC and sold. If it is a before term unit that still has life on it, according to our asset management principles, that vehicle becomes surplus and available for redeployment. As you know we have a very heavy redeployment initiative within the company. And I am very pleased to say that in the fourth quarter of all the new sales and all the replacements that we had in the quarter, 50% of it was fulfilled from existing redeployed units. Those are units that are coming from surplus. Our surplus units are up as we have said early because of downsizing. We are working with customers on the downsizing, you must do that. We are also -- some of it is self initiated to protect the vehicle and our accounts receivable. So we are pleased that we have a fulfillment rate of 50% coming from that surplus group. So that hopefully the amount of surplus units will decline in the future. But second to mileage, the surplus vehicle impact on the P&L is the second largest one, and that's because you have the fixed cost relating to those vehicles but zero revenue.

[Ed Wolfe:]

Is there anything else other than that Tony, if third or fourth that show up that we should think about or is it really those two that we have to focus on?

[Anthony Tegnelia:]

Those are really the two that you have to focus on, offset by the productivity improvement and overhead savings that we had announced in the fourth quarter. Those are the two issues that we focus on completely and the mileage is tough. I mean that's dependent upon our customers' activities but the surplus we have strong redeployment initiatives on surplus, and we are pleased with the fulfillment rate.

[Gregory T. Swienton:]

Okay. I think Robert's got the answer to the question you asked.

[Robert Sanchez:]

Yeah, Ed, the depreciation expense associated with the acquisitions was $5 million.

[Ed Wolfe:]

5 for the year or for the quarter?

[Robert Sanchez:]

That's for the quarter, that's a pretty good run rate too.

[Ed Wolfe:]

Okay, thank you. That's helpful. On the back to the miles, how do we think about the miles? Is there some percentage of the fleet that has miles, does every contract at some point have miles? If we are trying to get our hands around that, talk a little bit about what it means that they are not running their miles and how that impacts your revenue?

[Anthony Tegnelia:]

As we had said Ed, we are pretty much 85

[Gregory T. Swienton:]

If you are asking if we can discern between actually fewer miles running on a truck or whether it's coming down because some trucks are just parked. That I'm sure the shop would know. They'd know that on location basis, but on the aggregate trying to disaggregate all of that, that would be a guess at this point.

[Ed Wolfe:]

But I guess my question is, every contract give or take, not everybody, the average for every contract is kind of every contract has some piece of miles in percent?

[Anthony Tegnelia:]

Yeah.

[Ed Wolfe:]

Or are they two separate kinds of contracts, types of contracts?

[Anthony Tegnelia:]

No, we have the fixed and the variable. You have to have that from an asset management point of view. If they run way over the miles then originally rate it, okay then of course you're going to want to recapture that in your mileage piece.

[Ed Wolfe:]

I don't have a recall hearing of that mile component. So, what was the level that we got to that was so weak that the mile component started to being an impact?

[Gregory T. Swienton:]

Well, it started in the third and fourth quarters in '08 because even in the previous periods of rate decline, we were still showing increases in average miles driven per unit in all of that leased fleet. In the third quarter and the fourth quarter last year, I think we got to maybe 4% down, 6% down and now it's 9% down. So, it's just starting to be a bigger and more accumulating number.

[Ed Wolfe:]

Okay. So, it's ....

[Anthony Tegnelia:]

It's freight levels, Ed it's what it is. It's just general freight levels in the economy. Unfortunately, our customers don't have the freight to move, so utilization of their fleets are going down. And that's manifested in mileage.

[Ed Wolfe:]

Understood. So, if it's minus 9 for the quarter, where were you in March and April, is it similar or is it worse or is it better?

[Gregory T. Swienton:]

Well, we won't comment on April because that would be forward-looking, but March was worse than January and February.

[Ed Wolfe:]

Well, up to April 21st would be backwards looking anyway.

[Gregory T. Swienton:]

Well, we're considering this is the call for the first quarter. So, I'll comment only on the first quarter. March was worse than January and February. So, it took the 9% average higher.

[Ed Wolfe:]

And March down 15, down 11, can you use some magnitude?

[Gregory T. Swienton:]

Low double-digits.

[Ed Wolfe:]

Okay. You talked about the rental utilization, where the numbers are versus a year ago and last quarter?

[Gregory T. Swienton:]

I'm doing this from memory, I think 61.8 was this quarter and that's maybe7.4% lower than last year.

[Ed Wolfe:]

How about in fourth quarter?

[Gregory T. Swienton:]

Fourth quarter, that I don't have from memory. I'll have to look across to the -- to Tony, if he has got in his pages there.

[Ed Wolfe:]

I assume if it's in your memory, it's something that you care about though.

[Gregory T. Swienton:]

I care about all of it. Yeah, I just want to give you absolute precision when I answer these.

[Ed Wolfe:]

Understood. But I've got an impression that that's something that needs to improve. Can you give me the CapEx, Robert, both gross and net where the guidance is now for '09, not the cash flow but the CapEx ?

[Robert Sanchez:]

Yeah, we haven't put out -- we're not putting out guidance on the CapEx. So all we are really saying is that we are expecting CapEx to come down further because lease is softening.

[Ed Wolfe:]

So, some other way (ph) you can be variable enough with that to hit your cash flow targets if you need to adjust it?

[Gregory T. Swienton:]

I would say of the things that -- the one thing we are confident about over fairly wide range of earnings and again we are not providing an earnings forecast. The one thing we are quite confident about as we've modeled this is that the cash flow will still hold up over a significant range. And that's a big driver of that the two norms that I mentioned as well as the significant portion of the business model of the CapEx reduction, when lease sales are coming down.

[Robert Sanchez:]

And remember cash CapEx is a lag from when you sign a lease, so we've got a pretty good view of what's been signed so far to forecast what cash CapEx will be for balance of the year.

[Ed Wolfe:]

Can you talk a little bit about if you got any sense from the government or from GM, what happens if there is a process bankruptcy, obviously you're critical vendor, what would that mean for you one way or another? Do you have any sense of anything there?

[Gregory T. Swienton:]

I don't think we have a sense as to how it's going to be concluded. We know that their dates are -- the calendar pages are flipping and there supposed to be decisions made, how it turns out we don't know. What we have been doing throughout this process is managing that portfolio of business. We have the team of people who are looking at all of the contracts we have. The receivables are disclosed in the Q that will be going out today. I think our GM trade receivables are about 35 million, somewhere in that vicinity. So it all depends whether we would be named a preferred supplier for some or all of that business and whether any of that would be a drift.

[Ed Wolfe:]

Okay. On supply chain if you reverse the 3.5 million in international, is the implication that 2 million or so of the contribution margin should be positive within a quarter or two?

[Gregory T. Swienton:]

When that's ultimately completed, so during the course of '09 all of those should be transitioned out. I'll let John Williford to comment on that further.

[John Williford:]

Hi Ed. We expect that the discontinued operations will almost all be shut down at the end of the second quarter and all be shut down at the end of the third quarter. And then yeah when you back that out SCS would be profitable.

[Ed Wolfe:]

Okay so maybe a little more of the loss in second and then by third it should be or by fourth?

[Gregory T. Swienton:]

We are not giving specific guidance by quarter, but I think that overall trend is that the third quarter would be better than the second quarter. If that was your question.

[Ed Wolfe:]

Yeah. Interest expense Robert is at 38.8 came down a bit. Can you just give some guidance for how that should look going -- is there changes there that should be thinking about?

[Robert Sanchez:]

Well what's driving that is it's -- actually our debt levels were up mostly due to the acquisitions, our average debt levels and then with the rate came down a bit. So it's the combination of those two. As you might imagine what we're expecting is that with free cash flow you'll pay down some debt throughout the year. So those debt levels should come down some.

[Ed Wolfe:]

What are you paying right now as your debt levels came down and how much are they down?

[Robert Sanchez:]

5.4% is the rate we're paying.

[Ed Wolfe:]

And does that feel like a pretty fair number to use going forward?

[Robert Sanchez:]

Yeah it's probably a good number to use.

[Ed Wolfe:]

And one last one and I'll pass it. Used truck you said pricing isn't showing any signs but I thought I heard you say Greg earlier that you are selling more trucks that that markets improved a little bit. Can you tell us?

[Gregory T. Swienton:]

Yeah, we were up I think 700 units compared to the fourth quarter and the total number of units 4500, in all of our network. The numbers sold in March were considerably better than in January and February. So the prices weren't better but we sold more units.

[Ed Wolfe:]

Why do you think that is?

[Gregory T. Swienton:]

I am sorry you broke up.

[Ed Wolfe:]

Why do you think that is, what are you seeing in the marketplace?

[Gregory T. Swienton:]

Tony, do you have a clue?

[Anthony Tegnelia:]

Yeah January is typically very low that carried into February, and we saw a little bit of tick up in the month of March which is more typical. And some of the customers actually who were able to get some credit in March, they were not able to get it earlier in the quarter.

[Ed Wolfe:]

Thanks so much for all the time.

[Gregory T. Swienton:]

Sure.

[Operator:]

Thank you. Your next question is from Art Hatfield. You may ask your question and please say state your company name.

[Art Hatfield:]

Thank you Morgan Keegan. Good morning everybody.

[Gregory T. Swienton:]

Good morning.

[Art Hatfield:]

Hey Greg just a couple of questions, back to that 15% variable component of the full service fleets business. Do you have like a utilization number where you can say, we're -- based on the contract that have been signed or getting 75% of the potential revenue or some number like that?

[Gregory T. Swienton:]

I don't know. If Tony knows that answer either but if anybody would he may.

[Anthony Tegnelia:]

We track the variable knowledge on a combined fleet basis and also the fixed on a combined fleet basis. We can go back actually by vehicle number and look at the mix within any period of time, of what percentage portion of the total revenue for that vehicle came from fixed and what percentage portion of it came from variable. And we do that on occasion for certain fleet, so we do have the ability to look at the mix between the 85

[Art Hatfield:]

Okay. So that's not something you could talk about fleet wide.

[Anthony Tegnelia:]

No. We actually do that more on a customer type basis, that's correct.

[Art Hatfield:]

Okay And then I think re-educate me please if you could on early terminations and how that impacts you financially in the short run and also in the long run and if they (ph) that flows through the financial statements?

[Anthony Tegnelia:]

Okay. The way our business model works, generally speaking if a vehicle goes to full term, at that the end of that term, that vehicle will be sent to the UTC operations to be disposed off and generate cash and also generate a gain. For whatever the reason may be that the unit may be early termed, there's life in the vehicle, let's say its only three years old or four years old and typically it would be out on lease full term for six or seven years. Because there is still life in that vehicle we will keep that vehicle within the asset base for the balance sheet, as it specifically relates to the full service leased product line. That being said, the depreciation, the interest, taxes and things of that nature remain in the earnings for the full service leased product line but because it's surplus and not out with the customers there is zero revenue. So if you look at the P&L exclusively for the vehicles not generating revenue either combined as a portion of our fleet or unit by unit, you'll see virtually zero revenue but a number of costs associated with it. So you have an NBT loss for a non revenue generating vehicles that are surplus. Those are growing as we had mentioned because of the early terms and our objective is to redeploy those as quickly as we can and get the units on ground that are generating revenue, generating some revenue. So if it goes full term, it gets sent to the UTC and sold. That asset is no longer in the full service leased product line earnings implications, if it's early term, it stays until redeployed where you have its cost but zero revenue.

[Art Hatfield:]

On the early term is there not a penalty that customers will pay in that situation?

[Anthony Tegnelia:]

Yes there is, with the exception of bankruptcy but yes there is. And typically we receive those early termination fees or we'll make other financial arrangements with the customer with re-rate on remaining units that exist or they may be putting on some other vehicles at another location and the rate on those vehicles may absorb some of that early termination fee.

[Art Hatfield:]

Okay. So, is that early termination fee generally classified as a revenue in the quarter it happens?

[Anthony Tegnelia:]

Yes it is.

[Art Hatfield:]

And then as the early terms in the first quarter, do you kind of have a rough estimate of what the life left on those vehicles as a whole was?

[Anthony Tegnelia:]

Generally speaking about three and half years roughly.

[Art Hatfield:]

Left or what was utilized, is that?

[Anthony Tegnelia:]

They are generally half-way through their life for the most part, on average.

[Art Hatfield:]

Okay, that's very helpful. Thank you, that's all I had today.

[Gregory T. Swienton:]

You're welcome sir.

[Operator:]

Thank you. Your next question is from Todd Fowler, you may ask your question and please state your company name.

[Todd Fowler:]

Good morning, KeyBanc Capital Markets.

[Gregory T. Swienton:]

Good morning.

[Todd Fowler:]

Greg, could you talk a little bit about, I mean I know you are not having quantitative guidance but directionally, where should FMS go from a margins standpoint and then from a trend standpoint? It sounds like the leased fleet is about 50% through in general three and a half years, under 7 year leased fleet. Should we expect to see -- continue to roll offs (ph) people are not taking on your vehicles going forward? And then what's the impact that it has on margins for next couple of quarters right, you can do to get margins up from the levels that we were at in the first quarter?

[Gregory T. Swienton:]

Well, I think that the expectation for margins is that they would return to where they have been but the key question and the reason that we're not providing the guidance is we don't know, we don't have a good idea when it's going to be. You and anyone else who could prognosticate can determine when this economy is going to turn around. When the economy does turn around I mean the big plus you'll see going to the bottom line are going to be what are currently the big negatives. You start seeing additional miles driven on existing leased equipment and then also getting some supplemental demand for commercial rental you are going to get a quick drop to the bottom line, it's going to probably restore the level of net before tax earnings as a percentage of operating revenue. You are going to get back to that 12-13% that we had. But what I can't answer because I don't know and I don't know anyone who does is when is that going to happen.

[Todd Fowler:]

No, that's certainly fair enough I guess me, from a historical perspective, when you've seen in previous downturns your customers downsized their leased fleets? Is this generally something that takes in the course of a year or six months, two years, I mean is there any sort of historical context in past cycles for the length of time that we should expect, customers to be downsizing their fleet? And then I certainly understand that this cycle is different?

[Gregory T. Swienton:]

Yeah, I guess that their pure expectation, I think the last downturn when it was 2000, 2001, 2002, I don't know that we had as rapid or dramatic loss in miles, I think we had a lot more loss in units. And what recovered more quickly in that case was the commercial rental. I think in this case because of the nature of this severity, we are going to see two items and we are going to be watching very closely that move up and go to the bottom line. And that's the miles plus the commercial rental and then the actual increase in leased fleet sizes.

[Todd Fowler:]

Okay. I got you. And then just as far as thinking about the cost structure right now, I know you guys have done a lot of work over the past two and a half years to take out costs. What's your feel right now as you look across the business as what you need to do -- it sounds like to me you're always working on productivity, is there anything that you look out going forward from kind of a larger scale type thing that you would consider or are considering right now to reduce costs?

[Gregory T. Swienton:]

I would say not something that is one big large drastic lump that we can go get. I think we've modeled this business over time and made a lot of changes and lot of reductions that we are not in the position that we might have been in 7, 8, 9 years ago to look for big single easy to identify lumps of costs. I think what we continue to do and this is true in overhead generally, and in supply chain and fleet management is we keep making adjustments based on the declines. But that doesn't come from a big further announcement of reduction in force or some other big location of money in a P&L somewhere. It's going to be adjustable and gradual based on lot of volume levels and lot of transactional activity.

[Todd Fowler:]

Okay. And then question to you on the cash flow guidance, Greg or Robert, what's your expectation here for the benefit from deferred taxes for the full year in 2009? I would assume a lot that's related to the change in the tax laws, how much are you factoring that that's going to be a benefit or favorable cash flow impact for '09?

[Robert Sanchez:]

We're not giving guidance on that specific but of the 100 million that we talked about, we are looking at 30 to 40 million. And that's really dependant on capital expenditures, how many new trucks we buy for the year because that's really related to bonus depreciation on new investments.

[Todd Fowler:]

And now there are 30 to 40 million, you got 17 of that in the first quarter or there is perhaps 30 to 40 million additional to the 17 that you picked up here in the first quarter?

[Robert Sanchez:]

No we really didn't pick up anything in the first quarter associated with that bonus appreciation. It's really going to be in the latter part of the year, it's really going forward second and third and fourth quarter.

[Todd Fowler:]

I am sorry, okay so it's 40 million is variable working capital and deferred taxes in the first quarter.

[Robert Sanchez:]

Right.

[Todd Fowler:]

Okay got you. And then directionally for the full year working capital in general should be a positive this year?

[Robert Sanchez:]

Yeah, I would think so. We're certainly looking at that as being a positive due to volumes that we're seeing.

[Todd Fowler:]

Okay, and then just one last here expectations for the tax rate going forward, should it come down from where we were at the first quarter?

[Robert Sanchez:]

I hope so. Well yeah what you'll see is from the 47 which is really the more comparable number, you'll see that come down certainly as we get out of some of the operations in supply chain outside of the U.S. which really -- those foreign losses are really what's driving that number up to the 47. And then clearly as earnings improve at some point that's where we're going to get back to a more normalized number. But you should see it improve from the 47 as we, as John Williford mentioned earlier, we'll be getting out of those operations by the middle of the year and certainly all of it by the third quarter.

[Todd Fowler:]

Sure. Okay that makes sense. Okay thanks a lot.

[Operator:]

Thank you. And due to time constraints our last question comes from David Campbell; you may ask your question and please state your company name.

[David Campbell:]

Yes thank you very much. I am just curious as to why we can't use the base of revenues and profitability say in the month of March as a base estimate for this year for 2009. It seems like that would probably be the good assumption that things aren't going to get any worse there.

[Gregory T. Swienton:]

Well I don't know that any of us can say that it's going to get any worse or any better. I'm personally not that confident that I know. It certainly could get worse. I mean it depend -- there is a couple of camps out there right now generally, once says they think they are bottoming out and another says that perception is a bit premature. And either one could be right and right now, we are sort of in the camp that says it's premature to say we've bottomed out because we have no evidence of it yet and it certainly could get worse.

[David Campbell:]

Okay, and you spent $85 million in the first quarter for an acquisition how much revenue did that generate?

[Robert Sanchez:]

The annualized revenue for that acquisition we anticipate to be about $35 million.

[David Campbell:]

And was it all fully effective in the first quarter? I don't know when it was effective?

[Gregory T. Swienton:]

Generally it was in February so not full effect for the quarter.

[David Campbell:]

Okay, and the last question is the Supply Chain Solutions margins of 4 to 5%, does that depend upon getting auto business back to where it was two years ago or how does one do that? How do we do that?

[Gregory T. Swienton:]

John, do you want to take that?

[John Williford:]

Yeah hi David yeah that depends on the automotive business settling out to a level that's more predictable than it is today. And to our initiatives in the other sectors starting to result in the growth and profitability, we expect there. And of course the changes outside of the U.S. that we've already talked about rolling out later on this year. You won't see that obviously this year.

[David Campbell:]

All right. Okay, thank you very much for your answers. Appreciate it.

[Gregory T. Swienton:]

Okay, you're welcome.

[Operator:]

Thank you. This concludes the question and answer session. I'd now like to turn the call over to Gregory T. Swienton for any closing remarks.

[Gregory T. Swienton:]

Well, as we're passed the new -- already and a little bit over time, I thank all of you who are sill remaining on the call and have a good safe day.

[Operator:]

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