Ryder System, Inc.
Q1 2010 Earnings Call Transcript

Published: 21 Apr 2010

[Operator:]

Good morning and welcome to Ryder System Incorporated First Quarter 2010 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 now like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs provider. Mr. Brunn you may begin.

[Bob Brunn:]

Thanks very much. Good morning and welcome to Ryder's first quarter 2010 earnings conference call. I would like to begin with a reminder, that in this presentation you will hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made 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 economics, 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 Greg 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.

[Greg Swienton:]

Thanks Bob and good morning everyone. Today we will recap our first quarter 2010 results, review the asset management area and then discuss our outlook and forecast for the year and after our remarks we will open up the call for questions. So let me get right into an overview of our first quarter results and for those of you following along in the PowerPoint presentation we are on page 4. Net earnings per diluted shares from continuing operations were $0.24 for the first quarter 2010 as compared to $0.20 in the prior year period. In 2009 the first quarter included a $0.10 charge related to restructuring and other items. Excluding these items in the prior year comparable EPS from continuing operations were $0.24 in the first quarter 2010, as compared to $0.30 in 2009. While earnings were down versus the prior year they were above our forecast range of $0.17 to $0.22. As a reminder we discontinued all supply chain operations in Europe and South America by the end of last year and have now restated our historical EPS to reflect the exclusion of these discontinued operations. The comparable EPS we originally reported in the first quarter 2009 including these operations were $0.25. So our restated results excluding these operations for the first quarter 2009 were $0.30. Total revenue for the company was up by 4% from the prior year. Total revenue reflects higher fuel prices and favorable foreign exchange rate movement partially offset by lower fuel volumes. Operating revenue which excludes FMS fuel and all subcontracted transportation revenue was unchanged from the prior year. The impact of favorable foreign exchange rates was offset by lower FMS contractual revenue. On page 5, in fleet management, total revenue increased 2% versus the prior year. Total FMS revenue includes the 21% increase in fuel services revenue reflecting higher fuel prices partially offset by lower fuel volumes. FMS operating revenue which excludes fuel declined by 2% due to lower contractual revenue. Contractual revenue which includes both full service lease and contract maintenance was down 3% or down 4% excluding foreign exchange due to fewer contract at units in the fleet. Commercial rental revenue was up by 2% but was unchanged from the prior year when excluding the impact of foreign exchange rate. Rental revenue benefited from improved utilization, offset by a significantly smaller fleet size. Net before tax earning and fleet management were lower by 28%. Fleet management earning as a percent of operating revenue decreased by 110 basis points to 3.2%. FMS earning were negatively impacted by lower full service lease performance due to fewer vehicles in the fleet and higher maintenance cost on an older fleet as well as higher depreciation expense per unit. These negative impacts were partially offset by better used vehicle results, improved commercial rental performance and lower expenses in our retirement plan. Turning to the supply chain solution segment on page six, total revenue was up 10%, reflecting higher automotive volumes and favorable foreign exchange rate movement. Operating revenue grew by 4% due to favorable foreign exchange rate movement and higher automotive volumes, partially offset by some locations we closed in the latter part of last year as we rationalized underperforming account. SCS net before tax earning were $7 million for the quarter, up over 360% compared to a very weak first quarter last year. Supply Chain's net before tax earning as a percent of operating revenue increased by 220 basis points to 2.9%. Higher SCS earning were driven largely by improved automotive volumes. In Dedicated Contract Carriage, total revenue was up 1%, reflecting higher fuel cost pass through. Operating revenue was down 1% due to contract non-renewals. Net before tax earnings and DCC decreased by 28%. DCC's net before tax earnings as a percent of operating revenue declined by 250 basis points to 6.6%. The decline reflects higher self-insurance cost, accrued compensation expense and costs related to investments in new technology initiatives. Page seven highlights key financial statistics for the quarter. I already highlighted our quarterly revenue results so let me start with EPS. Comparable EPS from continuing operations was $0.24 in the current quarter, down from a comparable $0.30 in the prior year. The average number of diluted shares outstanding for the quarter declined by 2.6 million shares to 52.7 million. In December 2009, we announced a 2 million share anti-dilutive re-purchase program and in February 2010, we announced the separate $100 million re-purchase program. These programs run simultaneously and were authorized for two year period. During the first quarter, we re-purchased 550,000 shares at an average price of 3509 per share under the $100 million program. During the first quarter, we also purchased 170,000 at an average price of 3391 under the two million share anti-dilutive program. As of March 31st, there were 53 million shares outstanding of which, 52.3 million are currently included in the diluted share calculation. The first quarter 2010 tax rate was 42.8% versus 51.2% in the prior year. The prior year's tax rate was impacted by foreign restructuring and impairment charges. Excluding these items in the prior year the comparable tax rate would be 42.8% in 2010 versus 42.6% last year. Our current year tax rate is somewhat above our normalized rate due to a higher proportion of non deductible charges on a smaller earnings base. I will now turn to page 8 to discuss some of the key trends we saw during the first quarter in each of the business segments. In fleet management solutions full service lease revenue was down 2% or 4% excluding foreign exchange. The average fleet size was down 5% over the prior year's first quarter and down 1% versus the fourth quarter 2009. The reduction in the lease fleet primarily reflects, the cumulative effect of customer non renewals of expiring leases resulting from a protracted freight recession. The fleet size in our contract maintenance product line shows similar trends. During the first quarter we continue to see customers downsizing their lease fleets at a somewhat higher rate, than planned. However, we continue the effectively use our centralized asset management process to extend lease terms and redeploy vehicles with customers. You can see some of these graphs highlighted in the appendix to the presentation on page 23 if you want to take a look at those later. Lease pricing on new units has been and remains firm, as we are focused on realizing appropriate long term returns for investments made in this asset based contractual product line. For the first time in almost two years miles driven per vehicle per day on U.S. lease power units increased over the prior year. Miles per unit were up by 1.4% versus the first quarter 2009 which is an improvement over the 2% year-over-year decrease we saw in the fourth quarter of 2009. Excluding foreign exchange commercial rental revenue was unchanged from the prior year on a 12% smaller average fleet. Despite a significantly smaller rental fleet, we rented each vehicle for a greater number of days during the quarter resulting in higher utilization. Global pricing on power units was flat which represents an improvement from the 4% decline we saw last quarter. Global commercial rental utilization on power units was 68.6% up 780 basis points from 60.8% last year. This is a strong utilization rate for what is typically the seasonally slowest quarter and it was seen in all vehicle classes. The improvement reflects both the actions we took last year to right size our rental fleet as well as higher demand. While our initial business plan called for our rental fleet to remain flat year-over-year we are continually reevaluating our plan in light of recent stronger demand conditions and we'll modify the fleet size as appropriate throughout this year. Also in FMS we saw stronger used vehicles results reflecting both our initiatives and an improved environment. I will discuss those results separately in a few minutes. FMS also benefited from lower retirement plans expense. We saw higher maintenance cost in FMS due to the aging of our lease fleet. Since we haven't been replacing lease units at a normal rate. The fleet has become relatively older. We also saw negative operating leverage on our fixed facility network as the fleet size contracted. We expect these trends to continue until our lease fleet resumes growth. Finally, depreciation expense per unit in FMS was up due to our lowering of residual values and accelerated depreciation on some units. In supply chain solutions, operating revenue was up by a better than expected 4% in the quarter. Automotive volumes with plant reserve were higher as compared to the very weak period of early 2009. Improvements in auto volumes were partially offset by the closure of certain operating locations we undertook in the latter part of last year as we rationalize underperforming accounts. SCS earnings of $7 million for the quarter were up strongly over the weak prior year period, driven largely by higher automotive volumes. SCS net before tax as a percent of operating revenue was 2.9% and reflects the typical seasonally slower period as well as some impact from plant shutdown by a significant automotive customer among other items. In Dedicated Contract Carriage, operating revenue declined 1% due to some contract non-renewal. DCC's net before tax earnings were down by approximately $3 million due to higher self insurance cost, accrued compensation expense and cost related to new technology initiative. As shown in the appendix, total central support service cost were up by approximately $4 million or 11%, reflecting higher spending for technology and professional services and accrued compensation expense. The portion of essential support cost allocated to the business segments and included in segment net earnings was up by 2.2 million. The un-allocated share which is shown separately on the P&L was up by $1.9 million due primarily to technology and professional fees. Technology spending included cost related to main frame, shop maintenance and purchasing systems which we expect to result in cost and productivity benefits in future years. At this point, I will turn the call over to our Chief Financial Officer, Robert Sanchez to cover several items beginning with capital expenditures.

[Robert Sanchez:]

Thank you Greg. Turning to page nine, close capital expenditures in the first quarter totaled 276 million, up by 51 million from the prior year, spending on lease vehicles declined by $85 million or 41%. Lease capital is down due to lower new and replacement lease sales as customers downsize their fleets. Lease spending is also down due to the successful implementation of our strategy to increase the number of lease term extensions and increase the use of surplus and other midlife vehicles to fulfill new lease sales. These actions reduce the requirement for new vehicle purchases to fulfill customer fleet needs in the lease product line. Gross capital spending on commercial rental vehicles was $142 million in the quarter due to our planned refreshment of the rental fleet this year. This is an increase of 138 million over last year where we spent virtually no capital on rental vehicles for the full year in 2009 due to the soft economy. While we expect full year total capital spending to be at or near our prior forecast range, we may reallocate some capital between the product line as demand conditions merit. We realized proceeds primarily from sales of revenue earning equipment of 49 million in the quarter, up by $3 million from the prior year. This increase primarily reflects higher used truck pricing including proceeds from sales full year net capital expenditures were $227 million up by $48 million from the prior year. We had virtually no acquisition spending this quarter as compared to the $85 million last year which was primarily on fleet management's acquisition of Edart leasing in the Northeast U.S. in the first quarter of 2009. Turning to the next page, we generated cash from operating activity of $271 million in the quarter which was in line with the prior year. Depreciation declined by $11 million due to lower adjustments in the carrying values of used vehicles, prior year's supply chain facility impairment charges and smaller fleet. These items more than offset higher depreciation cost per vehicle stemming from lower residual values and accelerating depreciation rates on certain vehicles. Including the impact of used vehicle sales we generated $336 million of total cash unchanged from the prior year. Cash payments for capital expenditure were $200 million down by $52 million from the prior year due to the timing of payments for vehicles received late in the current quarter from the OEMs. Including our cash capital spending the company generated a $136 million of positive free cash flow in the current year. This is an increase of $52 million from the prior year due primarily to the timing of cash payments for vehicles, we continue to expect the full year free cash flow to be at or near our prior forecast of $225 to $275 million. On page 11 total obligations of approximately $2.5 billion are down by $72 million as compared to the year end 2009. The decreased debt level is largely due to the use of positive free cash flow to pay down debt. Balance sheet debt to equity was a 172% as compared to a 175% at end of the prior year. Total obligations as a percent of equity at the end of the quarter were a 181% versus a 183%, at the end of 2009. Our equity balance at the end of the quarter was $1.4 billion down by $19 million versus the year end 2009. The equity decline was driven by net share repurchases of $23 million and dividends of $13 million. At this point I will hand the call back over to Greg to provide to provide an asset management update.

[Greg Swienton:]

Page 13, summarizes key results for our asset management area globally. At the end of the quarter our global used vehicle inventory for sale was 6800 vehicles down by 2700 units from the first quarter 2009 and down by 100 units from the end of the fourth quarter 2009. We are very pleased by the reduction we have achieved in our used vehicle inventories which are slightly below our target range. We sold 4700 vehicles during the quarter, up 4% from the prior year. We saw improved used vehicle demand in the first quarter and this demand has continued into April. Stronger demand has allowed us to start to become more selective on used vehicle pricing and increased the proportion of retail sales of vehicles. Compared to the first quarter 2009 proceeds per vehicle were down 4% on tractors but were up 12% on trucks. From a sequential standpoint however, prices on both vehicle types were up strongly versus the fourth quarter 2009 with tractor pricing up 7% and truck pricing up 15%. At the end of the quarter, approximately 9800 vehicles were classified as no longer earning revenue. This was down by 4200 unit or 30% from the prior year and unchanged from the fourth quarter 2009. This decrease versus the prior year reflects fewer units held for sale and an improvement in rental utilization. We continue to successfully implement our strategy to increase the number of lease contract on existing vehicles that are extended beyond their original lease term. By the first quarter, the number of these lease extensions in the U.S. was up by approximately 550 unit or 37% versus the prior year. Increasing lease extensions is a beneficial strategy in the current market environment as it retains the revenue stream with customer and lowers new capital expenditure requirement. We also successfully redeployed almost 600 more units than in the prior year's quarter, a 66% increase as we continue to focus on driving return from vehicles already in the fleet. Early terminations of leased vehicle declined by 350 units and return to relatively more normalized level. These are all positive indicators and result from our asset management area. Our global commercial rental fleet in the first quarter declined on average by 12% from the prior year. This reflects the successful execution of our plan last year to reduce the size of our rental fleet. The smaller fleet coupled with recently increased demand has driven significantly improved utilization rate in rental. Finally, let me turn to page 15 to cover our outlook and forecast. Overall, we've begun to see some improvements in customer demand levels. In FMS, we expect to see higher demand continue to benefit our transactional commercial, rental and used vehicle sales areas first. This should benefit us primarily to higher utilization and pricing in rental and through increased pricing on huge vehicle sales. However, given the long term nature of contractual lease commitment, customers still remain cautious about expanding their contract that leads fleet to this time. This will continue to put pressure on lease due to the typical lag in the timing of recovery and lease sales and an aging fleet resulting in higher maintenance cost. In supply chain, we expect the improvement in automotive volumes we've seen, we've been seeing to benefit our performance for the remainder of the year. So given these factors, we're revising our full year 2010 EPS forecast to a range of $1.85 to $1.95. And this represents an increase of $0.15 to $0.25 or a 9 to 15% improvement from a comparable $1.70 in the prior year of 2009. We're also providing a second quarter EPS forecast of $0.45 to 0.50 versus a comparable prior year EPS of 48. That does conclude our prepared remarks this morning. So we'll move now to question and answers. So at this time, I'll turn it over to the operator to open up the line for any questions.

[Operator:]

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

[David Ross:]

Yes Stifel Nicolaus, good morning gentlemen. Greg you talked about the increase in maintenance costs on the order fleet as there is a lack of renewals right now. How much I guess can the average fleet continue to age before there is a need for renewals?

[Greg Swienton:]

I think the true answer to the question is that the fleet will kind of normally seek its course. The lease fleet is where we've commented on the additional maintenance and it is getting older. We are a part of causing that because we think it's in our net net benefit on the bottom line because we are extending leases and keeping units in service longer. We are not saying that it's a tipping point burden that's going to cause an extreme problem but its just one more factor that with an increasing age of fleet we're just going to add to some expense and you won't have as much bottom line impact as fast until customers really have confidence in their long term futures of the business to actually begin to add units to their fleet that are leased as well as to do more renewals. I hope that gives you a little bit more perspective.

[David Ross:]

Yes that's helpful and then also you go and talk to the FMS customers, the 2010 engines and the 2010 trucks are obviously a lot more expensive than the older trucks but I don't think that's necessarily coming into a lot of discussions yet because people can do expansion to kind of get around this year. When do you all see that becoming a real selling point for Ryder and that people are going to have to get these more expensive trucks and then it kinds of tips the decision to leases versus owned?

[Greg Swienton:]

Well I think what we always try to communicate is that one of the real values of our value proposition and what we offer is the quality and the ability to deal with maintenance and these increasing new issues in the areas of complexity. So I think that's an ongoing message that we certainly try to communicate with prospects and existing customers and I think as they become familiar with the new units, the complexity, the expense, all of that hopefully should play in our favor and that's the part of our marketing and sales effort. Customers have been so focused on just kind of getting through this period, surviving that they really haven't focused yet on the complexity as well as the expense of these new engines but I think that day is coming.

[David Ross:]

And then last question is on the contract related maintenance side. That was down 11% more so than any other piece of the FMS puzzle. I guess what are your thoughts there and why was that down so much?

[Greg Swienton:]

I think it's only down because there are just fewer units that customers have to be maintained and I think when there does become a rise in fleet size and customers have stopped downsizing their fleets and have leveled off the revenue and the related earnings from that will also continue to increase and improve.

[David Ross:]

And what's the breakdown of that maintenance between your prevented maintenance and [serious] maintenance?

[Greg Swienton:]

It really is all preventive. I mean the idea is that it is just standalone without a lease but it is the same kind of idea we have with our lease customers. It's contracted, they bring them in for regular maintenance and the idea is to make sure that they have extremely good uptime.

[David Ross:]

Okay. So even the aging of their fleets wasn't necessarily increased maintenance revenue to writer.

[Greg Swienton:]

I'd let Tony give you a little flavor on that if he has some more perspective.

[Tony Tegnelia:]

On a net basis I think Greg is exactly right. The customers have reduced their fleet in total, so this product line is when where its not on lease with us, but I think generally even though they aged those fleets a bit, if the actual average repair on those units is a bit higher that average higher amount is still more than offset by the reduction of the units actually running out there and also the reduction in the mile of those units that are running out there. So that portion of our customers fleet is smaller and they are running fewer miles which means less transactional activity on that even though the average repair may rise because the units are older.

[David Ross:]

That's enough, thanks very much for the color.

[Operator:]

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

[Jon Langenfeld:]

Robert W. Baird. Good morning. On the crucial rental side Greg, what would be the year-over-year growth pricing there both in the first quarter here as well as the fourth quarter?

[Greg Swienton:]

You broke up a little but you are asking about pricing?

[Jon Langenfeld:]

Yes, commercial rental pricing year-over-year growth in the fourth quarter and the first quarter.

[Greg Swienton:]

Year-over-year it maybe less bad or maybe up a bit but I think kind of flat from fourth to first quarter.

[Jon Langenfeld:]

So flat meaning flat on year-over-year basis.

[Greg Swienton:]

No flat on the fourth quarter versus first quarter.

[Jon Langenfeld:]

So by the way Q1 relative to Q1 last year, would that still be down?

[Greg Swienton:]

Slightly.

[Jon Langenfeld:]

Okay. So the ability to drive rates in this line of business, I am assuming part of this is seasonal, part of this is the cycle, but the expectation for higher rates would be very likely here I would think over the course of the next couple of quarters.

[Greg Swienton:]

If you continued to see the demand that we have seen in March and into April that would be a logical conclusion.

[Jon Langenfeld:]

Okay. And then on the lease fleet size still declining sequentially, when should that stop are we still several quarters out from that actually stabilizing?

[Greg Swienton:]

Given no other external dynamics that cause the problem and we are sort of in the same general economic scenario of gradual improvement we think that the net sales improvement ought to show up more toward the latter part of this year which means that the revenue and earnings from that would not occur until like the second quarter of 2011.

[Jon Langenfeld:]

Okay and then historically the extension side of the equation, what sort of conversion rate do you have on the extensions to be able to then convert them into a new vehicle?

[Greg Swienton:]

Well I think we have probably never done as much in our history as we have done recently but I would put it this way, since these are customers who have chosen to extend and therefore have chosen to stay with us as customers I think that there is a high probability, that as they have maintained the relationship with us they are going to look to us when it is time to actually get new equipment.

[Jon Langenfeld:]

Okay so we soon look at that as necessarily head wind I think we have talked in the past you have anywhere from a 12 to 18 month average extension timeline don't necessarily look at that those vehicles as falling off when those start to come due later this year in early '11?

[Greg Swienton:]

No I would think not because the important thing is to maintain the service and the quality and the relationship with the customer and the very fact that they have extended would indicate that they are satisfied with that service and relationship.

[Jon Langenfeld:]

Okay and has the availability of capital become a larger part of the selling proposition it's always out there but given the capital markets today has that been more of a value proposition that customers are focused on.

[Greg Swienton:]

I think it will and it would be except that there probably hasn't been enough of a critical mass to say that that's proven to be a factor. I am sure in some cases where customers are confident enough about their businesses and are looking for financing or more importantly since cash and capital and credit is so dear they are more likely putting it into their core business and considering something like transportation and leasing and maintenance to be something that they can get through us and then spare their available capital for their own business.

[Jon Langenfeld:]

Right and then just two number questions if you have them. Do you have the not yet earning number for the global fleet?

[Greg Swienton:]

Yes we do and I know it's on a note I have here.

[Jon Langenfeld:]

And then while you were looking for that I was also wondering if you had the amount of losses or gains in the depreciation line?

[Robert Sanchez:]

Yeah the (inaudible) earnings is $1400.

[Jon Langenfeld:]

Okay.

[Greg Swienton:]

Robert can find it in the 10Q better, faster than I can.

[Jon Langenfeld:]

That's actually an acceleration from the second half of last year, correct? Because you had 700 I believe.

[Greg Swienton:]

No that was 700 at year end. March 31, 2009 was 1100.

[Jon Langenfeld:]

1,100 okay.

[Greg Swienton:]

What was the second question?

[Jon Langenfeld:]

Second question was the amount of losses or gains in the depreciation line.

[Greg Swienton:]

Just under $10 million of expense was from the write-down at the used vehicles center.

[Operator:]

Thank you. Our next question is from Scott Group from Wolfe Trahan.

[Scott Group:]

Couple of quick ones, first. Can you give a little color on the new technology initiatives and dedicated and then how much was the expense in 1Q and what do you think that should be going forward.

[Greg Swienton:]

Broadly, those are intended to provide some software capabilities that we believe will enhance our service for customers and improve our administrative efficiency but I will turn that over to John Williford who has that segment

[John Williford:]

Yeah we are putting in a new operating system for dedicated contract carriage. I think it will improve our capabilities quite a bit and in the first quarter I think the impact was about half a million

[Scott Group:]

Any expectations for that going forward?

[John Williford:]

I think by the end of the year it should net out. We should start to see the benefits equaling the cost

[Scott Group:]

The essential support services expense, that's been pretty choppy past few quarters, can you guys give any kind of color or guidance on that going forward.

[John Williford:]

Usually that's the place that we look to maintain pretty significant cost control that's kind of in our history in that expense area over time. We have said that we are not managing this business for a quarter or two; we are managing it for the long-term. And we want the opportunity to make investments in technology in certain platforms and I think we will see that continue not in an unusual or particularly choppy level but as a commitment for improving our infrastructure going forward because it will be necessary and valuable as we go through recovery.

[Scott Group:]

Okay, and then last one just bigger picture. Can you just talk about the lease and rental fleet and where we are through the first quarter relative to peak and when you think you get those fleets back up to peak levels, what's the timing?

[Greg Swienton:]

Yes. We are quite away from where the peak size of the rental fleet was. I think that will depend on demand and sometime over the next few years as I sort of intimated in my comments, we are looking at that even this year whether it will make sense to increase that. But compared to where we were, it will be a while to get that fleet size up, but as long as we are getting good utilization, very strong utilization and improving pricing that's less of a concern than the fleet size. On the lease units I think that's going to also be a multiyear progress activity and it has to do with not just strength in the overall economy, but confidence levels of 15,000 customers generally that they are ready to believe and commit that the recovery is long-term and our business are sound and they are going to add to the fleet. So I think that's also a multiyear effort.

[Scott Group:]

Right, and until you get those fleets back up to those peak level, can you get back to that four for fifty years kind of peak number you had in 2008 or does that mean there is something else you can do to get there or do we just have to wait for the fleet to get back up the peak up?

[Greg Swienton:]

Well if you freeze everything else going on, I would say that it is important to get the leased fleet back up to a higher level. It's less critical and rental and you also have to look how much now can a DCC and Supply Chain provide, because they had some very soft years as well and they will contribute. In addition, we haven't taken acquisitions of the table and we still have the warewithall for the share re-purchase. So, organically freezing a lot of other items, it will take a while, but there are other factors that can influence the speed with which we reach former peak earnings.

[Operator:]

Thank you our next question Alex Brand, you may ask your question and please state your company name.

[Alex Brand:]

Hey Stephens Inc., good morning guys. Greg I think you sort of answered this question but the CapEx in the back half of the year. You still don't have anything other than customers who are looking to pick up '09 engines that are still available right. Nothing in addition to that, so far,

[Greg Swienton:]

I'll make sure I understand your question correctly. Are you talking about the back half of 2010?

[Alex Brand:]

Right.

[Greg Swienton:]

Well the 2009 engines are running out as we speak, because there it is only, they had to be manufactured and put into vehicles. So by the end of the year that's all it's going to available for 2010.

[Alex Brand:]

Right I think you had said before you had like 250 million of CapEx that was mostly related to replacement vehicles and people trying to grab non-engines while they could.

[Greg Swienton:]

That was primarily the 250 million was primarily a reflection of our commitment to replenish and refresh the rental fleet.

[Alex Brand:]

Okay, and as you go out to talk to private fleet and obviously trying to generate organic growth from new customers. Are you yet seeing the interest in the private guys maybe saying hey we don't want to get in that position again come next cycle and maybe we do want to outsource our fleet needs.

[Greg Swienton:]

I'll let Tony comment it if he would like what he and the sales organization are encountering these days.

[Tony Tegnelia:]

I think what we are seeing is that there is and you can see it manifest in the extensions as well, there is a lot of concern about the expense and the complexity of maintaining these new vehicles in the market place today and we think that is a great place for us. It uses, doesn't use their capital, uses our capital instead, we do buy better than they buy and we are better equipped to really manage the running cost aspect of these more complex vehicles than we believe any of the customers are clearly and also of course the residual unknown is something that we have more knowledge about as well. So we do believe that the complexity and a lot of the unknowns relative to these units will be very good for leasing. And that is their concern, I think first what they are doing is extending and watching to see a little familiarity with the new unit and then we believe that given the complexity to maintain those that we'll get that renewal business on extension they will be the 2010 technology. And we think that complexity is a good thing for leasing.

[Alex Brand:]

And just one more question for Robert, can you remind us what we should expect on pension expenses and overall retirement expenses for the rest of the year?

[Robert Sanchez:]

Pension expense if you remember the waterfall, the pension expense benefit was about $0.18, and that's spread evenly across the year, so that comes out to either about $0.04 in the first quarter and you've got another $0.12 to $0.14 left in the rest for the year.

[Operator:]

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

[Art Hatfield:]

Morgan Keegan. Good morning everybody.

[Greg Swienton:]

Good morning.

[Art Hatfield:]

Hey Greg, kind of think about the commercial utilization fleet and what's the commercial fleet utilization, what's got on the first quarter, can you talk about kind of where utilization was in March versus say January or December?

[Greg Swienton:]

I would say that anecdotally and looking at lots, the utilization was much higher in March than it was in any of the December, January and February. If we've got a specific stat, maybe Tony might have it nearby.

[Tony Tegnelia:]

And while in the second quarter or so, I'm sorry, the second quarter utilization of '09, we were about 68 to 5, something like that for this second quarter of '09, for the power fleet.

[Art Hatfield:]

Do you have the utilization by the month? First quarter?

[Tony Tegnelia:]

First quarter was about 60%.

[Art Hatfield:]

For the first quarter about last year. And you have it by month now?

[Tony Tegnelia:]

Yes. For this year or for last year.

[Art Hatfield:]

For this year.

[Tony Tegnelia:]

For this year, it's about 69% in January, about 71% in February and about 72% in March.

[Art Hatfield:]

Okay, great. Thank you.

[Tony Tegnelia:]

Which are very attractive utilization rates for that early in the year.

[Art Hatfield:]

Yeah. That was my next question. How does that compare to kind of what you've seen historically on average for the first quarter?

[Tony Tegnelia:]

Well, last year this time, those rates were all in the low 60s; 60%, 60.1%, 60.4%. So we are dramatically evolved in utilization rate for each of the months January and February and March in 2010 compared to '09. And they are actually very high even for that period of season. So generally, they're high for that early in the year and also much higher than they were this time last year.

[Art Hatfield:]

Greg, as you go forward and you mentioned, you're discussing the possibility of growing and maybe getting more, growing the commercial rental fleet, how do you balance that against it? And if you grow it too fast, can that create a potential disincentive for customers to sign long-term lease agreements?

[Greg Swienton:]

Well, you would think not because you have a disparity in the price level. I think customers will use rental, almost regardless of the price until they're confident that they got long-term certainty in their business. So I don't think that's a concern. I think that by our nature, you've seen that we've been pretty aggressive in downsizing the fleet in order to be careful. We'll be careful on the way up but once you start getting to some of the utilization rate that we are now seeing, you don't want to have empty lots, you don't want to have inadequate spectrum of vehicles for customers to come in and rent. So we took some pain, some several years of pain on the downside on rental. And this is going to be the first thing out and the first thing up. And we don't want to loose the opportunity on the way up.

[Art Hatfield:]

Got it. And then, finally on extension, as we've got to this downturn, you have been extending a lot of leases as they were rolling off. Do you have enough data say for extensions that expired in the first quarter to get a feel for what customers are doing or is it too early in the rollout for those to have many to say that be comfortable in saying 50% are going with new vehicles or they are just letting those vehicle go away.

[Greg Swienton:]

Tony?

[Tony Tegnelia:]

I think for the most part, it is bit too early. But reflecting on Greg's comment earlier, these are customers that are solidly loyal to Ryder. And I think they are waiting until they get better indications as to what is happening to their business. I want to get those indications to do more talking about the future, we think a very good proportion, a strong proportion of that group will go for the longer term, 50-60 months scenario with us. So it's a bit early but we think a preponderance to that group will stay with us.

[Art Hatfield:]

Okay. And if you have the experience you had of having extension expire and then re-extending those or you be pretty firm to the initial terms to the extensions?

[Tony Tegnelia:]

For the most part, they stay with the initial term at the extension. We're very careful that there is some light left in the vehicles when they go to the used vehicle centers. So typically, they're extendable for one period of time.

[Operator:]

Thank you. Our next question is from Todd Fowler. You may ask you question and please state you company name.

[Todd Fowler:]

Hi good morning, it's KeyBanc Capital Markets.

[Greg Swienton:]

Good morning.

[Todd Fowler:]

Greg, sticking with the commercial rental fleet, at what point would you have to make the decision in the year to actually grow that fleets, take it those vehicles in this service by the end of the year?

[Greg Swienton:]

Well, there's some lead time. I'm not sure that the lead time is real long. I think that we'd be making expectations about what we're seeing thus far, what we're seeing in the near term. And if you want to talk about lead time Tony, you can add that.

[Tony Tegnelia:]

Sure. I think basically, the lead times are about two months or three months or so, something like that before we can get the vehicles into the fleet. But I think most importantly, if we do see the demand that we do anticipate now, we would just slow the out servicing of the units that are currently planned to be out serviced. And that's one way to really grow the fleet. But our peak fleet this year is planned to be up, slight a bit versus the peak fleet, last year to take advantage of this demand that we see. But notwithstanding the fact that this is about 12 or so weeks for delivery times its easier to swell your fleet by delaying the out servicing of the units to be retired and that is our plan right now.

[Todd Fowler:]

Okay so you can grow the fleet without having significant CapEx in the short term.

[Greg Swienton:]

In the short term yes.

[Todd Fowler:]

Okay and then on commercial one for pricing if memory serves me I think that half of the commercial rental revenue comes from whole service lease customers is that pricing established on an annual basis or how quickly does that pricing reset or does that look at renewed dictations from the utilization trends?

[Greg Swienton:]

Well generally the portion of the rental revenue is generated by a lease customer will be at the contracted lease rate and that's typically right now that's running about 35% or 40% of our total rental business, the pure which is outside customer pure transaction is more about the 60% range but for those lease customers that do rent from us, they will rent at the contracted lease rate.

[Todd Fowler:]

Right and how frequently is that price updated is that an annual decision or is that something that covers the life of the lease product?

[Greg Swienton:]

Well it would be whatever the lease rate is at that period of time which also adjusts for CPI and things like that as well. So whatever the outstanding lease rate is for lease customers at that time that is the rental rate that they will pay.

[Todd Fowler:]

Okay that's helpful and then just switching gears here with the supply chain business the margins here in the quarter slipped a little bit again from that high water mark in the third quarter of 2009 what's the expectation for that going forward and was there any impact on the quarter from the Toyota stretch answers, the Toyota issues on the business?

[John Williford:]

Yeah okay first most of that is seasonal right if you look at our history even going back to '06, '07 and '08 we tend to do about 200 basis points better for the year than we do in the first quarter and a lot of that is automotive and some of that is hi-tech seasonality and that's exactly what we expect this year. So, that's most of the discrepancy between what you might be used to for a full year margin or what you saw on the first quarter, then the impact with a one large auto customer that you referenced is, that's about a $1 million impact for the quarter, that's we don't see going on a going forward basis.

[Todd Fowler:]

Just thinking about the guidance for the second quarter, you know when your business just does have some seasonality, can you talk about, Greg some of the drivers that get you from the $0.25 here in the first quarter to kind of mid-point at the range being $0.47, $0.48 in the second quarter?

[Greg Swienton:]

Yeah the big step up is normal seasonality and in improving environment economically and financially, I think the four pieces that would cause the improvement, second quarter to first would be the commercial rental improvement in utilization, the used vehicle sales pricing, the miles driven continuing to be anticipated to be stronger and you have got a big improvement in supply chain when you look at volume and activity especially in the automotive portion compared to last year so those four, really carry you as well as the seasonality

[Todd Fowler:]

And did you see what miles driven were on a year-over-year basis in March.

[Greg Swienton:]

It was 1.4% for the quarter I don't know if you have March. March was 3.5, a very nice increase. Yeah it carried the quarter.

[Operator:]

Next question is from Matt Brooklier your line is now open, you may ask your question and please state your company name

[Matt Brooklier:]

Yes, Piper Jaffray good morning guys. I wanted to go back to the commercial rental fleet you guys indicated that you are potentially reallocating some of your CapEx this year to expand that fleet. Where are you in terms of that process? Is that kind of an initial discussion phase, are you out speaking with some of the OEMs in terms of putting together packages to purchase, new equipment. I am just trying to kind of a measure here conviction level in terms of expanding the commercial rental fleet going forward.

[Greg Swienton:]

It's under consideration.

[Matt Brooklier:]

Okay. Under consideration just in conversation or you're actively looking at equipment currently?

[Greg Swienton:]

Certainly under consideration internally and we will let you know when we've done something externally.

[Matt Brooklier:]

Okay and on the DCC side you guys showed nice, sequential profitability improvement in that particular business line, want to think and look at pricing going forward, I know that the pricing on that particular product is more kind of longer term contractual, wondering given the current freight environment and things getting tighter here, are you guys able to take price going forward? I mean when did the majority of those contracts come up for renewal, or is it kind of balanced throughout the year or is it skewed more towards the beginning in the year maybe just add a little bit of a color on DCC pricing going forward.

[Greg Swienton:]

Yes. I haven't thought about that issue in terms DCC pricing but more in terms of growth opportunities. In the last year we've been competing with truck load carriers with excess capacity and as their capacity tightens up we do expect to see better environment and higher retention of existing business and more growth.

[Matt Brooklier:]

Okay. Are you actively able to start ratcheting price up as contracts come out for renewal or there are more contracts that come up earlier or later in the year kind of what does that look like during 2010?

[Robert Sanchez:]

Yeah, on the pricing and because it's contractual pricing and you're pricing a long-term contract where you have to make a decent return on capital. Added competition from truck load carriers really didn't affect our pricing, we priced at the same level on loss in business and now I think we'll price at the same level and retain more business and win more business.

[Matt Brooklier:]

Okay. And just one last question for Robert, in terms of expected depreciation expense during 2010, I think you guys had given guidance that it's going to be up year-over-year, has that changed going forward because the kind of the run rate in what we saw on first quarter was a little bit lower than, at least I had in my model.

[Robert Sanchez:]

I don't know what about it being high, we're expecting to be slightly down for the year and a lot of that is because of the reduction in the write-downs of the used trucks spenders and the fact we have a smaller fleet. So you look at what happened in the first quarter to kind of remain at that level and maybe a little bit higher at the tail end of the year as the metal vehicles come on, but it would be slightly down from last year.

[Operator:]

Your next question is from David Campbell.

[David Campbell:]

I wanted to ask you about the miscellaneous income in the first quarter, a $1.5 million, where was that from?

[Robert Sanchez:]

That was better performance for the securities in our deferred compensation plans, the better performance caused that gain.

[David Campbell:]

Okay. You think the gains from the used vehicle sales will increase in the next two quarters but I am not sure if they will because you made less vehicles for sale.

[Robert Sanchez:]

No we, we wouldn't say that they are going to necessarily increase the gains, the gains I think as you mentioned will have the inventories are down so I would expect them to kind of be close to the run rate that you are seeing at the current gain levels. What we expect is a reduction in the write-downs for the vehicles at the used truck centers year-over-year.

[David Campbell:]

Which will impact your DNA charges?

[Robert Sanchez:]

Correct.

[David Campbell:]

Total DNA charges.

[Robert Sanchez:]

That's right.

[David Campbell:]

You were talking about reallocating capital expenditures to commercial rental fleet if there continues to be increase in demand so where would the CapEx reductions come from, where would you spend less money?

[Robert Sanchez:]

You would spend less money on capital expenditures for lease if the demand for lease is not as we had originally forecasted and right now it's a little bit softer.

[David Campbell:]

Full service lease you mean the long term leases?

[Robert Sanchez:]

That's correct.

[David Campbell:]

Then the problem will come when both of them are stronger, then you have to do something different right?

[Robert Sanchez:]

Well, it's a problem we will look forward to.

[David Campbell:]

The delaying of outsourcing of this to be sold, can you explain that? You said you could increase the fleet size without adding CapEx immediately?

[Tony Tegnelia:]

Yes this is Tony. Typically what we do is, we'll sequence the new vehicles in right before the season and out serve these vehicles on a timely basis to make sure that we maximize the size of the fleet during the peak season, but as demand does for tract, if you are well and goes on later into the year and carries further beyond the season. We'll just delay the out servicing and keep the fleet levels high. We would never take vehicles away from customers if you will, who are renting them and stick with our out servicing plan given the fact that those vehicles are targeted to be out serviced. We just keep the units in the fleet, enjoy the revenue and the very high margin pull through on that business and grow the fleet from that strategy.

[Operator:]

Our final question today is from Jeff Kauffman.

[Jeff Kauffman:]

Terrific I guess lead indicators here. John I don't want to discount what's going on in your business because I thought logistics look great. But my question is going to be directed to Tony. First of all rental utilization picking up as always been historically a precursor for full service lease, that's good. I've always thought at 75% utilization we grew the fleet 65% we shrank it and it sounds like at 72%. You are ready to grow. Are we kind of preempting this or you are telling us that you think you are going to be at that 74% utilization rate pretty soon?

[Tony Tegnelia:]

We believe that the demand for rental is going to come on very strong. And we feel very good about what we are seeing with the demand, this actually this early in this season. So we believe we have done the right thing by rightsizing the fleet in '09 our refreshment program, the vehicles will be delivering right now as we speak, perfectly on time for our peak season and we think the demand will really be there. Because a number of the lessor and renters if you will and also because of the private fleets have all been reducing their fleets over the last six to eight quarters. We think that there'll be very strong demand for (inaudible) when we go into season and this will cause upward pressure on pricing as well. So we'll have the unit, our peak fleet will be greater this year than it was peak last year and we think there'll be a lot of pressure on price because of demand and the reduction of lot of private carriers fleets and we think it will an excellent season for us.

[Jeff Kauffman:]

Just so I can get an idea because it sounds like we are near the bottom of the fleet cycle. Do you have the vehicle counts for the rental fleet and the full service lease fleet at the end of 1Q?

[Greg Swienton:]

Yes.

[Jeff Kauffman:]

Okay and we can follow up offline as well. I just wanted to get those counts if you happen to have them handy.

[Greg Swienton:]

Yes we have them now.

[Greg Swienton:]

At the end of March by product line, full service lease was 112,700 commercial rental 28,800; service vehicles and other 3,000; 144,500 active units, 6,800 held for sale for a total of 151,300 plus 33,900 customer vehicles under contract maintenance.

[Jeff Kauffman:]

Okay, so that's the [RPM] maintenance.

[Greg Swienton:]

Right and that will all be out in the queue pretty soon.

[Jeff Kauffman:]

One final question, you know this is a business where the margins tends to lag the volume growth. You're signing new business, I know the pricing starts getting better but you also have a fair amount of business that was signed in '06 and '05 and '07 is coming off the books probably at higher margins. To extent you are comfortable and however you want to describe this. Can you give me an idea of the difference that you are seeing in the margins of new business being signed today versus the average business that might be coming off the books?

[Greg Swienton:]

Well remember what we measured Jeff, we measured EVA per unit. And the EVA per unit is higher than it was several years ago. So we have not changed our standards. You know that the fact that equipment is more expensive or will be more expensive. The important thing is the return on that investment. So you can't assume that just because you are going through a difficult time that lease is acting like other transactional products. So our commitment and our requirement for the long-term because you signed a six year lease, you are burdened with that. On your bottom line you P&L and your return. So our critical measurement there is still EVA per unit and it is better than it was several years ago.

[Jeff Kauffman:]

So with the cost of the equipment being higher is it safe to assume then that your cost of capital is lower?

[Greg Swienton:]

I don't think you can assume that necessarily because it also comes from our leverage ratio and there are cost involved but obviously what we are trying to increase is the spread between the return on cost, a return on capital and cost of capital. And that's where because of what's occurred in the last couple of years, we've taken such a dip. But we want to make sure we are in good stead and good position for that recovery.

[Jeff Kauffman:]

Okay. Well that's great news. Guys thank you very much.

[Greg Swienton:]

You're welcome.

[Operator:]

Thank you. And that concludes the question-and-answer session. I would now like to turn the call over to Mr. Swienton for closing remarks.

[Greg Swienton:]

All right. Well a little after noon. So our time is finished. I thank you all for attending and have a very good safe day.

[Operator:]

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