Ryder System, Inc.
Q4 2010 Earnings Call Transcript

Published: 4 Feb 2011

[Operator:]

Good morning and welcome to Ryder Systems Inc. Fourth Quarter 2010 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. As a remainder, if you are using a headset or a speaker phone, please pick up your handset before asking your question. Today’s call is being recorded. If you have any objections, please disconnect at this time. I would like to introduce 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 Fourth Quarter 2010 Earnings and 2011 Forecast Conference Call. I’d like to begin with a reminder that in this presentation, you will hear some forward looking statements within the meaning of Private Securities Litigation Reform Act of 1995. These statements are based on management’s preferred expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. For detailed information about these factors is contained in this morning’s earnings 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 Art Garcia, Executive President and Chief Financial Officer. Additionally, Robert Sanchez, 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 Swienton:]

Thank you Bob and good morning everyone. This morning we’ll recap our fourth quarter 2010 results, review our asset management area and discuss our outlook and forecast for 2011. And after our additional remarks we’ll open the call for questions. So, let me get into an overview of our fourth quarter results beginning on page four for those of you following on the power point. Net earnings per diluted share from continuing operations were $0.80 for the fourth quarter 2010, up from $0.43 for the prior year period. Both periods included income tax benefits partially offset by restructuring and other items. Excluding these, comparable EPS was $0.65 in the fourth quarter 2010, up from $0.41 in the prior year. Fourth quarter EPS was also above our forecast range of $0.58 to $0.63. Total revenue was up by 5% from the prior year reflecting a 4% increase in operating revenue and higher fuel services revenue. Operating revenue which excludes FMS fuel and all subcontracted transportation revenue increased due to higher commercial rental and supply chain solutions revenue partially offset by lower full service lease revenue. On page 5, in fleet management total revenue increased 5% versus the prior year. Total FMS revenue includes a 10% increase in fuel services revenue reflecting higher fuel cost pass throughs. FMS operating revenue which excludes fuel increased by 4% due to higher commercial rental revenue. Contractual revenue which includes both full service lease and contract maintenance was down 2% due to fewer contracted units in the fleet as compared to the prior year. Commercial rental revenue was up by 31%. Rental revenue benefited from improving global demand, higher pricing and an increase in the fleet size. Net before tax earnings in fleet management are up by 55%, fleets management earnings as a percent of operating revenue increased by 220 basis points to 6.8%. FMS earnings were positively impacted by improved commercial rental performance better used vehicle results and lower expenses in our retirement plans. These improvements were partially offset by higher maintenance cost and an older lease fleet. Fewer vehicles in the lease fleet increased compensation expense and investments in sales and information technology initiative. Turning to supply. chain solutions segment on page 6, total revenue was up 8/% and operating revenue grew by 4% due to increased volumes and new business in the high-tech and automotive sectors. SCS net before tax earnings were up by 5%. Supply chain’s net before tax earnings as a percent of operating revenue increased by 10 basis points to 4.8%. Higher SCS earnings resulted from improved operating results particularly in the high-tech sector partially offset by increased compensation pension cost. In dedicated contract carriage, total revenue was up by 2% and operating revenue was up by 5% reflecting higher fuel cost pass throughs and new business. DCC’s net before tax earnings decreased by 6% while earnings as a percent of our operating revenue were down by 60 basis points to 5.5% reflecting higher driver cost. Page 7, highlights key financial statistics for the fourth quarter. I already discussed our quarterly revenue results. So let me start with EPS. Comparable EPS from continuing operations were $0.65 in the current quarter, up by $0.24 or 59% from $0.41 in the prior year. Including discontinued operations earnings per share for the quarter was $0.72, up $0.57 or 380% from $0.15 last year. The average number of diluted shares outstanding for the quarter declined by 3.2 million shares to 51 million. During the fourth quarter, we completed our $100 million share repurchase program purchasing approximately 565,000 shares at an average price of $44.01 per share. We also purchased approximately 145,000 shares at an average price of $43.88 under the separate 2 million share anti-dilutive program during the fourth quarter. This program remains active with a little over 1.4 million shares available under the program at year end. As of. December 31st there were 51.2 million shares outstanding of which 51 million are currently included in the diluted share calculation. The fourth quarter 2010 tax rate was 16.4 % the tax rate was below a normalized rate due to the favorable settlement of prior tax years as well as an expired statuette of limitation. The fourth quarter 2009 tax rate was 25.6% reflecting income tax rate changes in Canada. These tax benefits were excluded from our comparable EPS in each year. Page 8 highlights key financial statistics for the full year. Operating revenue was up by 2% comparable EPS from continuing operations were $2.22 up 31% from $1.70 in the prior year. Including discontinued operations, earnings per share were $2 in the quarter up 103% from $1.11 in the prior year. Adjusted return on capital was 4.8% up from 4.1% in the prior year and this increase represents a turn around from negative ROC comparisons we saw earlier in 2010. I’d like to now turn to page 9 to discuss some of the key trends we saw during the fourth quarter in each of the business segments. And some of the key statistics I’ll discuss here are also included in a key performance indicator’s page in the earnings press release tables. In fleet management solutions, full service lease revenue declined 2%. The average de-leased fleet was 4% smaller from the prior year’s fourth quarter but only down 1% sequentially from the third quarter 2010. Contract maintenance revenue decreased 5% reflecting a reduction in the average fleet count of 3% versus the prior year but only down 1% sequentially from the third quarter. Lease pricing on the new units has been and remains firm as we are focused on realizing appropriate long term returns for investments made in this contractual product line. Following declines in 2008 and 2009, miles driven per vehicle per day on U.S. leased power units increased over the prior year for the fourth consecutive quarter. Miles per unit were up by 4% versus the fourth quarter 2009. Commercial rental revenue was up very strongly by 31% from the prior year on 9% larger average fleet. We’re seeing benefits from improved demand and greater usage of rental trucks, due in part to the higher cost of new vehicles. Given these factors, we rented each vehicle for a greater number of days during the quarter, resulting in higher utilization. Global, commercial rental utilization on power units was 77.9%, up 550 basis points from the 72.4% last year. Global pricing on power units was up 10%, accelerating from the 8% increase we saw in the third quarter. In fleet management, we also saw stronger used vehicle results during the quarter, reflecting an improved environment. And I will discuss those results separately in a few minutes. The trend of higher maintenance cost on our older lease continued during the fourth quarter. Since customers have been replacing leased units at a slower than normal rate, the fleet’s become relatively older during the year. In supply chain solutions, operating revenue was up by 4% in the quarter. We had some nice new sales wins and we also benefited from higher volumes, particularly with some of our automotive and high tech customers. Please note in our segment reporting in the appendix that we have gone to a global reporting format for supply chain. Our results are now presented globally for our four key industry verticals. Automotive, high tech, retail CPG and industrial and other. In dedicated contract carriage, operating revenue grew 5% due to higher fuel cost pass throughs and new business. DCC's net before tax earnings were down by $400,000 due to higher driver cost of approximately that same amount in the quarter. We’ve seen more driver job openings and longer hiring lead times which resulted in more costly use of temporary outside drivers. We focused on addressing this issue and the number of open driver positions declined throughout the quarter. Page 10 highlights our full-year results by business segments. In the interest of time, I won't review these results in detail but just highlight the bottom line results. Comparable full-year earnings from continuing operations were $170 million, up by 24% from $94.6 million in the prior year. Net earnings, including discontinued operations, were $118.2 million, up by 91% from $61.9 million last year. And at this point, I will turn the call over to our Chief Financial Officer, Art Garcia, to cover several items beginning with capital expenditures.

[Art Garcia:]

Thanks, Greg. Turning to page 11, full-year gross capital expenditures totaled almost $1.1 billion, which is up $476 million from the prior year and in line with our initial forecast. Full-year spending on leased vehicles increased $99 million from the prior year, reflecting improvements in both new lease sales and lease renewals as well as higher per vehicle investment costs. Capital spending on commercial rental vehicles was $379 million, due to refreshment and growth of the rental fleet. This was an increase of $371 million over the prior year, since in 2009 we spent very little capital on rental vehicles due to the weak economy. We realized proceeds primarily from sales of revenue earning equipment, of $235 million. That’s up $19 million from the prior year. The increase reflects higher used vehicle pricing, partially offset by fewer units sold. Including proceeds from sales, full-year net capital expenditures increased by $457 million to $853 million. We also spent $212 million on acquisitions, primarily for the purchase of total logistic control on December 31. As additional information on this deal, we paid 8 to 9 times EBITDA for TLC. So, we’re very comfortable with the price paid for this strategic and accretive acquisition. Turning to the next page, we generated full-year cash from operating activities of about $1 billion that’s up $43 million from the prior year. Depreciation decreased to $47 million in 2010 due to a smaller fleet, as well as lower adjustments in the carrying values of used vehicles. These items more than offset higher depreciation cost per vehicle, resulting from higher average vehicle investments, lower residual values and accelerated depreciation rates on certain vehicles. Including the impact of used vehicle sales, we generated over $1.3 billion of total cash for the year, that's up $62 million from the prior year. Cash payments for the capital expenditures increased about $400 million to $1.1 billion, reflecting increased vehicle purchases and the timing of vehicles received from OEMs. We generated $258 million of positive free cash flow for the year and this is right in line with our initial forecast. Free cash flow was down $356 million from the prior year’s record free cash flow due primarily to higher capital spending on vehicles. On page 13, total obligations of approximately $2.8 billion are up $230 million as compared to year-end 2009. The increased debt level is largely due to higher vehicle capital spending and the closure of the TLC acquisition on December 31. Balance sheet debt to equity was 196%, as compared to 175% at the end of the prior year. Total obligations as a percent to equity at the end of the quarter were 203% versus 183% at the end of 2009 and below our target range of 250% to 300%. Our equity balance at the end of the quarter was approximately $1.4 billion that's down by $23 million versus year end 2009. The equity decline was driven by net share repurchases of $123 million and dividends of $54 million partially offset by earnings of $118 million and currency translation adjustments. At this point, I'll hand the call back over to Greg to provide an asset management update.

[Greg Swienton:]

Thanks Art. On page 15 we summarize key results for our asset management area globally. At the end of the quarter, our global used vehicle inventory for sale was 5200 vehicles, down by 1700 units from the fourth quarter 2009. The used vehicle inventory is up 500 units sequentially from the end of the third quarter 2010 but still below our target level. We sold 4000 vehicles during the quarter, 23% fewer than the prior year due to our smaller inventory available for sale. We saw continued strength in used vehicle demand and pricing in the fourth quarter. Improved demand is the result of both relatively better market conditions and the desire of some truck buyers to obtain pre 2010 engines. Stronger demand combined with less available inventory in the market has allowed us to up price generally and to increase the proportion of retail sales where we realize better prices. Compared to the fourth quarter 2009 proceeds per vehicle were up 39% on tractors and 56% up on trucks. From a sequential standpoint, tractor pricing was up 13% and truck pricing up 4% versus the third quarter 2010. At the end of the quarter approximately 7200 vehicles were classified as no longer earning revenue. And this was down by 2600 units or 27% from the prior year and the decrease reflects fewer units held for sale and an improvement in rental utilization. We've continued to successfully implement our strategy to increase the number of lease contracts on existing vehicles that are extended beyond their original lease term. The number of these lease extensions in the US for the full year was up by approximately 1500 units or 20% versus the prior year. Increasing lease extensions is a beneficial strategy in the current market environment, as it retains the revenue stream with the customer and lowers new capital expenditure requirements. We anticipate strong continued lease extension activity, particularly due to the increased cost of the new 2010 engines. Early terminations of leased vehicles declined by almost 2500 units and were at the lowest level in at least five years. This is a very positive indicator of improved lease demand. Our average global commercial rental fleet during the fourth quarter was up by 9% from the prior year period. Let me move now into a discussion of our 2011 outlook. Pages 17 and 18 highlights some of the key assumptions in the development of the 2011 earnings forecast that I'll review shortly. Our 2011 plan anticipates a moderately stronger overall economic and freight environment. We assume that the overall interest rate environment will remain stable. However Ryder’s average interest rate will decline due to the maturity and roll over of higher rate debt. We forecast foreign exchange rates to be stable. If the US dollar were to be stronger than we forecast, there would be a negative impact primarily on reported revenue but this generally would not materially impact earnings. In the fleet management area, we expect stronger new contractual sales and improving retention levels. This should lead to organic growth in the lease and contract maintenance lease beginning in the second half of this year. We have a some what higher than normal proposition of leases expiring this year due to our strong sales years back in 2005 and 2006. Therefore our focus on good customer retention is important this year. Closing the Scully and Carmenita acquisitions in January should help us realize a small increase in the total contracted fleet in the first half of the year and will benefit earnings mainly in the second half. In addition, we expect to see continued modest growth in miles driven per unit our lease fleet. In commercial rental we anticipate higher rental demand and continued strong utilization with further pricing improvement during the year on a larger fleet. In the used vehicle area we expect that the number of vehicles sold will increase due to higher lease replacement activity this year. We anticipate pricing to continue to improve due to a modest better economy and the desire of some buyers to avoid the more expensive new engines. Turning to page 18, in supply chain and dedicated we expect revenue and earnings growth due to both organic new sales and recent acquisitions. We also anticipate higher volume in several industry verticals we serve in supply chain. In dedicated, we expect higher cost due to increased driver wages and equipment cost. We anticipate offsetting these cost increases however through rate increases and productivity improvement. Page 19 provides a summary of some of the key financial statistics in our 2011 forecast. Based on the assumptions I just outlined, we expect operating revenue to grow by 11% to 12% this year. Comparable earnings from continuing operations are forecast to increase by 23% to 27% showing strong operating leverage on our revenue growth. Comparable earnings per share are expected to increase by 26% to 30% to a range of $2.80 to $2.90 in 2011 as compared to our 2.22 in the prior year. Our average diluted share count is forecast to decline by 1.1 million to 50.8 million shares outstanding. The share count decline results from the share repurchases made during 2010 under the recently completely $100 million program. We project a 2011 comparable tax rate of 38.6% largely in line with the prior year. Our return on capital is forecast to increase from 4.8% in 2010 to 5.2% this year driven by higher projected earnings. Please note that we’ve included a page in the appendix on page 27, which shows our cost of capital versus our return on capital over a multi-year period. These comparisons were negatively impacted in the past couple of years by the severity of the recession but we are starting to narrow the gap. Next page 20 outlines our revenue expectations by business segment. In fleet management contractual revenue and lease and contract maintenance is forecasted to be up by 2%. This largely reflects the impact of acquisitions, higher rates on new sales resulting from increased vehicle investment cost and CPI rate increases. In commercial rental we’re forecasting revenue growth of 19%. This is driven by a modestly improved economic environment and demand from customers who are delaying purchases of the more expensive new engine technology for their own private fleets. Supply chain operating revenue is expected to grow by 29% driven by the acquisition of TLC, organic sales and volume improvements. Dedicated operating revenue is forecast to be up 12%. This forecast reflects dedicated revenue from the Scully acquisition and to a lesser extent organic new sale. Page 21 provides a waterfall chart outlining the key changes in our comparable EPS forecast from 2010 to 2011. We continue to face headwinds from the impact of fleet downsizing by our leasing contracts, maintenance customers over the past several years. While the rate of decline has slowed and we anticipate the fleet to start growing organically by mid-year, the fleet is now older by eight months compared to last year and this means our maintenance costs are up. While we’re implementing significant initiatives to address this, we still expect the older fleet to negatively impact FMS contractual earnings by $0.28 to $0.32 per share. We plan to make several strategic investments to support the long term growth and profitability of our business. These investments mainly fall into the areas of enhancing the maintenance technology and processes in our shops and in sales and marketing. These strategic investments are expected to cost $0.20 this year. In 2010, we partially restored some compensation that was eliminated or lowered during the recession. This year we expect to restore the remaining portion of compensation to return more normalized levels and this will negatively impact EPS by $0.11. We expect improvements in numerous areas to more than offset these headwinds. We’ll benefit by $0.06 from the share repurchases we made during 2010. As is our normal forecasting approach, we’re not factoring in any potential new share repurchases into our forecast. The three acquisitions we recently closed are expected to add $0.15 to $0.17 EPS this year. This benefit is already net of the negative impact from the amortization of intangibles. We have the balance sheet capacity to complete additional accretive acquisitions and continue to look for appropriate opportunities as a supplement to organic growth. Again as is our normal forecasting approach we’re not factoring in any potential and new acquisitions into this forecast. In 2010 we expect a net $0.11 benefit from our pension plans driven largely by the increase in asset values in our plans all of which are frozen. As reminder back in 2009 we had a negative year-over-year impact of $0.75 per share from our pension plans. In 2010 &2011 we’ll see a combined $0.40 benefit so recovering some but not all of the 2009 expense increase. We expect improved results in supply chain and dedicated totaling $0.16 due to new sales, improved volumes and productivity initiatives; partially offset by higher driver in vehicle costs in DCC. In FMS stronger used vehicle pricing as well as an increase in a number of used trucks sold will benefit our result to lower depreciation expense and higher gains and sales. As we do at least annually; we reviewed and modified our residual value estimates to reflect the impact of recently higher used vehicle prices. The combined benefit from lower depreciation and improved used vehicle sales is expected to be $0.10. Finally, a larger commercial fleet and higher pricing is forecast to improve EPS by $0.63 to $0.67 for the year. In total, these items are expected to result in comparable EPS of 280 to 290 in 2011. I’ll turn it over to Art now to cover capital spending and cash flow

[Art A. Garcia:]

Okay turning to page 22, we’re forecasting gross capital spending in a range of $1.7 to $1.8 billion that’s up approximately $600 million to $725 million from 2010. Lease capital is projected to increase by $350 to $475 million approximately $70 million of this increase is a result of higher purchase cost for vehicle. Of course we expect to earn an appropriate return on this upfront capital investment over the contracted lease term. The remainder of the increase largely stems from a higher than normal replacement cycle and improving retention rates on expiring leases this year. Since this capital spending is spread throughout the year a significant portion of this increased investment will benefit revenue and earnings primarily in 2012. We plan to spend $575 million on commercial rental vehicles. As a reminder in 2009, we spent virtually no capital on rental trucks. So part of the higher rental capital in 2010 & 2011 is making up for differed fleet replacement. Of the total spend we plan to invest approximately $200 million to grow the rental fleet by 10% this year. Lastly the higher cost of new engine technology will require an additional $50 million for rental and again we expect to realize an appropriate return on this capital cost increase over the life of the trucks. As always please note that the split of capital between lease and rental could be revised during the year, based upon movement of trucks between product lines. Proceeds from sales of primary revenue earning equipment are forecast to improve by $45 million to $280 million reflecting higher prices and an increase in the number of used vehicles sold. As a result net capital expenditures are forecast at roughly $1.4 to $1.5 billion that’s up approximately $560 to $680 million from the prior year. Free cash flow is forecast at negative $240 to $290 million due to higher capital expenditures. This reflects the vehicle replacement cycle and our upfront investment in a greater number of vehicles purchased as well as higher investment cost per vehicle, which again should lead to revenue and earnigs improvement in future years. Based on these projections total obligations to equity are forecast at 202% to 212 % including the recently completed acquisitions of Scully and Carmenito. This forecast leverage is flat to up from 203% at the prior year end and well below our target leverage of 250% to 300%. As we have communicated before at this leverage we have capacity to support additional organic growth, acquisitions and or share repurchases over time. At this time let me turn the call back over to Greg to review our EPSfore cast.

[Gregory T. Swienton:]

Going on to page 23 as I previously outlined in the waterfall chart, our full year 2011 EPS forecast is for a range of $280 to $290 up $0.58 top $0.68 from a comparable $222 in the prior year. We’re also providing a first quarter EPS forecast of $0.40 to $0.44 per share vs. comparable prior year EPS of $0.24. This represents first quarter EPS growth of $0.16 to $0.20 or 67% to 83% improvement. Turning to page 24 in closing let me briefly summarize the key points in our 2011 plan. We’re working to manage through the cumulative impacts of the prolonged freight recession on our leased business which has resulted in the ageing of our leased fleet. We expect improved new sales and renewal levels as the economy modestly improves and as we execute on our sales and marketing initiatives. Over time, we expect lease sales to benefit from pent up demand for private fleet replacement and growth, more expensive and complex engine technology and more limited credit availability from private fleets. We expect continuing significant benefits from improved demand in our commercial, rental and used vehicle businesses. We manage these assets very well during the recession and anticipate leveraging their return to more normalized level this year. We expect much stronger growth rates in supply chain and dedicated due to improved organic sales, acquisitions and improving volumes. We are very focused on implementing cost management and productivity initiatives to address cost pressures, especially due to higher maintenance and driver related expenses. And finally, we’re making both capital investments in vehicles and P&L investments in strategic initiatives which we expect to propel additional revenue and earnings growth in future years. That does conclude our prepared remarks this morning and we will move on to questions and answers. Due to the expected number of callers to queue up. I will ask that you limit yourself to 2 questions each. If you have additional questions, you are welcome to get back in the queue and we will take as many calls as we can. So, at this time I will turn it over to the operator to open up the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question today is from John Barnes with RBC Capital Market. Your line is now open.

[John Barnes:]

Thank you. Good morning guys. A couple of cold corners here. Could you talk a little bit about what percentage of your leases, your lease business is up for renewal in 2011 and 2012 and is it more than you would normally see?

[Gregory Swienton:]

Yeah, they will be up more because of the heavy sales in 2005 and 2006 and I will ask Robert Sanchez to give you more precise answers.

[Robert Sanchez:]

Yes. As we always say, on any given year, there is 15% to 20% of the fleet that’s up for renewal. What we’re expecting in 2011 and 2012 is on the high end of that. So, to be about 20% in 2011 and 20% in 2012.

[John Barnes:]

Very good. And then, Greg, can you just talk a little bit about, when do you think, your CapEx catches you up enough that you can, the fleet age is sure to trend down and you can get ahead of these rising maintenance cost?

[Greg Swienton:]

Well, since it's kind of accumulative factor that grows slowly overtime, you have the same recovery slowly overtime. So, I would say if it took a couple of years to cause the maintenance cost to go up on an ageing fleet, it would take another couple of years to get that average fleet age down. So, about the same time, for improvement as on the downturn.

[John Barnes:]

Alright. Thanks for your time guys.

[Operator:]

Thank you. Our next question is from David Ross with Stifel Nicolaus. Your line is now open.

[David Ross:]

Good morning, gentlemen.

[Gregory Swienton:]

Good morning.

[David Ross:]

A question about the TLC acquisition. I saw that [Inaudible] and his team came over and you said that that Peter was assuming the same roll, I guess, heading up the consumer package goods sector or segment of your SCS operations. Are you fooling other customers and business in under hands? Are you running a bigger unit? Or whether any technologies that TLC had or either improving Ryder's SCS operations or I guess, Ryder's sales [ph] technology is improving TLC's operations.

[Gregory Swienton:]

Yeah. I will let John Williford talk about that organizational design in TLC and CPG.

[John Williford:]

Right now, the focus is to bring this unit on, as you mentioned, to become our CPG vertical industry group and at first we’re going to be focused on bringing the other strengths we have to that industry group. So we can grow it. So, we think we had more geographic presence, stronger TM and DCC products and more resources and in engineering and continuous improvements. So, we’re putting all those things into the old TLC as our CPG industry group, so we can organically grow that industry group faster than it was growing on it's own. We have some CPG business. It’s not a lot. If you can see it reported in our Retail/CPG Industry Group and eventually, probably, some of that will move over. But that’s not our priority right now.

[David Ross:]

Okay. And then, one follow up, I guess, on the technology and sales initiative that you mentioned investing for the future at FMS technology, it sounds like that’s mostly for maintenance. Can you talk about the, I guess, sales initiatives going on?

[Gregory Swienton:]

Sure. Robert?

[Robert Sanchez:]

Yes, David, one of the key initiatives there, as we are spending some money on some of our front end customer facing technology in terms of being able to communicate through the web and being able to have more interaction with customers. That’s going to take us a few months to really get that going but we are spending some money there. We are also investing in adding some additional sales people to the organization, which I think is important as we get into the next couple years we expect to have more activity around replacement and some more activity around growth.

[David Ross:]

Excellent. Thank you very much.

[Gregory Swienton:]

You welcome.

[Operator:]

Thank you. Our next question is from Jon Langenfeld with Baird. You're line is now open.

[Jon Langenfeld:]

Good morning, I have one on the rental side . I understand that the cost of the assets are going up but your revenue per unit is approaching an all time high not adjusting for mix. I guess I am curious as you think about that fleet are you interested in growing it meaningfully further. You talked about the 10% this year but how you think about it over the course of the cycle knowing that this is more cyclical part of the business?

[Gregory Swienton:]

Yes, I think the term I would like to use is we like to grow it appropriately based on what we're experiencing in the market place. So we put there is first stake in the ground that based on what we see that the anticipated size. Depending on customer confidence strength in the economy and the willingness to have enough confidence in their own business that they might be spending more on lease. That could shift a little bit, but that’s our best guess on what we think appropriately seems to make sense and you're right we are approaching the higher side but as long as customers are more willing to pay a premium without having a make a longer term commitments and until maybe they have got more confidence in their business and their economy then that’s sort of the way this is playing out for a while.

[Jon Langenfeld:]

And then how do you think about the leased product. We live in more uncertain times today then we have in the past and customers willingness to sign up for five or six year type contracts may have a really taken a hit, so is there anything in the leased product you can do or the structure the pound you can do to maybe make that less onerous to the customer in terms of having to commit over a long duration?

[Gregory Swienton:]

Yes, we don’t think that in the long-term any of the fundamental value proposition changes or is harm but I think in a period of uncertainty customers make decisions more cautiously. The fact is that I think that the team especially in sales and marketing in conjunction with finance and returns have thought about additional options and flexibility for used equipment that give customers more options than they have in the past. We are very much open to you innovation in that area as well as innovation for enabling customers to take advantage of maintenance if they would like. So, our mindset and our approach is to try to be appropriately creative yet in the context and willing to make sure we always get the right return on the capital. But one other things Robert mentioned earlier about a desires for interfacing with customers is stay close to them and give them what they need right now and there is still somewhat tenuous environment.

[Jon Langenfeld:]

Great. Thank you.

[Gregory Swienton:]

You welcome.

[Operator:]

Thank you. Our next question is from Ed Wolfe with Wolfe Trahan. You're line is now open.

[Ed Wolfe:]

Hi, good morning, guys.

[Gregory Swienton:]

Good morning.

[Ed Wolfe:]

If you go to slide 20 where you breakout the revenue by segment, can you talk a little bit to when you combine the acquisitions and we look to a portion that in our model going forward where the revenue and and pretax is going to fall out among the divisions?

[Gregory Swienton:]

We can probably give you a fairly good idea on the revenue of the amounts you see there. The total operating revenue in FMS is about 1% of the total operating comes from acquisitions to about half of the contractual a very tiny piece of the rental and about one-fifth of the total operating. In SCS about 20 to 29 maybe about 5 to 6 percentage points comes from organic growth the rest comes largely from acquisition and DCC the best proportion comes from acquisition and a little bit from organic growth. Now for modeling I think you can make some estimates about flowthrough but that will give you an idea of what drives the revenue if that would be helpful.

[Ed Wolfe:]

That is in this directionally on the pretax because in your flowchart on the next page you have got $0.15 to $0.17. If you had a point to it say we're bulk of that $0.15 or $0.17 is coming from where should we look at that?

[Gregory Swienton:]

You can probably do it about a 50-50 split. Now as it plays out you might say 40-60 from one side or the other but for ballpark purposes about half in each segment.

[Ed Wolfe:]

So half in FMS and half in combined supply chain dedicated?

[Gregory Swienton:]

Yes.

[Ed Wolfe:]

Okay.

[Gregory Swienton:]

Art, do you want to clarify anything there?

[Art Garcia:]

Yes, I think in total if some of it will depend on the way we handle the interest allocation across the segments. Some of the interest costs high proportion will appear in the FMS side. So if you look at the deals including all in with the financing element it's to what Greg said which was that 50-50 split approximately.

[Ed Wolfe:]

Okay and then one more and I'll get back online. When you think about cash, using the cash for the business this year and CapEx going up and the acquisitions you made at the end of the year, what do we think in terms of what the intention for share buybacks further acquisitions and leveraging the balance sheet further?

[Gregory Swienton:]

Yes, Well, the right target for the model of our company is to get the leverage right and to keep moving toward that. I think first call will be on how the things look for additional acquisitions. Clearly, as you’ve indicated, we are having to step up capital expenditures, so that’s a part of it. If we have acquisition good continuous accretive acquisition opportunities, that’s where we want to go for. We think that that’s good for long term growth and share and development of the organization, for our owners. If those should not play out then we re-evaluate and decide do you want to do something else with the share repurchase. But it would be too early in the year to conclude that yet.

[Ed Wolfe:]

So, the authority that is still out there on the share repurchase we shouldn’t assume that are going to do that all this year or we should?

[Gregory Swienton:]

Well the only authority that still open is the anti-dilutive, so we will always do the anti-dilutive that offsets employee share purchase plan and any option exercises. I am talking about a new, like the 100 million one, that we just finished, it would actually impact the leverage.

[Ed Wolfe:]

Okay, thanks. I’ll haul back in the line Thank you.

[Gregory Swienton:]

You’re welcome.

[Operator:]

And next question is from Jeff Kauffman fromStearn Agee. Your line is now open.

[Jeff Kauffman:]

Thank you very much. Well, congratulations on a solid year. Real quick questions. First of all, regarding free cash, since you’re to be in a deficit situation this year, I noticed your share guidance was based on just the current plan. Is this basically saying until you get back to a positive free cash situation you wouldn’t use leverage to install a new share repurchase plan, you want that for acquisitions or is that just you are not making any assumptions about share repurchase?

[Gregory Swienton:]

We are not making assumptions yet. We really want to see how additional potential acquisition opportunities play out. The state of positive or slightly negative free cash flow will play a secondary element. But the issue is to get the right leverage for our model, I mean, that’s important as we try to get the right amount of, the right quantity cost to capital versus return on capital that is significant. But at this point first priority is to assess additional good accretive acquisitions and then we’ll make the call on any share repurchase as appropriate.

[Jeff Kauffman:]

Okay, thank you. And last question, you mentioned the large number of full service fleets renewals and this assessed with the ’05, ‘06 coming off. When you talk about the negative impact in terms of next year’s earnings, is that more based on the idea that there is a certain amount of that business that doesn’t renew or is that based on the idea that maybe the spread with that was signed in ’05, ’06 is going to be little bit different as you resign it today?

[Gregory Swienton:]

No, actually neither. The bar chart on that waterfall that shows the $0.28 to $0.32 is really largely proportionately from the fact the fleet is on average eight months older and therefore has heavier cost to it. That is I think the really way you want to interpret that. And Robert if you want to add anything please?

[Robert Sanchez:]

The only thing I’ll add to that is that as you know Jeff there is a lag between when we signed the business and the units actually start to come in and really impact the P&L and as lot of work we are expecting is towards the second half of the year. You don’t really see the benefit of that until 2012 in this case. And that’s why you’re still seeing some of that lag. And Greg mentioned, getting the fleet age back in line with where we’d like it to be is probably going to be a couple year endeavor.

[Jeff Kauffman:]

Okay, guys, congratulations and thank you.

[Robert Sanchez:]

Thank you

[Operator:]

Your next question is from Art Hatfield with Morgan Keegan. Your line is now open.

[Art Hatfield:]

Hi, good morning everybody. Just little quick, just kind of couple of questions here. I noticed in the slides on the CapEx guidance side you had mentioned in the footnote that you have an assumption of $99 million spend on acquisitions this year. Can we assume a portion of that was for the Scully companies or all of that or?

[Art Garcia:]

Yes, yes. That would be our estimate for both those acquisitions Carmenita and Scully Scully combined.

[Art Hatfield:]

So that has no further acquisition assumption built in for the year.

[Art Garcia:]

Yes, correct.

[Art Hatfield:]

But that is not to say that couldn’t change, if the right opportunity came up?

[Gregory Swienton:]

Exactly.

[Art Hatfield:]

Okay. Secondarily, looking at the waterfall chart, the biggest drag as you mentioned Greg is the full service fleets business and the biggest tailwind is the commercial rental business. As you move forward and you sign new customers to full service fleet leases. Is there a way to think about how those two segments impact the income statement, is there a way that if the FMS gets better the commercial rental goes down or do you think both of those can continue to be positive contributors to the overall business.

[Greg Swienton:]

Well, there’ll sure be positive contributors if you’re asking for future waterfall charts what that might look like, they would over the multi-year period inversely move opposite. So the size or the positive on the commercial rental will get smaller but the lease will turn from negative to positive. So I think you got a net gain over time and that’s kind of what would expect to happen.

[Art Hatfield:]

Okay, thanks that’s very helpful thanks for your time

[Operator:]

Thank you; our next question is from Matthew Brooklier with Piper Jaffray, your line is now open.

[Matthew Brooklier:]

Hey thanks good morning guys if I listen to your comments regarding the core lease business; it sounds like there are going to be a greater number of overall renewals going forward which is a good thing yet the fleet has aged and it sounds like a decent portion of your CapEx is going to go to I guess refreshing vs. growth. So if I kind of add those two components together, it would sound like the fleet, the overall fleet and you may have already eluded to the overall fleet. In ’11 its going to be smaller vs. Tano [ph]. I was just wondering if you guys wanted to provide some guidance in terms of the size of the fleet in ’11 vs. ‘10

[Gregory Swienton:]

Our first point, the capital is there representing both refreshing or replacing existing units and some growth I believe the actual expectation is that the 2011 fleet size by the end of the year will be higher than the end of the fleet size in 2010 and Robert if you have specifics you can share them.

[Robert Sanchez:]

Yeah I think , Matt I think what Greg said right now is right now we are expecting to be slightly higher at the end of 2011 vs. the end of 2010. Grand that includes the acquisition so if you were to kind of draw out what we expect to you to like. we expect that the fleet to kind of continue do what it did in the fourth quarter which is maybe slightly down, kind of bumping along the bottom to about the middle of the year and then begin to pick up more towards the second half of the year. And then end up slightly up at the second half of the year.

[Matthew Brooklier:]

It sounds similar to your thoughts on the fleet I think when you said your third quarter earnings call.

[Robert Sanchez:]

That’s correct

[Matthew Brooklier:]

To strip off the acquisitions from the total fleet count I mean if you strip off the acquisitions that means you’re going to be organically if you will flattish or still gonna be up a little bit

[Robert Sanchez:]

That’s correct; organically flattest if you strip of the the acquisitions.

[Gregory Swienton:]

Flattish end point to end point knowing that it’s actually dipped down a little bit towards the middle of the year.

[Matthew Brooklier:]

Okay understood, and my last question you quoted that miles on these equipment are 4% year-over-year yet the fleet’s smaller if you will. Is that adjusted for a smaller fleet size.

[Robert Sanchez:]

Yeah that is, that’s based on the fleet side that we have at that point.

[Matthew Brooklier:]

Okay Apples to apples it’s the comparison number?

[Robert Sanchez:]

It is its per unit; if you look at what happened throughout the year in the first quarter, we were up 1% in the second quarter up 4%, third quarter up 3%; and now fourth quarter up 4% again. So we ended the fourth quarter pretty strong in terms of year-over-year comps and even throughout the quarter we saw miles per unit grow in the fourth quarter. So, I think that was a positive trend that we saw in the fourth.

[Gregory T. Swienton:]

And that calculation always does a per unit by power unit.

[Matthew Brooklier:]

Okay so there is the overall adjustment for the total size of the fleet and any change in the fleet count .

[Gregory T. Swienton:]

Right.

[Matthew Brooklier:]

Okay sounds good; thank you

[Gregory T. Swienton:]

You welcome.

[Operator:]

Thank you our next question is from George Pickral with Stephens; your line is now open.

[George Pickral:]

Hey good morning guys; I just want to make sure on the lease renewals in 2011. that the 20% of the fleet that renewing, do you think everyone renews the same amount of trucks or are we going to see this continued trend where the client might reduce his fleet size by one to two trucks given the -- Robert ?

[Robert Sanchez:]

Well George I think, we see we’re going to continue to see little bit of that, there’s certainly just of what we’ve seen in the last few quarters. We’re seeing less of it than we saw at the beginning of 2010. So we expect that trend to continue where you’ll see more and more of the units being replaced versus downsized and we expect year-over-year retention to improve as a result of that because certainly customers will want to renew their fleet at a higher clip than what they were last year.

[George Pickral:]

Gotcha. So then the follow-up question would be on the utilization. When do we kind of reach that tipping point for the increase in miles per tractor per day where people need to start either releasing the same amount of trucks or growing the number of trucks at least.

[Robert Sanchez:]

Yes. As I mentioned, we expect; we expect that to really begin the show in the second half of the year but it is not a perfect science, because its not only a matter of how many miles per unit they’re running but what their confidence is in the sustainability of the business they are seeing. And that’s kind of the unknown; and that’s the one that makes it little bit more difficult to understand when that happens. But we are still just to put it in perspective we’re still about 3% off the peak miles per unit that we’ve seen historically. So there’s still some more room for that miles per unit to go up.

[Gregory Swienton:]

Okay. Customers clearly are still sort of giving themselves a cushion, I mean when you look at the strength of rental demand price and utilization clearly a lot of those, the majority of those are probably leased customers who are taking advantage of the rental capacity. So, it won't be just an isolated miles per power unit of the existing fleet. You know, they are also drawing on capacity from the commercial rental fleet.

[George Pickral:]

Right. Thanks for the time.

[Robert Sanchez:]

Sure.

[Operator:]

Thank you. Our next question is from Peter Nesvold with Jefferies. Your line is now open.

[Peter Nesvold:]

Good morning.

[Gregory Swienton:]

Good morning.

[Peter Nesvold:]

When I look at the waterfall slide in slide 21, the commercial rental number does really jump out a lot I mean. I was hoping to understand a little bit better. The commercial rental is only about 11% of revenue and I think you said, you are growing the fleet 10%. But I will look just at that one time and I mean, that’s all your earnings growth for this year. And that alone is driving earnings up about 30% higher. So, intuitively, it seems like you are trying to raise pricing in that business, in order to stimulate more contractual lease demand, push people over to that side of the table. But it's still a fairly fragmented market. So, what I want to understand is how do you guard yourself against pricing yourself out of this market. Or and looking at it differently, in another way, maybe asking the same question is how do you get 30% earnings growth from something that’s only 10% of your revenue base?

[Art Garcia:]

Well, historically, as you might expect, you get a lot of bottom line pull through proportionally for every dollar of revenue. And that’s always the case. On the way down, it pulls it down that way and the way up, you get the same advantage. This is not different than what happened in 2010. This is the first sign of a recovering economy and customers move to the product because they've got additional capacity even if they are uncertain about it in the long-term. The assumption that we only move the prices up to try to move people towards lease wouldn’t be totally true. The reality is that we never want to price ourselves out of the market. We not only manage the ads essentially but we are very attuned to every rental desk in the country about supply and demand by every vehicle class. And when the lots are empty, you just basically are doing supply and demand and those prices move up to allocate the resources. So, that really has as much more to do to within anything and that’s what we are really attuned to on a daily basis on what goes on in those rental counters and in the lots.

[Peter Nesvold:]

And as a follow up, you had mentioned earlier in the call that your average cost of fund will decline this year as you are rolling over your debt structure. I don’t see that on the water fall chart. Is there a way of quantifying what the lower average expense will contribute to EPS growth this year?

[Art Garcia:]

I guess, directionally, we are looking at probably a 30 to 40 basis point drop in our effective rate versus 2010. That’s probably is the easiest way to look at.

[Peter Nesvold:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question is from David Campbell with Thompson, Davis & Company. Your line is now open.

[David Campbell:]

Yes. Thank you. Can you estimate what your gains from equivalent sales may be this year? What your depreciation might be and interest expense?

[Gregory Swienton:]

Okay. Art, I will let you dig into that a bit. We are making on the waterfall one estimate about both [Audio Gap] gain.

[Gregory Swienton:]

You’re welcome.

[Operator:]

Thank you. Our next question is from [Brian] with Keybanc Capital Markets.[ph] Your line is now open.

[Unidentified Analyst:]

Hey guys. Good afternoon.

[Gregory Swienton:]

Afternoon.

[Unidentified Analyst:]

Yeah, I guess, the one question, I just want to go back to the commercial rental in the revenue per unit trend that you are seeing there recently, obviously, had improved, pretty nicely in the last couple of quarters. I just wanted to get a sense, I guess, how sticky that is, but the pricing within rental, towards the back half of this year. If you are assuming leasing demand potentially improving?

[Gregory Swienton:]

Well, I think the stickiness is the sheer reflection of the supply and demand. So, as long as there continues to be additional as we anticipate requirements for units and we can continue to sort of feather in and add in a number of units in those areas that need units because right now we were running a bit short in many areas as long as those trends continue and you’ve got still limited supply compared to the past and increasing demand that's what will cause near terms the stickiness on the price. But it’s all about what's going on in the reality the market place but we think that's probably a reasonable assumption for us in 2011.

[Unidentified Analyst:]

Okay, thanks. And then, for my second question, you had mentioned some maintenance initiatives on the leasing sweet in 2011, I am not sure you guys would give an additional detail on that, if I just missed it but just wanted to see if you guys can maybe just elaborate on that little bit?

[Gregory Swienton:]

Go ahead, Bob.

[Bob Brunn:]

Sure, this is some that we do each year and we always have a list of very tactical cost cutting and productivity improvement initiatives that organization tackles each year. So, things like making sure that we're, that as much work can be done in-house versus sending out that we're biggest productive as we can with the labor that we have and there is a series of those types of initiatives that we work on and we'll working on 2011 to help offset some of this increase in maintenance costs.

[Gregory Swienton:]

If you're also asking about the strategic investments and maintenance those have to do with technology and productivity initiatives that make the technician’s job easier and more focused on task at hand in working on the equipment as opposed to slower or less accessible of information in order to get the job done. Those would be the kinds of maintenance strategic efforts, technologically that we’ll doing.

[Unidentified Analyst:]

And Greg on those strategic efforts, when do we start to see the benefits from that? Is that something that is more towards the end of the year, you start to really see those initiatives come to fruition or is that more maybe a 2012 event?

[Gregory Swienton:]

I think that by the time you get things implemented across the network people trained, you’re at benefits more into next year.

[Unidentified Analyst:]

Okay, thanks. Thanks for time

[Operator:]

Thank you. Our final question today is from Peter Nesvold with Jefferies. Your line I now open.

[Peter Nesvold:]

Great. Just a quick follow up. I don’t if this was asked earlier, if it was I apologize. Seasonally it looks like 1Q versus the full year is little bit lower than we normally would see. And I am just trying to understand, I mean, it’s not a huge delta but is there. I’m just curious what color you might offer about that?

[Gregory Swienton:]

Art?

[Art Garcia:]

I think if anything, we have some of the integration of the acquisitions with Scully predominantly there are some items in there that is impacting it. And also the TLC business has some of that same seasonality that we’ve seen in our rental business actually. So, we kind of add a little bit of chunk of that.

[Gregory Swienton:]

I’d also say that if things are bit uncertain, I mean, we don’t even January results yet, so is based on our first forecast. If this call or week later we might be able to adjust one way or another but its our best estimate. We also don’t know and we really never liked to talk about what, but this has been brutal and unusual. We also don’t what that might cause. So we think that this is kind of like down middle of the fairway is a good increase over last year and we’ll see how it plays out

[Peter Nesvold:]

Ok great thank you.

[Gregory Swienton:]

You’re welcome.

[Operator:]

Thank you and currently showing no further questions. I’d like to turn the call over to Mr. Greg Swienton for closing comments.

[Gregory T. Swienton:]

Well. Showing no further questions we went jus a few minutes long but it was a more to cover. I think we got everybody’s questions in. So thank you for participating, so we’re going to sign off and have a safe day.

[Operator:]

Thank you, this does concludes today’s conference thank you for participating. You may disconnect at this time.