Ryder System, Inc.
Q2 2011 Earnings Call Transcript

Published: 28 Jul 2011

[Operator:]

Good morning and welcome to Ryder System, Inc. Second Quarter 2011 Earnings Release Conference Call [Operator Instructions] Today's conference is being recorded. [Operator Instructions] I would like to introduce Mr. Bob Brunn, Vice President Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

[Robert Brunn:]

Thanks very much. Good morning, and welcome to Ryder's Second Quarter 2011 Earnings Conference Call. I'd like to remind you that during this presentation you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in the economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission. Presenting on today's call are Greg Swienton, Chairman and Chief Executive Officer; and Art Garcia, Executive Vice 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:]

Thanks, Bob, and good morning, everyone. Today we'll recap our second quarter 2011 results. We'll review the asset management area and discuss our current outlook for the business. And after our initial remarks, we'll open up the call for questions. So let me begin with the overview of our second quarter results. And for those of you following on the PowerPoint, we're on Page 4. Net earnings per diluted share from continuing operations were $0.79 for the second quarter 2011, up from $0.58 in the prior year period. The second quarter of this year included a $0.10 charge from a tax law change in Michigan and a $0.03 charge for transaction costs related to our recent acquisition of Hill Hire in the U.K. Excluding these charges, comparable EPS was $0.92 in the second quarter 2011, up from $0.58 in the prior year. Second quarter EPS was also above our forecast range of $0.72 to $0.77. The second quarter out-performance was driven by better Commercial Rental and Used Vehicle sales results. The Japan disaster impacted the quarter negatively by $0.02. However, this impact was less than our forecasted estimate of $0.04 to $0.05. The Hill Hire acquisition also contributed $0.02 to EPS in the quarter. Total revenue grew 18% from the prior year. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue increased 15%. The growth in revenue reflects both the benefit of our recent acquisitions and organic revenue growth. On Page 5, in Fleet Management, total revenue grew 14% versus the prior year. Total FMS revenue includes a 29% increase in fuel services revenue, reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes the fuel, grew 10%, mainly due to higher Commercial Rental revenue and acquisitions. Contractual revenue, which includes both Full Service Lease and Contract Maintenance, was up by 2%. Full Service Lease revenue increased 3%, while Contract Maintenance revenue declined 2%. Commercial Rental revenue grew 38%. Rental revenue benefited from improving global demand, higher pricing and an increase in the fleet size. Net before tax earnings in Fleet Management were up 46%. Fleet Management earnings as a percent of operating revenue increased by 220 basis points to 8.7% in the second quarter. FMS earnings were driven primarily by stronger Commercial Rental performance, improved Used Vehicle results and the benefit of 4 FMS acquisitions closed in 2011. These improvements were partially offset by higher maintenance costs on an older fleet, increased compensation expense and planned spending on growth initiatives. Turning to the Supply Chain Solutions segment on Page 6. Both total and operating revenues were up 26% due to the Total Logistic Control acquisition in December, higher volumes and new business. SCS net before tax earnings are up by 37%. Supply Chain's net before tax earnings as a percent of operating revenue increased by 50 basis points to 5.5%. Higher SCS earnings resulted from the TLC acquisition, higher volumes, new business and favorable insurance claims development. These improvements were partially offset by impacts from the disasters in Japan. In Dedicated Contract Carriage, total revenue was up 22% and operating revenue was up by 19%. This growth reflects the Scully acquisition and higher fuel costs pass-throughs. DCC's Net Before Tax earnings increased 16%. The earnings benefits from the Scully acquisition and lower insurance costs were partially offset by some lower operating performance. DCC's earnings as a percent of operating revenue were down by 20 basis points to 6.9%, due to the inclusion of fuel cost in the operating margin calculation for the Dedicated segment. Excluding fuel costs, Dedicated margins would be up by 30 basis points. Page 7 highlights key financial statistics for the second quarter. I already discussed our quarterly revenue results, so let me begin with EPS. Again, comparable EPS from continuing operations were $0.92 in the current quarter, up by $0.34 or 59% from the $0.58 in the prior year. The average number of diluted shares outstanding for the quarter declined 1.3 million shares to 51 million. During the second quarter, we purchased 570,000 shares at an average price of $52.43 under our 2 million share anti-dilutive program. This program remains active with 618,000 shares available at quarter end. As of June 30, there were 51.1 million shares outstanding of which 51 million are currently included in the diluted share calculation. The second quarter 2011 tax rate was 45.5%. The tax rate was negatively impacted by a tax law change in Michigan, which resulted in a $5.4 million catch-up charge related to prior periods. Excluding this item, the comparable tax rate would be 37.7% in the second quarter of 2011 versus 41.4% for the prior-year. The decline in the comparable tax rate versus the prior year is due to a higher proportion of the amount of earnings in lower tax jurisdictions and lower contingent tax accruals. Page 8 highlights key financial statistics for the year-to-date period. Operating revenue increased 15%. Comparable EPS from continuing operations were $1.43, improving by 74% from $0.82 in the prior year. Excluding the Michigan tax law change I discussed earlier, the comparable tax rate was 38.8% in 2011 versus 41.8% last year. Adjusted return on capital, which is calculated on a rolling 12 month basis, was 5.3% versus 4.2% in the prior year, as growth and earnings outpaced growth and capital. We are now forecasting full year adjusted ROC of 5.6%, a 40 basis point improvement over our prior forecast. I'd like to turn now to Page 9 to discuss some of the key trends we saw during the second quarter in each of the business segments. In Fleet Management Solutions, full service lease revenue grew 3%. The average lease fleet size grew 0.6% from the prior year's second quarter, and was up 1.3% on a sequential basis versus the first quarter 2011, reflecting recent acquisitions. We acquired 1,900 power units and 6,100 trailers in the Lease Product line as part of that Hill Hire acquisition that closed on June 8. Including this units acquired late in the quarter, the ending lease fleet was up 7% versus the second quarter last year and also up 7% sequentially from the first quarter 2011. Financial returns on new lease contracts signed remained firm, as we're passing along higher vehicle investment costs and lease rates. Miles driven per vehicle per day on U.S. leased power units were unchanged from the prior year, but seasonally increased by 3% from the first quarter this year. Contract maintenance revenue declined 2%. This reflects a 2% reduction in the average fleet count versus the prior year. However, it's sequentially unchanged from the first quarter's fleet count. We realized a very strong growth in Commercial Rental revenue of 38% from the prior year. The average rental fleet increased 16%, excluding acquisitions, and was up by 19%, including the 5,500 rental units acquired from Hill Hire late in the quarter. The Hill Hire rental fleet included 2,100 power units and 3,400 trailers. Even with the increase in the rental fleet size during the second quarter, global utilization on rental power units continued to improve and was at 78.7%, up 100 basis points from the 77.7% last year. Global pricing on power units was up 11% this quarter. In Fleet Management, we also sold stronger Used Vehicle results during the quarter, reflecting a continued strong demand environment. I'll discuss those results separately in a few moments. The trend of higher maintenance costs on our older lease fleet continued during the second quarter. Since customers replaced leased units at a slower than normal rate during the past couple of years, the fleet has aged, and therefore our maintenance costs are up. As outlined in our business plan, we expect this trend to continue throughout the year. In Supply Chain Solutions, operating revenue was up 26% in the quarter, primarily due to the TLC acquisition, as well as higher volumes across all industry sectors and new business. These benefits were partially offset by the impact from the natural disasters in Japan. In Dedicated Contract Carriage, operating revenue grew 19% due to the Scully acquisition and higher fuel cost pass-throughs. Earnings benefited from the acquisition and favorable insurance claims development, but were partially offset by lower operating performance. We've seen a reduced impact from driver wages, which was more of an issue in the second half last year. Overall, we've had fewer open driver positions, both because driver availability has improved somewhat in the market and we've successfully implemented some internal initiatives in the area. Page 10 highlights our year-to-date results by business segment. And in the interest of time, I will review these results in full detail, but will just highlight the bottom line results. Comparable year-to-date earnings from continuing operations were $74.2 million, up by 71% from the $43.5 million in the prior year. And at this point I'll 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, year-to-date gross capital expenditures totaled $880 million, which is up $250 million from the prior year. Spending on lease vehicles was up $25 million from the prior year, reflecting improved sales and higher investment cost on new vehicles. We expect lease capital spending comparisons to ramp up over the balance of the year. Capital spending on Commercial Rental vehicles was $518 million, reflecting both refreshment and planned growth of the rental fleet. This was an increase of $224 million over the prior year. Our total full year capital spending forecast remains on track with previously expected levels. As compared to our original forecast, we anticipate some movement of reported lease capital in the rental capital. This reflects our asset management strategy of using mid-life rental trucks to fulfill new lease contracts. The activity under this program will be at a somewhat higher rate than planned and reported rental capital will reflect the new trucks we're ordering to backfill the vehicles used for lease sales. We realized proceeds primarily from sales of revenue-earning equipment of $143 million. That's up $39 million from the prior year. The increase reflects higher used vehicle pricing, partially offset by fewer units sold. Including proceeds from sales, net capital expenditures increased by $211 million to $737 million. We also spent $349 million year-to-date on acquisitions, primarily related to purchases of Hill Hire and Scully. We expect acquisition holdbacks of $16 million on these deals to be paid later this year. We closed the acquisition of Hill Hire in the U.K. on June 8. We paid approximately $252 million for this deal, which added around $147 million in annual revenue and expands our fleet offering in the heavy duty vehicle market. This transaction has nice synergies for us, and we anticipate good earnings accretion as Greg will comment on later. We're also pleased with the pricing on this transaction, which resulted in no goodwill recorded for Ryder. Turning to the next page, we generated cash from operating activities of $473 million year-to-date, down by $58 million from the prior year. The reduction is primarily due to changes in working capital, reflecting increased receivables on higher revenue and a decline in accrued liabilities compared to the prior year. We generated $646 million of total cash year-to-date. That's down by $22 million from the prior year. Increased Used Vehicle sales proceeds partially offset the reduction in cash from operations. Cash payments for CapEx increased by $273 million to $817 million, primarily reflecting increased rental vehicle purchases. Company had year-to-date negative free cash flow of $172 million. Free cash flow was down $295 million from the prior year's positive free cash flow, due mainly to higher planned capital spending on vehicles. At the midpoint of our 4 year forecast, we now expect free cash flow of negative $215 million as compared to our prior forecast of negative $265 million. The improvement in our free cash flow expectation reflects increased earnings and higher prices on Used Vehicle sales. On Page 13, total obligations of approximately $3.3 billion are up $480 million as compared to year end 2010. The increased debt level is largely due to recent acquisitions and higher vehicle capital spending. Balance sheet debt-to-equity was 222% as compared to 196% at the end of the prior year. Total obligations as a percent to equity at the end of the quarter were 228%, up from 203% at the end of 2010. We now anticipate our total leverage ratio to be 220% at year end, up from our prior forecast of 207%. This increase was driven by the impact of the Hill Hire acquisition. Including acquisitions completed to date, our forecasted leverage remains below our target range of 250% to 300%. Our equity balance at the end of the quarter was almost $1.5 billion. That's up by $55 million from year end 2010. The equity increase was driven by earnings and to a lesser extent, currency translation adjustments. And these were partially offset by dividends and net share repurchases. At this point, I'll hand the call back over to Greg to provide an asset management update.

[Gregory Swienton:]

Thanks, Art. Page 15 summarizes the key results for our asset management area globally. At the end of the quarter, our Global Used Vehicle inventory for sale was 5,000 vehicles, down by 900 units from the second quarter of 2010. The Used Vehicle inventory is unchanged sequentially from the first from the end of the first quarter in 2011, and does remain below our target level. We sold 4,400 vehicles during the quarter, down 6% from the prior year due to our smaller inventory available for sale. However, sales were up 7% sequentially from the prior quarter. We expect the number of vehicles sold in the second half to be consistent with our first half sales levels. We saw continued strength in Used Vehicle demand and pricing in the second quarter. Improved demand is a 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 realized better prices. Compared to the second quarter 2010, proceeds per vehicle were up 41% on tractors and up 31% on trucks. From a sequential standpoint, tractor pricing increased 6%, and truck pricing was 3% higher versus the first quarter 2011. Going forward, we expect strong, continued Used Vehicle pricing in all classes. At the end of the quarter, approximately 7,100 vehicles were classified as no longer earning revenue. And this was down by 900 units or 11% from the prior year. The decrease reflects fewer vehicles held for sale. As expected, the number of lease contracts on existing vehicles that were extended beyond their original lease term declined versus last year, and although it's still running somewhat above normalized levels. The number of these lease extensions in the U.S. for the quarter was down by almost 700 units or 16% versus the prior year. This decline reflects an increase in new full-term lease contract sales instead of lease extensions by customers. Early terminations of leased vehicles declined by 600 units or 26%. Early terminations were less than half what they were 2 years ago and were at the lowest level in at least 6 years. This is a very positive indicator of improved lease demand. Finally, let me turn to Page 17 to cover our outlook and forecast. In Fleet Management, we expect organic strength in Commercial Rental and Used Vehicle sales to continue this year. In Full Service Lease, our sales results have improved so far this year for both new business and fleet rentals. We remain on track with our prior expectation that the number of leased vehicles on an organic basis will inflect and turn up in the second half. Including vehicles from recent acquisitions, our lease fleet has already significantly grown. In Supply Chain, we anticipate continued benefits from the TLC acquisition and from organic new sales versus the prior year. The impact of the Japan disasters will be negative to SCS earnings, but to a lesser extent than previously anticipated. In the second quarter, we saw a $0.02 impact from the Japan tsunami compared to our prior forecast of $0.04 to $0.05. Given current production estimates, we now expect a full year negative impact of $0.04 to $0.05 in EPS as compared to our prior estimate of $0.10 to $0.15. The Hill Hire deal, which was closed in early June, added around $0.02 to second quarter EPS. For the full year 2011, this acquisition is forecasted to add approximately $0.12 to $0.17 to EPS for the almost 7-month period of operations with Ryder. We've seen continuing strength in Commercial Rental and Used Vehicle sales into early July, and are expecting improved results in these areas relative to our prior outlook. We also expect a modest improvement in leased results as the impact of fleet aging is somewhat less than previously forecast. Given the benefits of Hill Hire, a lower impact from the Japan disaster and improvements in our transactional businesses, we're increasing our full year 2011 comparable EPS forecast from a previous range of $2.90 to $3 to a new range of $3.33 to $3.43, which represents an increase of $0.43 over our prior forecast. Our new full year EPS forecast range represents a 50% to 55% improvement above last year's comparable EPS of $2.22. We're also providing a third quarter EPS forecast of $0.98 to $1.03 versus a comparable prior year EPS of $0.76. This represents third quarter EPS improvement of $0.22 to $0.27, or a 29% to 36% increase. That does conclude our prepared remarks this morning. We're going to now move to questions and answers. Due to the number of callers always in queue, I'll ask that you limit yourself to 2 questions each. If you do then have additional questions, you're welcome to get back in the queue, and we'll take as many calls as we can. So at this time, I'll turn it over to the operator to open up the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from John Barnes with RBC Capital Markets.

[John Barnes:]

Greg, in looking through your presentation, you had your normal bar chart in here that showed extensions and terminations and that type of thing. It looked like your early terminations and some things like that had really reached kind of the lowest level in several years. And I'm just curious, is this the inflection point you've been looking for on the lease side? Should we expect just start seeing growth on the number of vehicles under lease on a go-forward basis from here?

[Gregory Swienton:]

Thanks for your question or comments, John. in fact, for those of you who've got the PowerPoint, you're referring to the Appendix on Page 29, which among other things, does show the early terminations and the extensions. I would say the early terminations may be a reflection of an improved economy, but I think it makes your point. What also makes your point is the reduction in the extensions. That means that rather than extending units, I think we're seeing more customers who now are committing for new leased equipment. So I'd say your comment is right, but I would add both of those bar charts on early terminations and extensions.

[John Barnes:]

So what you're saying is we should anticipate that's the indication that we've kind of hit that inflection point on the number of vehicles in the lease fleet?

[Gregory Swienton:]

Yes, and I think it's a matter of degree, and I think it's a matter of timing and ramp up. So unless impacted by other external forces, like what's going on in Washington and confidence level and freight to move, all other things being equal, yes, I think we're seeing the point that we predicted in the business plan for the second half of this year.

[John Barnes:]

And then in terms of, along the same lines, now that we're starting to see the extensions come down and things like that, is this the point where we should start to see more new equipment showing up in the lease fleet and as a result, we should begin to see maintenance cost moderate from here?

[Gregory Swienton:]

Right. That's correct. Now, of course, that takes time to feather in. But directionally, that's exactly what you should expect to happen.

[Operator:]

Our next question is from Alex Brand with SunTrust Robinson Humphrey.

[Alexander Brand:]

So Greg, I just want to follow up on John's question. If we're going where we need to go, we're going to get more full-term lease contract business, how should we think about, as we move into maybe next year, and if the pattern is what we hoped, isn't the margin on the rental fleet a little higher? So as you shift into the longer-term contracts, is there a transition period there that we need to sort of worry about? Or is it all incremental as you look out?

[Gregory Swienton:]

Well, the areas of improvement yet that we'd begun to see but expect more of, FMS, NBT as a percent of op revenue in this quarter was 8.7%. You may recall that at our peak, it was 12.8% to 13%. So we have a lot of things, there are a lot of moving parts in the segment. So it's not as quite as simple as a rental and lease trade off. But we expect, during a period of still uncertain but improvement in the economy over time, improvement in housing, probably getting to a more reasonable employment level, all of the things that have to add up over a multiyear, bumpy, erratic period, that all of those factors should move positively in a good direction. And we believe that when all of those are not only in recovery, but we're now taking advantage of our strengths, our initiatives, our sales force activity, our technology deployment as well as our acquisitions, we expect that, that all can move in concert positively.

[Alexander Brand:]

And when I think about where your guidance is going now, I mean, I hear you saying that lease is improving. But it looks like most of your guidance doesn't really have anything to do with the core Lease business as you raised that guidance. And I also haven't heard you guys talk about really the meaningful step ups in CapEx for the core lease fleet yet either, right?

[Gregory Swienton:]

Well, the big pick ups, the reason that we've raised our forecast, the big items that make a difference and we've tried to highlight those so that's clear, continuing strength in the transactional Commercial Rental, Used Vehicle sales, the acquisition, the less negative impact from things like the Japanese tsunami. But yes, you can't say that there's robust growth yet that's showing up on the revenue line, the earnings line in the EPS from lease sales. That takes time. First, you start getting the sales then you got to place the orders and you got a 3, 4 month lag so that's not going to show up substantially until the end of this year, and then ultimately in EPS. But as that becomes a larger portion of the revenue stream and the earnings stream, that's solid, and that's good for years.

[Operator:]

Our next question is from Kevin Sterling with BB&T Capital Markets.

[Kevin Sterling:]

Greg, kind of along Alex's lines. When I look at your guidance raise, it seems like barring an economic collapse, you're in a sweet spot. And maybe what we're seeing this cycle, it could elongate the cycle and the timing of a new leasing cycle is uncertain, but Commercial Rental is carrying the day. Is that -- maybe this cycle is a little bit different and could actually be elongated compared to past cycles because of the uncertain economic environment?

[Gregory Swienton:]

Yes, it certainly can. And that's been our experience on this slow recovery generally in the last couple of years. We're not at any point now ready to say that we're not going to continue the lease sales. Part of it is economic recovery, and part of it is us. Part of us is our value proposition. Part of us is making sure that we provide real value to customers who might want to consider Full Service Lease or standalone maintenance. All of those things, in addition to our ability to have been in so strong a financial position and a balance sheet position to do acquisitions, all of that may tilt what your past comparisons may be for our recovery. So we think we're a little bit different. A lot of it, a lot of this recovery clearly is stronger than others in transports right now. But we think that's because of what we have done during the downturn to improve our business model and improve our position. But there is nothing better than economic recovery.

[Kevin Sterling:]

And let me follow up. You talked about acquisitions, and your balance sheet's in great shape and I think you've made 5 acquisitions since December. How's the M&A pipeline look today? Is it still pretty strong?

[Gregory Swienton:]

Probably the answer is the same that we've given you for the last several years. We continue to have great interest. And it's just a matter of timing. And you never know when a bunch of them hit. And they did. Right at the end of last year going into this year, and that's been a nice pick up. So we continue to be interested. We continue to be capable. But it all depends on willingness, timing for other parties where we've got a good fit.

[Operator:]

Our next question is from Peter Nesvold with Jefferies.

[H. Nesvold:]

Terrific results especially given the macro backdrop that we're all dealing with right now. I guess my question is I definitely hear you on the late cycle leverage. A lot of that still ahead of us and it could be very powerful. On the flip side though, I mean, most of the strength of this cycle to date has been the short cycle businesses

[Gregory Swienton:]

Well, I'd say one argument is that in our sales proposition and I'll just focus on FMS for the moment, which I think your question is primarily oriented toward. Even in an environment which might be worsening or not really improving, we also have to think about the rest of the parts of the macro environment. We think that the outsourced value proposition that we offer continues to be more compelling now than even in the recent past. So with increasing cost, increasing complexity of new equipment and new technologies that have to be deployed, we believe that our approach and our value to potential customers actually strengthens. In addition, whether you have even more of a financial crisis than we've had in the recent past, access to capital is still available from us. And many customers, as we've been seeing, even who are healthy now have been more inclined to put their own capital to use in their own core business as opposed the tangential activities that they need like in logistics and supply chain and distribution and transportation, and utilize outsourced services. So even though -- you could try to guess and model out downturns and economies and impacts, I still think that during this period and going forward, we've got a value proposition that I think matches what some of the macro economic issues are. In addition, when you see us doing things like adding new services that hadn't been provided before that has a lot of customer interest right now like natural gas, heavy duty vehicles, these are, again, new sources of opportunity for growth. So we're going to keep pushing the innovation and growth theme because we think we're in a leadership position. We're going to keep doing it and not just think about some of these negative economic potential issues that obviously we can only react to and not necessarily influence or drive.

[H. Nesvold:]

And as a follow-up question on the balance sheet, is there a way of gauging what percent of your funding structure renews over the next 3 to 4 quarters or so?

[Gregory Swienton:]

I'll ask our Chief Financial Officer to get that handy.

[Art Garcia:]

We don't have a ton, Peter, of debt maturing over the next year. I want to say it's a couple hundred million dollars. We have a medium term note renewing then. If you look at the makeup of our mix of debt, we're about now about 40% of our debt is variable rate debt so it reprices relatively on a short-term basis. So that's a little bit higher than we have been. And it can drive -- if you get an increase in interest rates, it can impact the results. But other than that, we're 40% variable now, 60% fixed.

[Operator:]

Our next question is from Jon Langenfeld with Robert W. Baird.

[Benjamin Hartford:]

Ben Hartford in for John this morning. First question, Greg, you had talked about the delta between FMS margins today and the previous cycle. I wanted to get your sense on what the drivers are to that. You had talked about maintenance being a key driver. Is there anything beyond maintenance? I mean, you look at the book of business, you look at the revenue base, you're at levels comparable to '04, '05. But you're dealing with a delta of 400 to 500 basis points there on the margin. So as we get to organic lease fleet growth over the course of the next 18 months, and the lease fleet age falls, is that the key driver? Is that the only driver between margins today and margins at the previous peak?

[Gregory Swienton:]

If you look at the major drivers, and I'll just highlight 4 of them and if I missed some, I'll ask Robert Sanchez or Art Garcia to fill in others. If you look at the major differences in the EPS drivers especially as it relates to FMS when we were at peak in 2008, it came from Commercial Rental, Used Vehicle sales, including carrying costs and depreciation, all the rest, from a leasing downturn as well as our non-operating expense of the pension cost. Because even though the pension is grandfathered and/or frozen going forward, we still have a tail there and that was a big impact in EPS and where the market closed in 2008. So of those you mentioned, 2 are largely restoring. That's Commercial Rental and Used Vehicle sales. But pension and the leasing earnings are not there yet. So I'd say those are the big ones. Those are still yet to be restored why we have confidence that we'll get back to the other NBT levels when all 4 have converted. If I've missed any others, Robert or Art, you could comment.

[Robert Sanchez:]

I guess the only thing I would add to that is the size of the power fleet also needs to come back because all of the overall fleet, now with the acquisition, that includes trailers, has gotten us back up to those levels. The power fleet is still down about 5,000 units. So you still have growth in there that we need in order to fully restore and get back to the levels that we're at. So we need the fleet to get newer and you need it to get bigger.

[Art Garcia:]

Right, and as a follow-up around pension. Pension expense increased about $0.75 from '08 to '09. And we're only about halfway back on that. And that's really a function to Greg's point about asset returns and where pension assets are.

[Benjamin Hartford:]

And then second on the acquisition synergies, it looks like they're trending better than expectations. I wanted to get your sense for what's driving that, whether it was just conservatism upfront, whether there's something unique about the targets that you've been able to acquire, whether you guys are one of the few actively in the marketplace that seems from a publicly traded company standpoint? Or is it better integration? Or maybe all of the above? Can you talk a bit about why the synergies have trended better than expectations?

[Gregory Swienton:]

Well, there's a lot of those, if not all of the above. I would say that the smaller acquisitions other than Hill Hire, we have always been able to integrate those as well in North America. And they've always been somewhat accretive. But you probably figure a few cents in every one, and let me do our waterfall charts, that's the way that it would show up. The one that became more substantial this year was Hill Hire. That was really the first one done over in the U.K. We had a great buying price. And there's no goodwill, as we mentioned earlier in the call, very attractive returns. There are logical synergies. We think it's good for customers, good for the large proportion of employees who are working operationally in conjunction with us. And it's going to work well. So that's why we pointed out that probably beyond most expectations, until we just spelled it out for this year, which is only a little over 7 months for Hill Hire alone is $0.12 to $0.17 in EPS, and it's going to continue being accretive next year as well.

[Operator:]

Our next question is from David Ross from Stifel, Nicolaus.

[David Ross:]

On the FMS side of things, I was talking to a private fleet operator the other day. He said it's now cheaper for him to get a Full Service Lease from Ryder for all of his new trucks that he's adding to the fleet than to buy it himself and do the maintenance on it with their maintenance infrastructure. I guess because your cost of capital is so low, and you have significant scale economies in purchasing. How many people out there do you think know that this is now the case that may not have been the case before? And then is there -- are you seeing any change in terms of your mix, who's signing Full Service Leases that may not have signed them before, who's renting now that may not have been renting before?

[Gregory Swienton:]

I'm going to turn that over to Robert for a little bit more detailed info for you.

[Robert Sanchez:]

David, I guess at the end of the call, I'd probably ask you for the name and number of that private owner you were talking about. I think to answer the question, we are seeing an increased interest from the ownership side. And we're also seeing increased -- an improvement in our ability to win those deals. So those 2 are 2 very positive things that we're seeing in our sales. I'd tell you, they're still not -- this doesn't move the needle significantly. But we are seeing an upturn in interest from private fleet owners as they look at the economics of having to go out and borrow the money to buy their own trucks and do their own maintenance on more complex technology versus turning to somebody like Ryder who has the capital available, has the better pricing on the equipment and can perform the maintenance.

[David Ross:]

And what about actual carriers rather than private fleet, other for-hire carriers? Are they showing any more interest than in the past?

[Robert Sanchez:]

No. I think on the for-hire carriers, as Greg mentioned some of the innovation initiatives that we have, one of the things that we're looking at is providing more transactional-type maintenance for some of these companies. And we're finding that you do get more interest from carriers on that type of activity. They typically want to continue to do some of the maintenance activity. But in geographies where they're not present, they are looking for partners that can help them with that.

[David Ross:]

One question for John, on the Supply Chain Solution side of things, is the mix of, I guess, profitability or business much different now after the TLC acquisition than prior? I guess if you could talk about maybe the breakdown between transportation management, contract logistics, other services and product management?

[John Williford:]

Yes, the primarily difference is where we've got a stronger CPG, less dependent on the more cyclical automotive sector. The TLC acquisition was -- the revenue was mostly CPG warehousing. And so it's also strengthened our Warehousing segment. And it's given us a nice group of customers that we can grow with where the business is pretty stable.

[Operator:]

Our next question is from Todd Fowler with KeyBanc.

[Todd Fowler:]

Greg, can you talk about the expectation for the size of the rental fleet into the back half of the year? I know there's been some acquisitions and it sounds like you're going to be moving some vehicles to sell. I just want to get an idea of how we should be thinking about the average size of the Commercial Rental fleet in the third and fourth quarter.

[Gregory Swienton:]

Again, I'll turn over to Robert to give you a little bit more detail. But we've been adding to the fleet this year both by our own capital investment, as well as the acquisitions. I don't know that there is much more equipment to already arrive. I think what we want to make sure we watch how it plays out is how is demand? How is the economy looking? How is pricing? And right now, we think we've got that right size, but we would evaluate for the rest of the year based on anything else we might see. In terms of the fleet size numbers, I think Robert may have that, if you'd like to comment.

[Robert Sanchez:]

Yes, Todd, at the beginning of the year we said that our goal was to be up 10% year-over-year on the power fleet for renting. We're going to come in right around that number plus the acquisition units. But we're still on track to be up around maybe 10%, maybe a little bit higher. Maybe when you average it out, we might be up 11% or 12% plus the acquisition units.

[Todd Fowler:]

And then, Robert, the way that it should work is roughly in the third quarter maybe flat sequentially with the second quarter, but then drift a little bit lower into the fourth quarter to reflect the seasonality?

[Robert Sanchez:]

That's correct. That's correct. We ended the second quarter a little bit higher than what we had planned, maybe a couple of percentage points. And that was just due to the fact that we're holding some of the vehicles we would otherwise out service themselves because of the strong demand. But as we get into the fourth quarter, those units will start coming out.

[Todd Fowler:]

Okay, great. And just as a follow-up, the change in lease miles driven on a per day basis being flat here year-over-year in the quarter, and I think this is the first quarter they've been flat, in maybe 4 or 5 quarters. I think if I remember correctly, there's a variable revenue component associated with that. Looking to the back half and some concerns about maybe the strength of the recovery or the pace of the recovery, how have you factored in the variable component related to miles driven on the lease fleet into the back half guidance?

[Robert Sanchez:]

The assumption we've made on the guidance is that it continues at about the pace that it's at today. There's some seasonal activity that happens that we've work in. So we are not assuming that there's a significant rise from the current levels. It is something that we're watching as you look at all of the indicators that we watch. That's probably the only one where you're seeing something that maybe isn't growing at the clip that we would like it to see it grow. But it's still a much healthier level than it was over the last several years. So not at the peak in terms of miles per unit yet, but still at a pretty good pace. So there's other things that can be impacting it. Customers have begun to utilize their fleet and have been using rental more. So some of that could be impacting us getting to the peak levels.

[Todd Fowler:]

Okay, that makes sense. And just to be clear, I mean, if you continue to see the trend the way it is, basically you have that to a certain extent factored into the guidance with how it's setup right now?

[Robert Sanchez:]

Yes, we do.

[Operator:]

Your next question is from Anthony Gallo with Wells Fargo.

[Anthony Gallo:]

Could you maybe talk a bit about Supply Chain and Dedicated, the year-over-year growth? I'm curious how much of that is new business wins, and how much of that is increased activity with existing customers.

[Gregory Swienton:]

I'll just let John Williford cover that.

[John Williford:]

Well, you kind of tease out the different impacts, Anthony. I think we would just do supply chain and you were to take out the tsunami impact and the acquisition impact, then we have operating revenue growth of about 10%. And I would say that is about -- I've given you a ballpark, about 50-50 net new sales and organic revenue growth.

[Anthony Gallo:]

I understand that there's an estimate on that. It's very helpful. How about the Dedicated?

[John Williford:]

On the DCC side, basically -- well, if you exclude the impact of fuel, then more than all of our growth has come from the Scully acquisition. So our dry revenue in DCC is actually down about 2.7% ex Scully. And that's really -- we have net new sales in there and a slight decline in existing business because of a couple of big customers whose volumes were down.

[Anthony Gallo:]

And then maybe a little bit of color on what the backlog looks like there. Obviously, despite the squishy in concerning second half, we're all staring at capacity. Recently for-hire markets seems quite tight. Some of the for-hire carriers, dedicated business has been fairly decent recently. So I'm curious what your backlog looks like there.

[John Williford:]

Yes, we've had -- in DCC, we had very strong sales months. We had poor sales in January and February and then very strong sales months in March through June. And we have a very strong pipeline.

[Anthony Gallo:]

How does that fall? Is that sort of a 60 to 90 day once you close the sale that they start to show up?

[John Williford:]

Yes. There's probably a 60 to 90 days to close the sale or to win or lose the bid. And then there's a ramp-up period of another 60 days or so to bring on new business.

[Anthony Gallo:]

And I guess related to Dedicated, I think recently, you had some struggles on the driver front there. But I thought I heard someone say that the driver situation has improved. And I'm wondering what magic you're working there because that sounds like great news.

[John Williford:]

Yes, you're right. The driver shortage really hasn't abated. We've just put a lot of focus on it. We started reporting on this in the second half of last year when we saw kind of a quick spike in the number of leased drivers we had to have. And so we really put a focus on recruiting and put a few new programs and then really have dramatically cut the number of days on average that it takes us to fill in an opening. And so the impact on leased drivers has really almost completely gone away. And we would expect that to be really almost a 0, and certainly, year-over-year, 0 impact going forward.

[Operator:]

Our next question is from Ed Wolfe with Wolfe Trahan.

[Edward Wolfe:]

I just want to make sure I'm looking at this right. If I back into $0.20 or so on an annual basis for Hill Hire, it implies about a 12% pretax margin relative to where you're at in FMS this quarter around 8%. And am I thinking about that right? Is there some synergy built in? Or is it just a higher margin business at this stage.

[Art Garcia:]

That would include the benefits of synergies as well as the purchase price and the financing on that transaction.

[Edward Wolfe:]

But I am thinking about that right? Right now that's a higher margin business for you?

[Gregory Swienton:]

Yes.

[Edward Wolfe:]

Second, Greg, you took us through Slide 29 with the U.S. asset management update in terms of talking about why you saw some potential for the leasing maybe to show some life in the second half. I'm sorry, I just didn't catch what you were focusing on. Can you do that again?

[Gregory Swienton:]

Yes, the original question that we went to the appendix on Page 29 was about early terminations, but I extended the answer to also include extensions. The fact that both terminations, early terminations, as well as extensions were down, was a good sign that when equipment came due, customers in particular weren't either giving up because they didn't need the equipment or they weren't just extending. The lack or the reduction in extensions was a reflection of the fact that they now had enough confidence and/or freight to move that those will be coming actual new leases with new equipment. So we think that, that snapshot is a good, good sign for future lease sales revenue and earnings.

[Edward Wolfe:]

Is there's something on the slide that if it starts to go up would be positive like early replacements or redeployments? Or are those -- what do expect there?

[Gregory Swienton:]

There will be some movement around early replacements. But that should stay fairly low as that chart would indicate. Redeployments might mean that if that goes up, we're having to be a little bit more creative because you don't have your natural model movement to the Used Truck sales or you're moving them between coming out of service or being extended into DCC. So as that's kind of reduced and leveled off, that's just fine. I think the expectation of all of these, again, would be the extensions and the early terminations. Extensions are still high by normal standards. But as those come down, that means those customers are selecting and asking us to get them new equipment, which is a good sign.

[Edward Wolfe:]

Last question, Commercial Rental at 78%. What's kind of the practical peak utilization as you look at that?

[Gregory Swienton:]

Well, probably in some places we're at it. It depends on what -- is there anything less in some yards. That means that some locations are pretty, pretty low on equipment. But Robert, if you'd like to further comment on it.

[Robert Sanchez:]

Yes, there's some seasonality there. But I think we're at the levels now where, certainly for this quarter, your rent level's where, I would say, is the target and at a peak.

[Gregory Swienton:]

And while I still have you on, I think Art had one other follow-up point on your earlier question about Hill Hire, Ed.

[Art Garcia:]

Yes, Ed, around the benefits in the accretion from Hill Hire, one point I wanted you to make sure you're aware of is Hill Hire is based in the U.K. We have a lower corporate tax rate there. The corporate tax rate in the U.K. is 28% versus the high 30s that we have here on a global basis. So that also adds a little bit of accretion to the transaction.

[Gregory Swienton:]

Right direction for the U.S. government, I would say.

[Operator:]

Your next question is from Jeff Kauffman with Sterne Agee.

[Kanchana Pinapureddy:]

It's actually Kanchana Pinapureddy in for Jeff. I just had one quick question for you. Could you talk a little bit about the spread between new contracts and your cost of capital now versus what's coming off of lease?

[Gregory Swienton:]

Robert, you want to comment?

[Robert Sanchez:]

Yes, Kanchana. What we stated publicly is that we target 60 to 100 basis point spread. And without getting into a lot of the detail, we're certainly getting that in this environment. So we're happy with the pricing. The pricing that we're getting is slightly better than what we had expected at the beginning of the year so that's just another indication that the environment certainly is strengthening, and we've got a good sales pipeline.

[Operator:]

Our next question is from Matt Brooklier with Piper Jaffray.

[Matthew Brooklier:]

This question's for John. Curious as to how far along you are in terms of integrating TLC at this point in time. Were there cost synergies achieved thus far with that business? Kind of what's left as we move into the second half of this year? And then on the flip side, maybe talk a little bit about the revenues, synergy opportunities there.

[John Williford:]

We did -- the vast majority of the integration in the first 60 days. So that's behind us. The primary benefits from the acquisition are on the customer side. There weren't any big cost takeouts. There's just some very small cost benefits. But we've really focused on bringing an enhanced value proposition to TLC's customers, and then also bringing that combined value proposition out to new food, beverage and CPG customers. And I'm really happy with the response we're getting. I think almost at all the customers, we have some growth opportunities, almost all the existing TLC customers. And then we're seeing lots of new customers that we wouldn't have been able to see if it wasn't for this acquisition.

[Matthew Brooklier:]

And customers, I guess the existing base of TLC customers it sounds like they've been relatively receptive to kind of the cross sell effort with Ryder's other products. Typically, how long does that take before you start to get traction in terms of selling other products?

[John Williford:]

That's probably a good 9-month cycle. Because you start out talking about kind of big picture opportunities and getting to know these new customers. And then over time, you start to zero in on actual projects. Quite often, the customer then, these are big companies, they'll often put out a bid on a new project, and then you have to go win the bid. And so we've been very focused on these customers since January. And now, we have built up -- we've won some new business, and we've built up a pretty good pipeline of new opportunities. Then as we win new opportunities, it will be a ramp-up period. So it probably will be next year before we start to see measurable revenue and profit growth from these initiatives. But the pipeline we're seeing and the kind of conversations we're having with these customers are all very positive.

[Matthew Brooklier:]

And just a follow-up to that, the NBT, Supply Chain Solutions at 5.5%, you take out the $0.02 of negative impact from the Japan situation a little bit higher. Were there any kind of volume anomalies because you saw nice growth with existing customers? Were there any volume or cost anomalies that pushed up that margin? Or is this kind of the run rate of the profitability moving forward?

[Gregory Swienton:]

Well, I think if you take our 5.5% margin and you add in the tsunami impact, you have what might be, I'm not a historian for Ryder, but it might be a record NBT. It certainly is a percentage margin that is at the high end of what I've said publicly, we could get to at some point. I think everything has been going right. I don't think you can expect -- I wouldn't take our NBT, add on the tsunami impact and say that's what we're were going to get every quarter. But I think everything was going right. And we're not expecting a lot to go wrong in the rest of the year. But it was one of those quarters where everything went very well.

[Operator:]

I would now like to turn the call over to Mr. Greg Swienton.

[Gregory Swienton:]

All right. I think we've gotten to everybody's call. And it's a little past noon so we're going to sign off. Thank you all for your participation. Have a good, safe day.

[Operator:]

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