Ryder System, Inc. (R) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ryder System, Inc. First Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Mr. Bob Brunn, Vice President Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning, and welcome to Ryder's First Quarter 2012 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 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; Robert Sanchez, President and Chief Operating Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Dennis Cooke, 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.

Thanks, Bob. Good morning, everyone. Today, we'll recap our first quarter 2012 results, review the asset management area and discuss our current outlook for the business. And then after our initial remarks, we will open up the call for questions. So let me get right into an overview of our first quarter results and beginning on Page 4 for those of you who are following on the PowerPoint. Net earnings per diluted share from continuing operations were $0.68 for the first quarter in 2012, up from $0.50 in the prior year period. The first quarter results included a $0.09 net benefit related to the resolution of a tax matter, partially offset by a restructuring charge related to the Hill Hire acquisition. The prior year's first quarter included a $0.01 acquisition-related restructuring charge. So excluding these items in each period, comparable EPS was $0.59 in the first quarter 2012, up from $0.51 in the prior year. This is an improvement of $0.08 or 16% over the prior year period. First quarter EPS was slightly above the high end of our forecast range of $0.55 to $0.58. Overall results in Fleet Management were generally in line with our expectations and benefited from accretive acquisitions, organic growth of the lease fleet, strong Used Vehicle sales and higher commercial rental performance. Supply chain generated better-than-expected earnings improvement, driven by higher volumes and new business. Total revenue grew 8% from the prior year. Operating revenue, which excludes the FMS fuel and all subcontracted transportation revenue, increased 9% from the prior year. The increase in revenue reflects both the benefit of organic growth and acquisitions. Page 5 includes some additional financial statistics for the first quarter. The average number of diluted shares outstanding for the quarter declined slightly to 50.9 million. During the first quarter, we purchased approximately 223,000 shares at an average price of $53.38 under our 2 million share anti-dilutive program, which expires in December 2013. As of March 31, there were 51.3 million shares outstanding, of which 50.9 million are currently included in the diluted share calculation. The first quarter 2012 tax rate was 26.9%, which reflects the favorable resolution of a tax matter related to prior years. The prior year's tax rate was 40.7%, which was negatively impacted last year by a tax law change in Illinois. Excluding the tax benefit item in 2012, comparable tax rate would have been 37.1% versus last year's rate of 40.7%. The adjusted return on capital was 5.6% versus 5.1% in the prior year, as growth in earnings outpaced growth in capital. We have a positive spread between adjusted return on capital and cost of capital of 30 basis points for the trailing 12 months, and this represents an improvement in the spread of approximately 100 basis points from the prior year. I'll turn now to Page 6 to discuss some of the key trends we saw during the first quarter in each of the business segments. In Fleet Management, total revenue grew 9% versus the prior year. Total FMS revenue includes a 7% increase in fuel services revenue, reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes fuel, grew 10%, mainly due to the Hill Hire acquisition and higher organic Commercial Rental and Full Service Lease revenue. Contractual revenue, which includes both Full Service Lease and contract maintenance, was up by 6%. Full Service Lease revenue grew 6% versus the prior year, due to fleet growth and higher prices on replacement vehicles. The average lease fleet size increased 9% from the prior year's first quarter, largely due to acquisitions. On an organic basis, excluding the acquisitions, the global lease fleet increased sequentially from the fourth quarter by approximately 700 vehicles, reflecting both improved new lease sales activity and higher retention rates. This represents the second consecutive quarter of organic lease fleet growth. Miles driven per vehicle per day on the U.S. lease power units were flat compared to the prior year. Commercial Rental revenue increased 26%, reflecting higher pricing, improved global demand on a larger fleet, as well as acquisitions. The average rental fleet increased 31%. It was up by 13%, excluding the acquisitions. While total demand increased strongly, it grew somewhat below our expectations, and therefore, power fleet utilization declined to 68.9% from 72.5% in the prior year on a larger fleet. Global pricing on power units was up 5% versus the prior year, which was generally in line with our expectations in the quarter. In Fleet Management, we also saw better Used Vehicle results during the quarter, reflecting a continued strong pricing and demand environment. And Robert Sanchez will discuss those results separately in a few minutes. Improved FMS results were partially offset by higher costs to maintain a slightly older lease fleet, increased vehicle out-servicing costs and commissions on used sales. Earnings before tax in Fleet Management were up 20%. Fleet Management earnings, as a percent of operating revenue, increased by 50 basis points to 6.4% in the first quarter. As a reminder, beginning this quarter, we moved the non-service portion of pension costs below the business segment line for reporting purposes. We believe this provides better visibility to the segment's operating performance, as well as to the performance of the frozen pension plans. Historical results under this new presentation are included in the appendix for your reference. Turning to the Supply Chain Solutions segment on Page 7, which now includes all Dedicated Contract Carriage activity. Both total and operating revenues were up 7%. Revenue increased due to both higher freight volumes and new business, as well as a 1-month benefit from the Scully acquisition. The strongest growth came from the automotive, retail and consumer packaged goods industry verticals, including 13% growth in the Dedicated Contract Carriage product. Improved earnings in the segment were driven by higher volumes and new sales. In total, SCS earnings before tax were up 8% from the prior year. Supply chain's earnings before tax, as a percent of operating revenue, were unchanged at 4.5% compared to the prior period. Page 8 shows the business segment view of our income statement, which I just discussed and is included here for your reference. At this point, I'll turn the call over to our Chief Financial Officer, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Greg. Turning to Page 9, year-to-date gross capital expenditures totaled $787 million, which is up $339 million from the prior year. This was driven primarily by purchases of new lease vehicles, which are under long-term customer contracts. Lease vehicle spending was up $324 million from the prior year, mainly reflecting improved sales and replacement activity. Capital spending on Commercial Rental vehicles was up $18 million, due to both refreshment and planned growth of the rental fleet. Capital spending for both lease and rental also reflects higher investment costs on new vehicles related to the 2010 engine technology changes. These higher costs are being priced in the customer rates. Our full-year gross capital expenditures remain on track with a $2.1 billion to $2.2 billion range we provided previously. However, the mix of this capital spend by product line may change modestly. We're seeing better-than-planned acceptance of new vehicles by lease customers and therefore, anticipate less usage of used equipment to fulfill new lease sales. Conversely, with somewhat lower rental utilization levels in the first quarter, we plan to spend a bit less on new rental purchases. Given these trends, we expect lease spending will be modestly higher, and rental spending will be modestly lower than our prior forecast. We realized proceeds primarily from sales of revenue earning equipment of $94 million, up $23 million from the prior year. This increase reflects higher Used Vehicle pricing and an increase in the number of units sold compared to the prior year. Including these sales, net capital expenditures increased by $316 million to almost $700 million. Turning to the next page. We generated cash from operating activities of $186 million during the first quarter, down $31 million from the prior year. Higher earnings and depreciation, net of gains, were more than offset by changes in working capital. The increase in working capital was driven by planned cash payments specific to the first quarter. Depreciation increased by approximately $20 million. As the year progresses and the fleet continues to grow, we expect year-over-year depreciation comparisons to widen, leading to a full-year increase of approximately $120 million. Including higher proceeds from Used Vehicle sales, we generated approximately $296 million of total cash during the quarter, down slightly from the prior year. Cash payments for capital expenditures increased by $158 million to just over $470 million. The company had negative free cash flow of $175 million during the quarter. Free cash flow was down $165 million from the prior year's negative free cash flow, due mainly to higher planned investments in vehicles that will generate revenue and earnings in 2012 and future years. Free cash flow in the first quarter is in line with the full-year forecast range of negative $400 million to $460 million we previously communicated. Page 11 addresses our debt-to-equity position. Total obligations of approximately $3.7 billion are up almost $210 million compared to year-end 2011. The increased debt level is largely due to higher vehicle capital spending. As expected, total obligations, as a percent to equity at the end of the quarter, were 267%, up from 261% at the end of 2011 and at the lower end of our target range of 250% to 300%. Our leverage ratio should increase in the second quarter, as we complete our seasonal purchase of rental vehicles, and then decline in the second half of the year towards our prior forecast range of 261% to 265%. At these levels, we have the balance sheet flexibility to support expected organic capital spending and acquisitions activity. Our equity balance at the end of the quarter was a little under $1.4 billion. It's up by $53 million versus year-end 2011. The equity increase was driven by higher earnings and currency translation adjustments. At this point, I'll hand the call to our President and COO, Robert Sanchez, to provide an asset management update.

Thanks, Art. Page 13 summarizes key results for our asset management area globally. At the end of the quarter, our global Used Vehicle inventory for sale was 8,700 vehicles, up from 5,000 units in the first quarter of 2011. This increase in inventory was driven by a higher number of vehicles out-serviced during the quarter, reflecting both increased lease replacement activity, as well as refreshment and out-servicing of some rental units. Used Vehicle inventories are forecast to remain at the somewhat elevated level throughout the year, largely as a result of the higher lease replacement cycle. Reflecting strong market demand for Used Vehicles, we sold 5,000 vehicles during the quarter, which is up 22% compared to the prior year. Improved demand is a result of both relatively better market conditions and the desire of some buyers to obtain pre-2010 engines. We saw a continued strength in Used Vehicle pricing at levels somewhat above our expectations for the quarter. Compared to the first quarter of 2011, proceeds per vehicle were up 20% on tractors and 3% for trucks. From a sequential standpoint, tractor and truck pricing were both up 1%. At the end of the quarter, 12,200 vehicles were classified as no longer earning revenue. This is up 4,800 units from the prior year, reflecting a higher Used Vehicle inventory. The number of lease contracts on existing vehicles that were extended beyond their original lease term increased versus last year. This is consistent with the higher volume of renewal activity associated with the heavier lease replacement cycle. Early terminations of leased vehicles declined by about 320 units or 36%. Early terminations were less than half what they were 2 years ago and were at the lowest level in the past decade. This continues to be a very positive indicator of improved lease demand. Our rental fleet was up 31%, including acquisitions, or 13% organically in the quarter. We're now expecting the full-year rental fleet to increase around 9%, somewhat below our prior forecast. At this point, I'll hand the call back over to Greg to cover our outlook and forecast.

Thanks, Robert. And finally, turning to Page 15, let me cover our outlook and forecast. In Fleet Management, we saw a continued improvement in results from our transactional products, Commercial Rental and Used Vehicle sales. While growth in Commercial Rental activity was somewhat less robust than we originally anticipated, we saw solid organic increases in both total global demand and pricing in the mid to upper single-digit range in the first quarter. Rental activity has been stable, with typical seasonal improvement into early April. In the Used Vehicle area, due to a heavier replacement cycle and out-servicing activity, we expect Used Vehicle inventories to remain at current levels this year. Based on market demand, we anticipate that Used Vehicle sales will remain strong and above our original forecast and that pricing will be generally stable. In Full Service Lease, our fleet size has now grown organically for the second consecutive quarter and in line with our expectations. Customers appear to be increasingly confident in signing full-term agreements on the new engine technology. Given this trend, along with the higher cost and complexity of new vehicles, we expect increased new lease sales to continue this year. In supply chain, we expect to see continued increases in new sales and activity levels, including improvements in our Dedicated Contract Carriage results. We anticipate overall supply chain results will be somewhat above our original forecast. Given all of these factors, we're raising our full-year comparable EPS forecast from a range of $4 to $4.10 to a new range of $4.02 to $4.12. This represents an improvement of 15% to 18% from the $3.49 last year. We're also providing a second quarter comparable EPS forecast of $1.07 to $1.12 versus the prior EPS of $0.92. That does conclude our prepared remarks this morning, and we will now move to our Q&A. [Operator Instructions] So at this time, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions] Our first question today is from David Ross with Stifel, Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Greg, we saw some softness in Class A truck orders in the first quarter, and I wanted to see, I know that you guys have a mix of vehicles in your fleet. But was that reflected in your Full Service Lease business, not and maybe being quite as strong as it could be? I didn't know if there were customers looking to take advantage last year of depreciation. And then maybe they took the time off in the first quarter from ordering, and you might see an acceleration later in this year. Just talk about, I guess, how you see the Class A order market reflecting Ryder's CapEx and Full Service Lease?

Yes, I think it certainly looks as though some customers or potential customers may have done some purchasing at the end of last year. I think that, that impact to us, though, may have been more regarding the Commercial Rental than for customers who may have been moving toward Full Service Lease. So if there were customers last year that had been using rental equipment more heavily, and then last year, because of the depreciation environment that they could take advantage of, bought their equipment and now was delivered, I think that may have had a bit of an impact a little bit on rental. But I think for lease and for us, I don't see a strong correlation necessarily between what had occurred among the OEMs who were manufacturing compared to what we're doing because we've had, again, good contractual lease sales and growth, and organic growth, in Full Service Lease units. So I would say that, that trend portends well for a pickup throughout this year, whether or not OEM production really accelerates or not. I think that for our value proposition to our customers, I think it's going to remain very strong. And because of cost and complexity, I think we're well-positioned, and we expect growth in that product line to continue through this year and forward. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Very helpful. And then on the supply chain side, given your relationships with GM and Toyota specifically, have they commented at all or have you guys looked into the potential supply disruption from that plant explosion and given the [indiscernible] of resin?

Yes. And I think that was one in Germany? David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Yes.

John Williford, do you want to comment, if at all?

Sure. I mean, it's pretty early. I know the OEMs are all looking at alternative sources of supply for those materials. We don't -- we're not forecasting any shortages that would affect our volumes at this time, but we're certainly talking to the OEMs about that potential.

Our next question is from Anthony Gallo with Wells Fargo.

You mentioned the 700 unit growth in the leasing that was organic in the first quarter. Can you remind us what it was in the prior quarter? And then also, is there a seasonal pattern to the lease growth?

Yes, I think the 700 is an increase organically from the fourth quarter.

And it was 1,000 up at fourth. It was 1,000 units up between the third and the fourth quarter.

Okay. And is there a seasonal pattern there? Or as your book runs off in 2012, it should -- any quarter should be particularly stronger than the other?

Yes. I'm not sure we call it seasonal. Maybe lumpier is a better word. You could have some quarters where it comes in a little bit stronger than others. And that really just has to do with the timing of when customers decide to make decisions, because even if a vehicle terms out in January, they might extend it a few months before they make a decision. So you could have some variability in the lease growth just based on that.

Okay. And then a different topic. You mentioned some strong growth in Dedicated, and I understand that you've changed the reporting there a bit. But if I remember correctly, the fourth quarter, Dedicated saw some challenges. Is this one quarter of John's magic [indiscernible] that's going on there or -- a little color of what's going on at Dedicated.

Go ahead, John.

I like the phrase John's magic. Yes, we've made -- we talked about having some specific challenges with specific customers that we are working on and actually, probably the third and fourth quarters last year. And I think the DCC team has made a lot of good progress on those customers. And between that and some growth, we've seen good revenue growth in DCC or the legacy DCC and even better profit growth.

Our next question is from Kevin Sterling with BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: Greg, in your outlook, you talked about Commercial Rental being somewhat less robust than previously anticipated, but your leasing reflects increased new and renewal sales activity. Is this an indication that we are seeing rental demand flow into leasing, do you think?

Perhaps, to some degree. Although when you have 26% revenue growth in Commercial Rental, with 5% increase in price year-over-year, I would say that's still on a very, very healthy trajectory. I think over time, you can expect some decline in that growth rate that would be natural, but at the same time, a faster acceleration in the Full Service Lease. And I think that for those who have been following and watching and waiting, I think the concern may have been that rental would fall farther faster before lease picked up. And I think for the quarter and for the full year, as we're forecasting, rental will probably be a little lower than we forecasted when we did our business plan. But the other parts of the business are going to be stronger. And that includes, to some degree, lease and Used Vehicle sales and supply chain. So I think the diversity of the portfolio of our company is working very well. So even if rental slowed down a bit, and as I say, when you're in mid-20% growth with price increases, that's still very healthy. I think on balance, we're in very good shape. Kevin W. Sterling - BB&T Capital Markets, Research Division: Great. It sounds like the cycle is playing out. And a separate question, you guys are on acquisition spree about a year ago. How does the M&A pipeline look today?

Well, while you call it a spree, it's because sometimes things just all come together at the right time, and it always is about timing and willingness. I think, as you know, we are always interested and active. We don't speculate or comment about what might occur. All I think is appropriate for us to say is that we continue to talk to and have possibilities that may come to fruition at some point, but nothing firm to discuss yet.

Our next question is from Art Hatfield with Raymond James. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Just a couple questions here. When I look at the miles driven calculation, and it was flattish in the quarter. But this is the fourth quarter running where it's been negative. Just thinking about that. Does that get impacted as you grow the fleet? Can it have a slight negative pinch to that?

Robert?

Yes, Art, this is Robert. I think, yes, the answer is yes. As you have a lot of churn in the fleet, in the lease fleet, when you have a lot of units coming in and a lot of units going out, that could, for a period of time, have an impact on that metric because you could have a unit that comes into the fleet and only runs for half the month, yet the mileage -- you're going to get half the miles, but you're going to get the unit count completely. So there is some noise potentially from that. As I said last quarter, I think this still continues to be a metric that we're watching closely, but there's no -- there's really not a lot of other metrics that are pointing to anything, any type of decline that we should worry about. So... Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Okay. So just a follow-up to that. Then, I mean, if you're flattish and you're having that impact, theoretically, is it possible that actually, on an apples-to-apples basis, mileage driven was up in the quarter?

It could be. It could be slightly up. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Okay. And my third question on the higher vehicle, the vehicles held for sale, that higher count, a little bit higher than we would have thought. And I to think you addressed that well, but just a couple questions related to that. One, can you refresh our memory on kind of where that range is that you feel most comfortable in that inventory? And secondly, I hope this comes across correctly, but if you wanted to push -- is demand there if you really wanted to move price where you could move those vehicles out? Or is -- in your commentary about that being kind of flattish going forward is a function of you really holding tight on price and just the churn that you're seeing in the fleet as is?

That's a good question, Art. The range is -- 6,000 to 8,000 is our stated range for the inventory. So we're slightly above the high end of the range. The good news is that the market continues to be very strong for the vehicles that we have. And yes, we are holding on price because in this environment, with such strong demand, we think it's the right thing to do. You have to remember that the vehicles that we're selling in our inventory are typically 7, 8 years old. Therefore, many of them are pre-'07 technology, which makes them highly desirable in the marketplace. So we've taken the approach, which we think is right, of holding price for a period of time, and it seems to be working well. We have some opportunities. You might see us move -- bring price down a little bit to move large volumes of units, but generally, that's the strategy. And what we're expecting is that these inventory levels will remain high for the balance of the year, but then start coming down as we get into 2013.

Our next question is from Peter Nesvold with Jefferies.

Just so I understand. So it sounds like the average number of Used Vehicle in inventory, there are 2,200 vehicles year-over-year, but you had 1,700 more vehicles. You've written leases for 1,700 more vehicles, which I suspect had trades with them. So is that -- I mean, is that the way to think about? Is that -- your inventories are 2,200 higher, but a lot of that is just because you're starting to see the long-term lease business kick in?

I'm not sure I understood the question, but I thought I heard you mention trades in there. We don't do trades back to the OEMs. We...

Or off lease. The vehicles are coming off lease, so they get put back to you. And you're holding them in inventory.

The majority of these vehicles, as you can see, early terminations are way down. So these are all vehicles that have run to the end of their lease term, and then they go into our used truck inventory. That's correct. And then we put them into resale. So since we have a higher lease replacement cycle this year and we're also refreshing the rental fleet, we have a higher-than-normal flow of units into the used truck centers, and then we are now working to move through those.

Okay. You stated it clearer than I did. Okay. So that makes sense. It's just not rare. I guess one thing to point that jumped out a little bit, Page 22, extensions were up year-over-year in the quarter. Can you just describe why that was the case and what read across or what conclusions should we draw from that?

Yes, that's actually a simple answer. The reason they're up is because we have more units that are coming up for renewal this year. So the increase is proportional to the number of -- the increase in number of units coming up for renewal. So as a percentage of total numbers, of total units coming up for renewal, it's about the same. They're getting the same percentage of customers deciding to extend.

Our next question is from Brad Delco with Stephens.

I guess, maybe Greg, I think the question was asked earlier, but I was maybe a little -- still has questions on it. The data we've seen in terms of kind of demand for equipment, in general, even with some trailer data that came out today, seems to be relatively weak. Is there any way to kind of -- is there any correlation between some of the weakness we're seeing in order data versus maybe the sequential trends you've seen and whether it's commercial rental or leasing activity in the quarter?

Generally, there is a broad correlation between activity and manufacturing and what we're doing for lease, depending on periods of time of replacement in our business and what the broad market has done generally. It may be more loosely correlated. Robert, if you want to add any other color to that.

Yes, I think what Greg said earlier, where we saw it the most, we believe, was in the impact to our rental fleet. We did see in our lease sales, January and February came in a little weaker than what we had expected, but March came in stronger than we expected. So net-net for the quarter, we were pretty close to where our lease sales -- the lease sales we were expecting. So that's probably -- those are probably the 2 areas where we saw some correlation, but probably not to the magnitude that the OEMs are showing.

Got you. Appreciate the color on that. And then, again, another question, I apologize if this was addressed. But I guess the changing guidance in terms of probably lower outlook on rental first and the higher outlook on leasing activity, is that mostly driven by a higher renewal rate or their new customers? Or what's really sort of driving that change? And then I guess my add-on to that is, what's the seasonality in terms of your expectations for lease for the year? Are there any quarters where more come up for renewal than others?

Well, what we're seeing is 2 things. You're right, we're seeing rental coming in a little softer. It's going to be offset by slightly better Used Vehicles and some lease activity. I think the -- what we are expecting is that more of the lease demand will be met with new vehicles versus redeployed units, as customers are getting more comfortable with the new technology, especially as it relates to our fuel efficiency. So we are now forecasting -- as we think about CapEx, we're forecasting more of the lease sales to come from new equipment, which would mean slightly higher CapEx on the lease side. And that's really what Art was alluding to.

Yes. But is that new customers or is that renewing old customers that are coming off prior leases?

It's both. But I think that what Art was referring to was the growth capital, which is really the new customers. So we're expecting more of the new customers to use new equipment versus using redeployed equipment.

Our next question is from Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So just wanted to ask a question about the gains on sale of $22 million in the quarter, which increased a lot sequentially from where we've been. Is that a sustainable run rate, given the high number of units for sale? Maybe just give some color of what's in your guidance for gains on sale. And then maybe related to that, the higher mix of lease CapEx and a little bit less on the rental CapEx, how does that, in any way, impact your thoughts, up or down, for 2013 CapEx?

Let me -- this is Robert. Let me address the question around gains. First of all, the improvement in gains is because of the higher volumes and obviously, the higher pricing that we're getting. We are expecting that to continue throughout the year. We're expecting the Used Vehicle pricing to stay, remain stable at where it is today. There is an offset, though, that I want to make sure that you're aware of is that the impact on earnings from Used Vehicles, the gains is one component, which I think the year-over-year improvement was $10 million, $11 million. There is an increase in carrying costs because of the higher inventory. And that increase in carrying costs year-over-year is about $4 million, $5 million. So the net impact is more like a $5 million year-over-year improvement. That addresses the used truck question? Your other question was around CapEx for 2013. I think it's safe to say that rental CapEx for 2013 will probably be down from this year, as we are assuming we're -- based on where we are in the cycle, we're going to see us slow that down into 2013. Lease CapEx, we expect to continue to be strong, as we continue to renew equipment and to grow the lease fleets. So without really getting into all or really even knowing the details of that yet, I think that's the general trend. Scott H. Group - Wolfe Trahan & Co.: Okay, that's very helpful. And just one other question. If we look at the Commercial Rental fleet utilization, which I think dropped a few points from the past few quarters, how should we think about that impacting leasing or FMS margins? And is there a target for the Commercial Rental utilization? I guess the new line that we're getting, the cost of lease and rental is a little bit higher than we thought. And maybe just some color on how we should think about that line going forward, as the leasing revenue accelerates and maybe the rental revenue decelerates against some really tough comps.

Yes, I think, ideally, we'd like to have the utilization as we rigorously define it. And I think everyone in the call knows how we do that, that we'd like to be 70%, 71%, 72%. When you get to be mid-70s and above, you're really overheated and you're short of vehicles, where we are now, at 69.7%, is not a reason for concern. But I think the important thing is that, as we have done, we closely monitor that, we are very effective and proactive in rightsizing that fleet because we don't want to have excess carrying cost. So we want to have continued strong revenue growth, we want to meet customer demand. We don't want to turn away customers, nor do we want to have too much equipment sitting. So there's an art and science in asset management. And we think that we've even taken some proactive actions now to right size the fleet. So I think going forward, that takes care of kind of the way we'll handle rental and lease Full Service Lease. We'll take all we can get when we are signing good, healthy, positive EVA kind of revenue because that is the value and the solidity and the solidness of a long-term revenue earnings and cash flow stream.

Yes, I think the question, I mean, directionally, as we start putting more leased units in and lease becomes an even bigger percentage of the portfolio, I would expect the percentage there, the margin percentage to go down slightly since rental has a higher margin than lease would have. So directionally, you would see that cost -- the cost would move up, the margin would move down slightly as we put in more lease into our portfolio. Scott H. Group - Wolfe Trahan & Co.: That makes a lot of sense. Just one quick follow-up to that. The utilization in Commercial Rental, are you back above 70% in second quarter with some changes you made in the fleet?

Yes.

Our next question is from Todd Fowler with KeyBanc Capital Markets.

Speaking with the Commercial Rental utilization theme, I'm kind of curious here in the first quarter. Does it feel like that the utilization was impacted was just the size of the fleet being a little bit too heavy going into the quarter? Was it something different in the economy or with your customers? It sounds like there was a couple of things going on. I just wanted a little bit more color as to what you really felt impacted the utilization in the first quarter relative to what you've been trending.

Yes. Well, in January, we really saw no issue at all. It was exactly right about where we expected. And in fact, right into the first or second week of February, it was just a solid. That's when we had earnings call, therefore had no commentary. As February went on, as February, mid-February to the end February, then it started to drop off. Then March picked up again, a little bit more normal and seasonal. And I think April is the same. So we can't be too overly concerned about one month or even one quarter. It's when you see a multi-quarter trend that you then will take more severe action. But even with a slight lower-than-expected performance, then we're going to do some adjustments proactively. So if that helps to give you a little more color on that.

No, that really does, and that's kind of the direction I was going with the question. And along the same lines with that, the timing with what you saw with the lease activity, did that follow with what you saw with rentals? So a rental slowdown at the end of February, was that when you saw a little bit of a pickup in the leasing? Or was leasing building strength regardless of what was going on with rental?

I think leasing may have been more independent, but it's certainly been picking up all through the quarter and continues to do so. And we expect it to continue to do so.

The other -- the only thing I would add to that, Todd, is that lease miles per unit, the metric that we follow, which was relatively flat for the quarter, it was slightly down in January, down in February and then up in March, so during the quarter. Now as I mentioned to Art, that could -- you could get some -- a little bit of volatility there as units are coming in and out of the fleet, but for the general trend. I think that was -- might be an interesting point also.

No, that helps as well. And then the follow-up I had, there was an earlier question about the performance and supply chain. When I look at the operating revenue being up 7% here in the quarter, definitely good revenue growth. However, when I look at the operating margins, they are relatively flat on a year-over-year basis and down a little bit sequentially. How should I think about the leverage in supply chain? Is there something that was going on with mix? Or how come maybe -- I guess I would have expected a little bit more leverage on the margin line relative to the revenue growth.

Yes, I think we pointed out in prior years the seasonality you'll see in supply chain margins. So the -- there is a little bit of leverage because we have some overhead. As we grow, we should -- our overall margin should come up a little bit. And I think we've shown that in the past few years. And we've talked about a target of 6% for a full year, and we're getting closer and closer to that. We expect to get closer to that this year. So we're right on track with our margin, we're right where we expected to be. And I think if you point out the sequential difference, that's all a season -- a seasonality difference.

Our next question is from John Mims with FBR Capital Markets. John R. Mims - FBR Capital Markets & Co., Research Division: When going back to the SCS division and the Dedicated Contracts related to the Scully acquisition, I mean, last quarter, you were looking for kind of 1% to 2% growth for the year. I know some of those repricing of contracts happened a little bit faster than previously expected this quarter. But the question is, how much of those contracts are left to reprice and if that activity is reflected in guidance now or if we should expect guidance to tick up over the course of the year as those contracts are kind of right sized?

Yes. Okay, let me -- so let me go back a little bit. We talked about 2% on an expectation for the year. Last quarter, we talked about an expectation for the year of about 2% growth, and that's certainly lower than what we think the business will grow at over the long-term, which we've said is more like 7% to 10%. And we described that difference between, let's say, 7% to 10% long-term expectation and our expectation for 2012 of 2%. That was really a function of some big customers who had either some network changes or had sold off some business units. And that was giving us some -- a chunk -- taking a couple of chunks of business away from us this year. We still expect those chunks to go away, and some of it already has. We beat the number, the expectation of 2% this quarter, because we brought some new business on faster than we expected and we did better on some new business. We got more growth early in the startups than we had expected. And we had some existing customers with a little stronger volume than we expected. If you look at the year, I think we're kind of expecting, instead of that 2% not being all the way back to the 7% to 10%, but maybe more like 5% for the year. So hopefully, that answers your question. John R. Mims - FBR Capital Markets & Co., Research Division: Sure. I mean, the 5% now based on how these chunks, as you say, may flow through or is it reasonable to expect or is it possible, I guess is a better way to say it, that one of these big things works out or there's 1 new contract in your pipeline goes through, then suddenly growth is at the 7% to 10% and guidance is up another 5%?

Well, nobody believed me when I said the 2%. You've got 5%. So now we're saying 5%. I feel like 5% is a good number. It's possible to beat the 5%, but I'm sticking with the 5% for now. John R. Mims - FBR Capital Markets & Co., Research Division: Okay. No, that's fair. And just as a follow-on, when you look at kind of the new leases signed and, to what extent, there's been a shift from rental into lease, can you comment on the duration of the new leases and how that stacks up, I mean, duration of structure just kind of lease terms? Any color you can add versus the average portfolio now?

Yes, probably the best way to look at that is based on the comment that Art made, that more of our leases are being done with new equipment versus redeployment. I would tell you that you're getting -- we're getting longer terms on those vehicles than when you sign a lease on a redeployed vehicle that may already be 2 or 3 years old. So the lease terms are moving in the direction of longer terms as a result of that.

I mean, our typical leases are 5 to 6 years, if you look at it. So that's what we're adding on term versus our portfolio, maybe, say, 3 years on average right now. And so for every incremental deal, you're adding 5 to 6 versus a 3. John R. Mims - FBR Capital Markets & Co., Research Division: Right. Okay. So right now, the whole portfolio is 3 years. Correct?

Right.

Our next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: I was wondering if you could provide any context in terms of the lease pricing dynamics you see on the Full Service Lease side in the market here 2012 relative to your initial expectations, given on the margin, it appears that banks have become more favorable as it relates to writing credit to the smaller owners. I was wondering if that is allowing some of the financial lessors or even competitors be on the margin any more aggressive or favorable as it relates to rates in engaging new leases.

I think, first of all, pricing is up because it has to be up, because the price of new equipment is so much more expensive. Now if you want to talk about pricing and value and increases above the increase in cost, then what's relevant is how we maintain our spreads and how our EVA calculation per vehicle are being priced and always continue to be strong and growing. So I think there are 2 dynamics. One is equipment costs, a lot more than it used to. So that has to be passed along. And then, of course, having the discipline in pricing, which comes from having a good value package to customers, so they are willing to pay the appropriate level of premium when they do business with us. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. Good. And then, I guess, separately or in conjunction with that, can you talk about any sort of traction that you might be having as it relates to some of the innovative leases that you've developed, whether the shorter-term leases or diversification into specialized equipment, natural gas-fired equipment and others? I mean, is it a meaningful driver? Are we seeing -- how has that been received in the marketplace? And where is that trending relative to your expectations?

Yes, I think the receptivity has been very strong. Natural gas, for example, we probably have deployed 220-plus units. So in a totality of 200,000-unit fleet, that's a small beginning. I think what's important is that the market recognizes that, thus far, we have been the sole provider in our subsegment, and we are gaining experience in the maintenance, in the specification, the spec-ing of the vehicles. And I think that over time, that will be a significant contributing factor because you have to believe that more and more industry and commercial customers are going to find natural gas vehicles attractive. So we're at the very early stages, but as in many industries, I think it's really important and valuable to be the leader and at the leading edge of those kinds of changes, which we are. And I think that secondary benefit is that the awareness of that is even causing some customers that might not have been considering a seriously -- outsourcing to us are now talking to us about that and other possibilities. We think that's very encouraging for the longer term. So clearly, not materially impactful on today's financials, but they will be in the future. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: And any traction in terms of the new products, the shorter-term re-leases and some of the others?

Yes, the shorter-term leases have had a very good reception in the marketplace. Those are typically units that we are -- we're going to provide for a, let's say, a 3-year lease instead of a 6-year, and then we redeploy those into other applications when they come in. So we got some good traction. In terms of -- I think a meaningful impact, I think, to Greg's point, you're still talking about over a 1-year period maybe having about 1,000 of those, which does have some impact, but certainly, on a fleet of 200,000, still not the primary driver.

Our next question is from Jeff Kauffman with Sterne Agee. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Sal Vitale on for Jeff Kauffman. So just a quick question, if I could go back to the rental side. Just -- and I apologize if you mentioned these figures earlier. But if I look at the decline in utilization year-over-year, about 360 basis points, holding the fleet constant, what would the utilization have done? I'm just trying to get a sense for how much of it was due to the higher fleet size as opposed to just lower demand.

Well, demand was up year-over-year. I don't have the exact stat for you on that. But I can tell you this, you're exactly right. We were up 350 basis points, which really our game plan is to adjust the fleet about that much in order to get us back in line with our target utilization for the balance of the year. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. That makes sense. And then if just asking on -- you mentioned in the press release, demand was strong but a little lower than you anticipated. Was that, I guess, in the number of vehicles deployed? Or was that more on the pricing side or some combination thereof?

Pricing was still up. Pricing was up 5%. Rental days were up. So I'd say, probably, overall, rental demand was a little lower than what we were originally planning when we did the business plan. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. So it was probably more on the volume side than on the price side?

Yes.

Yes. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. And that also -- that applies to the out quarters for the rest of the year as well in terms of the guidance you gave?

Yes, unless we see another bend in the curve one way or another, that's kind of what we expect. And that's why we'll make some modest adjustments to the size of the fleet primarily this quarter. We started in the first quarter.

Yes, we're expecting to see the seasonal movement in rental that you'd normally see picks up in the second quarter, third quarter and then into the fourth. We're actually -- we've begun to see that through April. So we're expecting it's just going to -- it's going to move like it would normally seasonally, just at a lower level than what we had originally expected. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. And by the way, what is that normal seasonal uptick from 1Q to 2Q?

Typically, what we'll see is, we'll see a -- in terms of demand, we'll see a 15%, 15% to 20% improvement from 1 quarter to the other. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: Okay. And then just the last question. You mentioned the -- well, the guidance you gave was up $0.02 essentially for the year. That's in terms of EPS. And you mentioned, rental, a few moving parts within the rental being a little lower, slightly better vehicle sales gains and better lease activity. Can you provide a little bit more color on the magnitude of the increases and decreases there?

With that -- to that level of specificity, no. I think if you -- to help you a bit, if you went to the original waterfall chart that we provided on the business plan call, and we have those available because we always share those at investor conferences, you can then look at -- it's sort of those bars and see the range on the big green bar. And rental come down a bit, you'll see supply chain come up a bit, you'll see Used Vehicle sales come up a bit. But to put a precise EPS number on each one, I think that would be both difficult and then a bit problematic to be reporting on that. So I think we have to kind of keep it in those broad generalities. But when you look at the picture of that waterfall, that will show you that we probably restricted some spending that was discretionary. Rental down a bit, lease, pretty steady, and SCS, supply chain, Used Vehicle sales, up. And I think that will give you kind of the broad picture to get you to that couple of cent improvement.

Our next question is from David Campbell with Thompson, Davis. David P. Campbell - Thompson, Davis & Company: You may have answered this during the last conference call, but regarding your new presentation of quarterly expenses, I was curious why you think that's a better description or a better -- provides better visibility into the company's expenses and operations. So there's some of the things you used to provide aren't there, and of course, now we have some new things. So can you generally say why that's improved to your...

I mean, David, this is Art. Part of it, we try to provide that information supplementally around depreciation and subcontracted transportation. Some of it is, as we look at our business as a whole, we're more than just a leasing or rental business. We also have a service operation and we sell fuel. And as we look -- the best way to present that, since we are a public company, you kind of are pushed to provide those earnings or the revenues and the costs by product line. So as we looked at that and we thought that was a better way to go to comply with all the external requirements, that's why we move to that. We actually think it provides more information because it does give you a visibility into the margin of each key business, as well as our overhead costs. David P. Campbell - Thompson, Davis & Company: Okay. And as far as depreciation and amortization is concerned, you show that, of course, in the cash flow, where would that come out of in the P&L, your new P&L presentation? That would be in SG&A expense?

Most of that is going to be in the cost of lease and rental. It's the assets, most of our depreciation associated with revenue earning equipment. So you're going to see the lion's share of that is in cost of lease and rental. David P. Campbell - Thompson, Davis & Company: Okay. So because looking -- so if I continue to show D&A as a separate line item, I would take just -- take most of it for purposes -- your purposes, all of that as a cost of lease and rental?

Yes. You would take its 80% of it, at least.

Our next question is from Anthony Gallo with Wells Fargo.

You mentioned that lease demand is increasingly being met with new equipment, and I know you said you were happy with the EVA spread trends. We also, I guess, recognize that, that means you can sell more used equipment into a strong used market. Does it do anything else to margins? And I'm thinking about, say, 2013 through 2015? And then because of the engine technology complexity, does it stimulate contract maintenance sales?

Robert?

I think what it will do to margin is that you -- well, more than what it does to margin, I think it's what it does to term, right? You get a longer term on the new equipment. So you've got a contract for a longer period of time, which guarantees that revenue stream for longer periods. In terms of contract margins, as you saw, we did see some improvement in contract margin. And I think some of that is coming from customers that are looking for maintenance on the more complex fleets. So 1 quarter doesn't make a trend, but certainly, that's an area for some growth that we think will come in the next few years.

That's all I'm showing for questions. I would now like to turn the call over to Greg Swienton for closing remarks.

Yes, before we sign off, I think Art Garcia wanted to clarify 1 comment.

Thanks, Greg. Yes, I was going to -- on a question from David Campbell about the percentage of depreciation, it's probably closer to 90%. 90% to 95% of that would relate to cost of lease and rental, and the remaining piece of it would be in the other parts of the P&L.

Okay, thanks. Well, operator, I think that's it. I think we've handled all the calls, and we're just after high noon. So thanks to everyone for participating, and have a good, safe day. Bye now.

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