Ryder System, Inc. (R) Q1 2013 Earnings Report, Transcript and Summary

Robert S. Brunn - Vice President of Corporate Strategy & Investor Relations Robert E. Sanchez - Chairman, Chief Executive Officer and President Art A. Garcia - Chief Financial Officer and Executive Vice President Dennis C. Cooke - President of Global Fleet Management Solutions John H. Williford - President of Global Supply Chain Solutions

Kevin W. Sterling - BB&T Capital Markets, Research Division David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division John L. Barnes - RBC Capital Markets, LLC, Research Division Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division Scott H. Group - Wolfe Research, LLC Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division Matthew S. Brooklier - Longbow Research LLC Justin Long - Stephens Inc., Research Division David P. Campbell - Thompson, Davis & Company

Good morning, and welcome to the Ryder System, Inc. First Quarter 2013 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 2013 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 Robert Sanchez, President and Chief Executive Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Greg Swienton, Executive Chairman; 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 Robert.

Good morning, everyone, and thanks for joining us. This morning, we'll recap our first quarter 2013 results, review the asset management area and discuss the current outlook for our business. We'll then open the call up for questions. Before we get into the results, I'd like to take a minute to thank Greg Swienton for the many -- his many contributions to Ryder over the past 14 years. As most of you know, Greg will be retiring from the company as of our annual shareholders meeting next Friday, May 3, although he'll still be available for us on a consulting basis for the next couple of years. The impact that Greg has had on the company truly cannot be overstated. For those of you who were around in 1999 when Greg joined Ryder, you know that the company was facing a lot of challenges back then. Ryder is a much different company today, thanks to Greg's leadership. He was instrumental in changing so many things about Ryder. He earned the trust of our employees, customers and shareholders by ensuring that we deliver on our commitments. Greg focused us on what's important to our customers, made us accountable for the results and developed a strong team throughout all areas of the company. Most importantly, Greg has given us a solid foundation for future growth. All of this has been done with the highest ethical standards and utmost integrity. Under Greg's tenure, we closed 18 accretive acquisitions, doubled the dividend and improved the free cash flow profile of the company. Greg's focus has driven significant improvements in our earnings, capital efficiency and return to shareholders. On a personal level, Greg has been an invaluable mentor to me and so many other people in our company. I know that I speak on behalf of everyone at Ryder when I say, Greg will truly be missed here. But his legacy will live on in the company that we've become under his leadership. With that, I'll turn to an overview of our first quarter results. Net earnings per diluted share from continuing operations were $0.79 in the first quarter of 2013, up from $0.68 in the prior year period. First quarter results include $0.02 of net expense from nonoperating pension costs, partially offset by a foreign currency translation benefit. The year-ago period included a $0.01 of net expense from acquisition-related restructuring and nonoperating pension costs, partially offset by the resolution of a tax matter. Excluding these items in both periods, comparable EPS were $0.81 in the first quarter, up from $0.69 in the prior year, an improvement of $0.12 or 17%. Total revenue grew 2%. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up 3%. These revenue increases reflect organic growth in full service lease, as well as higher volumes and new business in supply chain. Page 5 includes some additional financials for the first quarter. The average number of diluted shares outstanding for the quarter increased by 0.5 million shares to 51.4 million. This reflects the temporary pause in our anti-dilutive share repurchase program, which we discussed on our last call and is somewhat above our plan due to the increased employee stock activity. As of March 31, there were 51.9 million shares outstanding, of which 51.4 million are included in the diluted share calculation. The first quarter of 2013 tax rate was 34.7% and includes the impact of nonoperating pension. Excluding this item, the comparable tax rate would be 36.2%. The prior year's tax rate of 26.9% benefited from the resolution of a tax matter, partially offset by nonoperating pension costs and restructuring charges. Excluding these items in 2012, the comparable tax rate would have been 37.3%. The spread between adjusted return on capital and cost of capital increased to 90 basis points from 30 basis points during the prior year. This increase largely reflects the margin expansion in FMS. I'll turn now to Page 6 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions total revenue grew 3%. Total FMS revenue included a 1% decline in fuel service revenue, reflecting fewer gallons sold. Excluding fuel, FMS operating revenue grew 4%, driven mainly by growth in full service lease. Contractual revenue, which includes both full service lease and contract maintenance, was up 4%. Full service lease revenue grew 4%, due to higher rate of replacement vehicles and higher miles driven. The lease fleet was unchanged from the first quarter of 2012. Sequentially, from the fourth quarter, the lease fleet declined, but was in line with our expectation. The age of our lease fleet began to decline last June, reflecting replacement activity in a period of higher-than-average lease expirations. It continued to improve this quarter and was down 1 month sequentially or 4 months since the first quarter of 2012. Miles driven per vehicle per day on U.S. lease power units increased 4%, up from the growth rate we saw in 2012. Commercial rental revenue was up 1%. Globally, rental demand was down 2% from last year but was ahead of our expectations for a 4% decline. This reflects better-than-expected demand in North America, partially offset by weaker demand in the U.K. The average rental fleet decreased 8%, reflecting de-fleeting in the second half of 2012 in our 2013 fleet plan. With stronger-than-forecast demand on a smaller fleet, rental utilization on power units was 73.8%, an improvement of almost 500 basis points over last year and a strong rate for the seasonally low first quarter. Global pricing on power units was up 2%. Given the rental environment, we expanded capacity by redeploying vehicles into rental and expect to benefit from continued positive pricing trends. In used vehicle sales, we saw continued strong demand and good pricing. We'll discuss those results separately in a few minutes. Overall, improved FMS earnings were driven by depreciation benefits, resulting from improved residual values, increased lease miles driven and a higher lease rates reflecting new engine technology. Earnings before taxes in FMS were up 20%. FMS earnings, as a percent of operating revenue, were 7.4%, up 100 basis points from the prior year. I'll turn now to Supply Chain Solutions on Page 7. Total revenue was up 1%, as higher operating revenue was partially offset by lower subcontracted transportation. SCS operating revenue grew 2% in line with our expectations for the first quarter. This was driven by higher volumes and new business in both the automotive sector and in dedicated, partially offset by lower volumes in high-tech. Improved segment earnings of 9% were driven by favorable insurance development, revenue growth and improved operating performance. SCS earnings before tax, as a percent of operating revenue, was 4.8%, up 30 basis points from last year. Page 8 shows the business segment view of the income statement I just discussed and is included here for your reference. At this point, I'll turn the call over to our CFO, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Robert. Turning to Page 9. Gross capital expenditures for the quarter were approximately $450 million. That's down $338 million from the prior year. This decrease primarily reflects lower planned investments in our commercial rental fleet. Lease capital spending was also down somewhat, but was in line with our plan for the quarter, and we are making no changes to our capital spending forecast for the full year. We realized proceeds primarily from sales of revenue earning equipment of $113 million. That's up by $19 million from the prior year. This increase reflects more units sold versus last year. Net capital expenditures decreased by $357 million to $336 million. Turning to the next page. We generated cash from operating activities of almost $250 million during the quarter, up by $63 million from the prior year. The improvement reflects lower capital -- working capital needs and higher cash-based earnings. We generated $393 million of total cash for the quarter, up by almost $100 million, reflecting higher operating cash flow and increased used vehicle sales proceeds. Cash payments for capital expenditures during the quarter decreased by $50 million to $420 million. The company had negative free cash flow of $27 million for the quarter. Free cash flow did improve by $148 million from the prior year. Page 11 addresses our debt-to-equity position. Total obligations of just under $4 billion were relatively unchanged from year-end 2012, increasing by about $20 million. Total obligations as a percent to equity at the end of the quarter were 268%, down slightly from 270% at the end of 2012. Equity at the end of the quarter was just under $1.5 billion, up by $24 million versus year-end 2012. The equity increase was driven primarily by earnings. At this point, I'll hand the call back over to Robert to provide an asset management update.

Thanks, Art. Page 13 summarizes key results from our asset management area. At the quarter end, our used vehicle inventory for sale was 10,000 vehicles, up from 8,700 units in the same period last year. This is in line with the expected range that we previously communicated of 9,000 to 10,000 vehicles for 2013. On a sequential basis, from the fourth quarter of 2012, ending inventory increased by 800 units. We're selling a healthy number of trucks. Used vehicle sales were up 23% over last year at 5,800 units sold. Inventories are elevated beyond a normal range though, due to the heavy lease replacement cycle that we're in. Pricing for used vehicles remained strong. Compared with the first quarter of 2012, proceeds from vehicle sold were down 10% for tractors and up 6% for trucks, including heavier-than-normal wholesale volumes. From a sequential standpoint, tractor pricing was up 1%, and truck pricing was up 6%. Excluding wholesaling, retail prices -- pricing was down by 10% for tractors and up by 13% for trucks on a year-over-year basis. We plan to continue higher use of wholesale channels this year, given our elevated inventory levels and our expectations for continued lease replacement activity. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by almost 350 units or 18%. Early terminations of leased vehicles increased by just over 200 units but remained below pre-recessionary levels. Redeployment of used trucks also increased by over 200 units, demonstrating our ability to put these assets to work. Our average commercial rental fleet was down by 8% versus prior year and down 4% sequentially. We've added some rental capacity above our original plan by moving current trucks into the rental fleet, given the strength of that market year-to-date. I'll turn now to Page 15 and cover our outlook and forecast. In the fleet management area, full service lease performed well, benefiting from better residual values, higher rates on new vehicle technology and increased miles driven. As anticipated in our plan, lease -- the lease fleet grew year-over-year but not sequentially during the quarter. Quote activity remained strong, and we currently expect lease fleet growth to be at the low end of our prior range. Separately, we are seeing good interest and activity in our maintenance-only solutions. Commercial rental demand in North America was better than expected, resulting in higher utilization on a smaller fleet. This impact was partially offset by softer rental conditions in the U.K. The overall demand environment we saw in the first quarter has continued into early April. We expect the continued strength in rental demand will provide opportunities for further increased fleet utilization and price, and we're refining our fleet size plans. Maintenance cost benefited from a decline in the average age of the lease fleet, driven by elevated fleet replacements. Some of the age-related benefits was offset by a higher number of units being prepared for sale, as well as upfront costs of certain maintenance initiatives. We're very focused on driving the benefits of these initiatives and expect to realize cost savings from them in future periods. In the used vehicle area, we expect inventories to remain at elevated levels this year due to the high lease replacement cycle. We anticipate solid demand and strong pricing, although pricing on some vehicle types may be somewhat down from recent historically high levels. In supply chain, as we discussed on our last call, we expect improvement in revenue growth for the balance of the year as compared to the first quarter growth rate. Finally, a higher share count is negatively impacting us versus our original plan by around $0.04 this year due to higher stock price and increased employee share activity. Given these factors, we're reaffirming our full year comparable EPS forecast of $4.70 to $4.85. This is up 7% to 10% from $4.41 in 2012. Our second quarter comparable EPS forecast is $1.20 to $1.24 versus prior year of $1.09. That concludes our prepared remarks this morning. At this point, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions] The first question today is from Kevin Sterling of BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: Robert, you mentioned first quarter your maintenance cost did not decline as much in the quarter. As we progress throughout 2013, do you expect an improvement in your maintenance cost for the remainder of 2013?

Absolutely. Kevin, let me just clarify that our maintenance cost did improve year-over-year. As you know, we've -- the fleet age has come down, plus we have maintenance initiatives that we're working on. What we mentioned was that it did not come down as much as we had originally expected. And that was primarily due to some investments that we're making on the maintenance side for these initiatives. And we expect those investments to pay dividends in the balance of the year. So I'll let Dennis elaborate on that, if there's anything else for you to add.

Just 2 things, Kevin, that we saw in the first quarter. To Robert's point, first was, we have a focus on vehicle uptime, so we're focused on the quality of the PM, the preventive maintenance. So we're investing in that and focused on that in the first quarter. Second, as Robert mentioned earlier, the number of units they were -- we were outservicing for used vehicle sales was elevated and that cost us more in the quarter also. Kevin W. Sterling - BB&T Capital Markets, Research Division: Okay. And Robert, you talked about the strength of the rental market. What's driving that? And also, what is driving the higher miles driven per vehicle in FMS as well?

I think those are 2 very positive indications that we're seeing. To me that's -- from what we see, it's driven by economic activity. And as you know, those are usually leading indicators. The rental demand in the U.S. -- our rental demand in the U.S. was down 2% -- our rental demand globally was down 2% versus our plan of 4%. In the U.S., it was actually slightly better than the 2%. Utilization was at 74% versus 69% last year, so that's a good trend. I think what you're seeing there is, there is economic activity going on. Customers -- however, because of the uncertainty, customers are moving more towards the rental in the short term. Lease miles going up is usually an indication that there is activity, and customers who are leasing trucks are using their vehicles. As you know, that sometimes could be a little erratic from quarter-to-quarter. However, it was up 4% -- more than 4%, which is the highest rise since the fourth quarter of 2010. And probably, just as importantly, this is the fourth consecutive quarter of year-over-year improvement in miles driven per vehicle. So I think both of those are 2 positive trends in terms of just general activity.

The next question is from David Ross with Stifel. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: On the SCS side, one of the reasons for the margin improvement was favorable insurance developments. Can you add a little bit more color around that, as to what the magnitude of the benefit was?

Okay. Yes, it -- we have reserves for accidents and workers' comp. And we have tracked a little better than we expected in the first quarter, and that resulted in some improved margin there. And that's only part of our improvement. We're also -- we're growing. And we were -- this is the -- I will point out, this is the 10th quarter that we've improved our margin percentage -- 10th quarter in a row that we had at least either the same or an improved margin percentage. And that -- so that trend is coming from just better operations. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: So that 4.8% is SCS, would that have been 4.5% with a normal insurance quarter?

No, I think it would have been somewhere -- I don't have the exact number, but it would have been somewhere -- there's a lot of puts and takes, it would have been somewhere between the 4.5% and the 4.8%. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's helpful. And then on the SCS as well, lower subcontracted transportation in the quarter, what was the reason for that? Is it...

Yes, that can get a little -- yes, that -- we have some accounts, particularly in automotive, where we manage the transportation and then we put in place the best solution. And depending on the volumes we have at that account, at any point in time, that best solution might be using our own truck, or it might be subcontracting to outside carriers. Generally, when the volume goes up at some of the automotive accounts and is more consistent, it makes sense to operate our own trucks. So when you see the operating revenue going up more than the gross revenue, it just -- it tends to mean that we're shifting from -- for hire carriers at some automotive accounts to our own trucks. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So that might have been one of the reasons for the increase in dedicated?

Yes, definitely. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then last question is just on the rise in early terminations. I know it's still kind of coming off of a low, but is there any reason that people are ending contracts early?

Yes, David, I wouldn't read much into that. I mean, we -- it was up 200 units. It was still -- if you look at the last 7 years, I think it's still the second lowest year. And you can see that we're -- the units that have come back, we've been able to redeploy those very easily, so -- and it's just normal course of business.

The next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Could I get a little bit of specificity in terms of the elevated costs in FMS this quarter associated with some of the maintenance initiatives? I mean, I'm just trying to get a sense for how -- one, how much of a drag that was this quarter? And then, I guess, secondly, how long that'll persist into -- in '13?

Yes, without getting into -- in too deep in the details, I think the important thing is that our maintenance costs have come down. Our margin in lease and in FMS has expanded. And really, the -- I would tell you, the majority of the cost benefit we were expecting, we've gotten. There was some slight headwind from some of these investments that Dennis mentioned. If you think about it, the whole Ryder model is we do preventive maintenance on trucks. We keep them on the road. What we're trying to do is refine that even further to give better uptime and then lower overall maintenance costs. So we had some new initiatives that we had begun this quarter that we expected to see some benefits a little early, maybe we're a little too optimistic about it. But we started seeing some of that already at the tail end of the quarter. And then we expect to see that for the balance of the year. So not -- we're not very concerned about what happened in the first quarter. We're pretty confident that we're going to get our arms around it for the balance of the year. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay, good. And then on the lease side, in terms of aggregate demand, it sounds like it's trending in line with your expectations year-to-date. Can you talk -- are you seeing any sort of investor -- customer appetite for 2014 purchases, given some of the fuel efficiency gains associated with that model year? Has that changed your thinking in terms of maybe the shape of full service lease sales activity through '13 and into '14?

Yes, I -- right now, we're seeing, as you saw with the fleet age coming down, we're seeing strong replacement activity, which is, if you think about it, given still the continued uncertainty in the economic environment, I think is a very good sign. And the reason we're seeing it, I think, is because of some of the benefits clearly around uptime with the newer units as these vehicles have aged, and the fuel efficiency that we're seeing with the units. So I think that's going to continue. Obviously, we would really feel great if we had some boost from the economy that would raise where the customer that has 10 trucks needs that 11th one. That would really crank up the growth side of the lease. But in the meantime, there's a lot of strong replacement activity going on. I think we're making good progress on the initiatives to penetrate the non-outsourced market. And we're going to stay focused on that, because I think long term that's really the big growth opportunity for us. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. So just to clarify, it sounds like the improved fuel efficiency of these '14 model year type trucks, it is a driver, but it's not the driver in terms of the fleet refresh activity. It's something that could be incremental or something that could be -- yes, it could be additive as we go through '13. Is that fair?

Yes. And I think also, depending on what's going on with fuel prices, right? As fuel prices -- if fuel prices rise, you get a lot more focus on that issue. Right now, they've come down some but that moves around quickly. I think the other piece is natural gas. As you know, we're a leader in that industry, natural gas vehicles. The new 12-liter engines that are coming out now, I think the 400-horsepower version is coming out in the third quarter. We expect to see really a heightened interest in natural gas equipment as the higher-powered equipment comes on board, which I think is also going to help with the fuel challenges. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay, good. And then one last clarifying question on the share repurchase side. I know there's been a focus on the credit profile, and you should start to delever in the back half of '13. Any thoughts in terms of when you'll reengage the share repurchase activity?

Not yet, Ben. I think, as you know, the leverage really moved a little -- came down a little bit as we expected. But the real decline, we expect in the second half of the year. We are -- we're going to monitor that closely. We're also, obviously, looking at the acquisition activity that is out there. And based on -- if we get to our targets sooner and depending on what's going on in acquisition activity, we'll be able to make a call on when to turn it back on.

Our next question is from Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I'm not sure if I missed it, but did you speak to cash flow expectations for the year?

Yes, Peter, we haven't changed our expectations around free cash flow. Beginning of the year, we came out with a range of negative -- $130 million to $190 million, so that hasn't changed. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Okay. So I mean, normally, when a leasing business is growing the -- growing the book, the cash flow -- the free cash flow becomes a bigger -- you absorb more free cash. This year, it looks like your -- actually, your free cash flow dynamics are getting better at the same time that earnings are improving. What's the biggest -- what would you say like the biggest 2 drivers leading that right now?

Right. Remember, we are -- we're still in that heavy lease replacement cycle. So we're continuing a big spend in full service lease. Where we've reduced our spending this year is around commercial rental. That's down from almost $500 million to, say, $150 million sequentially. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: And last question. So if we roll into the back half of this year, how well positioned do you think you are right now in terms of the rental fleet? Are you feeling like you're fully utilized at this point, given the better-than-expected utilization right now? Do you feel like you might have to add to the fleet as we get into peak shipping season later this year?

Yes, as we mentioned on the call in -- at the beginning of the year, if demand came in stronger, we said there's a few things that we could do before we added fleet, right? We could delay selling some of the older units, and we could redeploy some units coming off of lease applications, put those into rental. We're doing both of those. So that's helping us capture more of the demand that's out there. We are evaluating, currently, if we're going to spend -- if we may spend a little more to buy some more units and capture some of the demand that we're seeing here in the next few months. So that's an option that we're evaluating right now. Dennis, is there anything else around that?

No, just building on what you said, Robert, we're really focused on the redeployments first before we look at new units, but we're evaluating it. As we stated upfront, Peter, in the U.S., demand was stronger than we expected. And so we're evaluating it every day as we're going through. But again, our first focus is on redeploying assets that are coming out of lease. If they have more mileage and time on them then we're putting them into the rental fleet.

Our next question is from Anthony Gallo with Wells Fargo.

I guess, a couple of questions around the average age of the fleet, however you want to answer it. How many months above average age are you now? And how does average age today compare to, say, 2007?

I'm sorry, Anthony, you cut off on that last part. How does the average age today compare to what?

The average age during 2007?

During -- yes, I think we're -- average age right now is right around 4 years. And if you go back to our 2007 time period, we were about 3 years. So we're still about a year off from where we were back in the '07 days. I don't know if you'll-- I don't know if we'll get all the way down to exactly 3 years, because as you recall, we had a huge replacement cycle that happened in 2006, which I don't know if that's going to recur. But certainly, we still have some room to go. I mean, we've talked about replacement activity remaining strong for the next -- really, through -- at least through middle of 2014. So we still have at least 1.25 years to go, I think, of this type of activity. And that's a little bit dictated by what's going on in the economy. If things really heat up, you're going to see that speed up. If they slow down, you might see it stretch out a bit.

Okay. And then, I guess, a related question. Some of us hold a view that if you look at today's FMS margins versus prior peak, is that about half the difference between then and now relates to this higher maintenance expense. Is that still a fair assumption?

I think that's pretty accurate. I think we're making half of it -- we said about a year ago, that half of it was fleet age/maintenance related and the other half was more growth of the power fleet. So we've probably made a little bit of headway into the maintenance cost, but I still think you're probably close to half and half.

Okay. And then last question, which again I hope is related. The change -- you mentioned the change in residual value assumptions, does that have anything to do with the -- as the fleet age decreases? Or just maybe a little bit of color on that would be helpful.

No, that actually has to do with depreciation expense. As you know, we determine our residuals with a very systematic process that we do a 5-year look back each year at what we're selling used vehicles for. And we use that to determine what the residual value should be for our vehicles that are in the fleet. So as we've had very good strong used vehicle sales results, those start to bleed into the 5-year averages and those residual values go up, giving us a benefit on the depreciation expense. So we said at the beginning of the year that this year, we expected to get about $28 million in the year of depreciation expense benefit in FMS, and that's really what that's about. The good news is, as long as used vehicle market continues to be strong and we're selling a lot of vehicles into it, that bodes well for the future as we roll in this type of healthy market activity into our residual values, and more importantly, into our lease pricing, which will make us more competitive against competitors in lease and also more competitive against private ownership.

The next question is from John Barnes with RBC Capital Markets.

A couple of things real quick. The increase in the lease miles is -- do you have a -- do you have kind of a feel on the threshold of that increase before you start to see maybe customers begin to take on more lease trucks? What should we expect? How much growth in that should we expect before you see that turn?

I think prior to 2008, we probably thought we had a pretty good read on it. It has been a little bit less predictable over the last -- this last cycle. But I think that the good news is that 4 quarters, straight quarters, of increases is a really good sign that tells you that, certainly, the fleets that they have, they're utilizing. And that, combined with the strong rental activity -- or strengthening rental activity, are 2 very, I think, very positive signs on where this is going. But it's hard to tell. I think we are clearly still off of our peak miles per unit. If you go back historically, we're still slightly off of that number. But once we reach that, I would tell you it's probably an indication and you start to see some of that. So how -- do you know how far off, Dennis, we are from our peak period?

About 1%, Robert. I'd just add to that, what it is we're looking at, John, is that for new units that are going in, they're running about 16% more than the units that they replace. So what we tend to see is when new units come in, customers are running them more. So that's -- as you're seeing this replacement cycle unfold, it bodes well for the miles.

Okay, very good. And then similar kind of question on the rental fleet. Utilization threshold, is there a range you look at where below a certain threshold you immediately begin to take equipment out of rental? Or more importantly, I hope in this regard, is there an upper band where you feel like you have to immediately begin to add equipment to rental in order to keep utilization and make sure you've got enough equipment to satisfy need?

Yes, I'll let Dennis follow-up on that.

John, I've always said that we do is we're looking at the fleet. And if we see demand softening, which we saw last year -- obviously, we're not this year, but last year, what we'll do is rather than outservice it and send it to the used truck center, we'll redeploy it to lease. So you have a lot of customers who like to buy used equipment or to lease new equipment. And that's been a very effective tool for us to defleet. So if we do see softness, we'll use our asset management capability to redeploy in the lease. And a lot of customers like leasing a piece of used equipment that has 3 years left on it.

And I think the first part of your question about the upside. I think we're -- remember, utilization also is seasonal. So we always say that our target utilization is the high 70s, 78%, let's say, but that's for the full year. 74% in the first quarter is very strong. So I would tell you the 74% in the first quarter will translate into the mid to high 70s for the second, third quarter. So what -- I guess to get to your question, we are at that point where we're certainly redeploying units into rental from lease. We're holding off on selling the units that we'd otherwise sell, and then we're evaluating whether we may spend a little more on getting some new units in.

Okay. And then last quick question for you. Obviously, the vehicle age is coming down. You saw the margin improvement in fleet management. Again, as the year progresses, are we on the right run rate? I mean, is this the right kind of margin improvement to extrapolate out through the year as that age continues to come down? I guess, you're still on pace to replace about 22% of the fleet this year. So are you on pace to kind of -- to continue to drop those maintenance costs out?

Yes, I think the answer to, are we on pace to continue to drop maintenance costs, the answer is yes. We expect lease margins to continue to improve. However, when you look at FMS margins, you need to also take into consideration the cost actions that we took in the middle of last year. We are getting the benefit of that in the first half of this year, and then we're going to see the comps get tougher in the second half. So I'd be cautious about just assuming that type of an improvement on margins across the board, not because of lease, but primarily because of the cost actions that we're taking in the second half for the -- of last year.

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

I don't want to split hairs too much, but I guess I want to come back to the full year guidance and your outlook. You had a little bit of upside versus the high end of your range here in the quarter. It sounds like North American rental is doing well, even better than expected. The lease activity was in line with expectations here in the quarter. You didn't move the full year guidance. I know that you've got the higher share count. Is that the majority of it? Or there were some comments about the lease fleet and coming at the lower end of your expectations, is there something going on with leasing activity that's a little bit different that what you were initially expecting?

Yes. I think, Todd, you've got it in terms of -- the biggest item is probably share count and $0.04 is -- can -- certainly has an impact. Don't lose sight of U.K. rental, we mentioned came in a little softer than we expected, so even though U.S. rental is really strong versus our plan, U.K. -- economy in the U.K., GDP was down in the fourth quarter. So it's -- some of that softness is being reflected in our rental performance out there. So that's creating a little bit of headwind. And then I would just -- I guess, the third piece is just the general economic uncertainty. We had -- we're seeing good rental activity, but the economy, the way it is, it's really difficult to say, "Hey, I know it's going to continue for the next 3 quarters." It's early in the year. We beat the top end by $0.01, and that we're pleased with that. We think it was certainly a very good performance versus our plan. But there's still a lot of runway in the rest of the year in a relatively uncertain economic environment. So on the lease side, I would tell you, it's really reflected maybe a little bit on the growth side. But the good news is the replacement activity, which is -- which really drives a lot of the margin enhancement is really moving strong. And we're seeing a lot of that. What we're missing, again, I think primarily due to this economic uncertainty, is really picking up the growth that we'd like to see.

Okay. And so just to make sure I understand it. It sounds like it's taking longer to close on new leases. You've got the indications, you've got the interest. That's just, actually, getting the signed leases is probably the issue right now?

Correct. And I would be more specific and say, especially around the growth pieces. So we're -- if somebody wants to add a unit to their fleet, those -- they're probably renting right now, and they're considering to lease, but haven't really inked it. But as we talk to our sales team, they're very busy. There's a lot of activity. There's been, obviously, a lot of activity around replacement, but there's also activity around growth. It's just the growth, I think, is still somewhat muted by what we're seeing in the economy. Dennis, is there anything else?

No, I agree. The activity is high and the pipelines are robust. So they're just not ready to ink yet, so it's taking more time than we expected.

Okay. And how big is U.K. rentals as a percentage of overall rental?

Let's look that up.

Yes, let's get that number.

And while Dennis looks for that, maybe I can just ask the last one that I had. The conversation on maintenance costs, to me, it sounded like there's 2 components of the guidance that you gave earlier in the year about maintenance. One piece of the benefit would be related to what you're seeing from the mix shift in the younger fleet, and the second piece would be some company-specific initiatives. I guess, I wanted to make sure that, that was correct. And if you could give an order of magnitude on both of those? And then secondly, if you could talk about, are you still seeing the maintenance on the mix shift piece progress the way you would expect, and it's just the delay on the company-specific initiatives, and that's what's pushing out some of the maintenance benefit here in the quarter?

Okay, let me take a stab at that. If you think about how much of the benefit we think comes from -- if I understand the question, is coming from the age and really the replacement and how much is initiatives, it's probably a 70-30. 70% from the age and 30% from initiatives, 80-20 maybe. And what was the second part of the question, I'm sorry?

The piece that's related to the age. Is that trending in line with your expectation? So there's not an issue?

Yes, absolutely. The age is coming in. We're seeing the benefit of the younger age. The issue is just more around some of these initiatives. And the time, I would say it's really the timing of the benefits from the initiatives.

Plus, in the quarter, Todd, we had, as Dennis had mentioned earlier, we saw more units go to our used truck center than we had anticipated. So we incurred some more costs around that.

That's true. And actually, that piece of it was -- if you look at the pieces that we saw some headwind that was one of the bigger pieces. We just had more units that we had to prepare for sale, that goes into our maintenance cost and that was a little heavier in the first quarter than we expected. We're really -- we expect to see a little bit of that in the second, but then in the second half of the year, we expect that to really back off.

And Todd, let me come back. The U.K. is about 15% of our global rental revenue.

I'm sorry, Dennis, can you repeat that? 15, 1-5?

15%, 1-5.

Our next question is from Scott Group with Wolfe Trahan.

So a couple of things. First, can you talk about the impact of -- of how you think about fuel impacted you in the quarter? And with fuel coming down, how that's impacting the guidance for the rest of the year? And then maybe just some thoughts on gains on sales, which were up a little bit year-over-year. Do you think that's a fair run rate going forward, the rest of the year?

Well, Scott, I think, on fuel -- fuel, as you know at Ryder's is primarily a pass-through. We -- the majority of the fuel that we have is either fuel that we sell to our lease customers and rental customers, or fuel that's in a contract on our supply chain side that is typically either passed through or has an associated adjusted surcharge. So I would say, fuel hasn't really had -- didn't really have a significant impact in the quarter. On the gain side, Art?

Yes. Gains, overall, we had expected used vehicle results kind of be flat year-over-year. And that kind of -- it's kind of how it played out in the first quarter, Scott. Obviously, gains are up a little bit, but we also have higher write-downs that are embedded within depreciation. So if you net those, we're kind of flat year-over-year. We're anticipating gains overall to be pretty much flat year-over-year.

Okay, that's helpful. And then in terms of just the CapEx outlook. If you do start to do some more on the rental side, should we assume that, that implies an increase in CapEx? Or are you going to take that out of somewhere else? And I know it's really early, but based on your views of strong leasing demand or replacement demand through at least the middle of next year, directionally, how are you thinking about CapEx up or down for next year?

Yes, that's a good question, Scott. I -- we're looking at that right now. I think there's 2 places that you might see some of that offset. If we -- first of all, if we spend money, we don't expect it to be a significantly large number, certainly, relative to expenditures we've had in the past. So we're looking at a -- we'd be looking at a very modest purchase. And that could be offset by maybe spending less money in, for example, the U.K., where we're having some challenges or over the balance of the year, depending on what happens in lease. So that's why we kept the CapEx forecast where it is. I wouldn't expect any purchase we do on rental to have a significant increase in our CapEx overall. I mean, there might be some, but it wouldn't be a significant number.

I mean, I think on your -- to your question about next year. I think what we've talked about is that 2014 is -- the replacement cycle process will be a little bit less than this year, so we're not going to -- as we sit today, don't expect to have to replace as many units. So if anything, that should drive down some of the lease capital. Rental spend is relatively low this year, notwithstanding what Robert was just talking about. So we'd have to see that's below our run rate spend, if you want to call it that. So that could, if anything, probably would go up a little bit as you look out. But we'd have to -- we have to think about that. We haven't really quantified all our plans around that yet.

Okay, that's helpful. And then maybe just last one. If we do enter a period of rising interest rates, how are you thinking about how that impacts leasing demand and then overall kind of contribution margins in FMS?

I think in terms of leasing demand, the fact that -- if interest rates go up for everyone, whether you're going to lease a truck or you're going to buy it, I think, sort of makes it an almost neutral proposition. If anything, our ability to continue to borrow, as you know, it's one of the reasons why our credit rating is so important. Our ability to continue to borrow at competitive rates, I think, still provides us an opportunity. In terms of the impact of interest rates right now on our earnings, Art, do you have the exact numbers on that?

Yes, I don't see that. I mean, interest expense is about $35 million, so -- for the quarter, I don't expect it to have a significant impact if interest rates do rise. It's the nature of our model, Scott, allows us to reprice business as we're quoting it realtime with interest rates as they're moving. So we're able to match fund and really not have an issue.

The next question is from Art Hatfield with Raymond James. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: You've covered so much, so hopefully I can ask something salient to the conversation here. But just -- as I looked at your numbers in the quarter, your miles driven and your lease fleet up 4%, very strong, but you had a little bit of an uptick from the fourth quarter in early terminations. Can you square that a little bit for me?

Yes, Art, we talked about this a little bit earlier, but I think there's not a lot to be read into that. There was no noticeable change, I think, in the environment. I think it's just normal course of business where even though it was up 200 units from last year, it's still -- if you look at the last 7 years, I think it's the second lowest year in the last 7 years. So it's not -- it hasn't been a real issue. When we've had units come back, as you can see, our redeployments are up, more than 200. So we're easily able to get those into other applications and get them with other customers running. So it hasn't been a challenge at all, especially actually I would even argue, given the rental demand that we're seeing, it's actually very simple to get units into -- that come off of a lease into rental. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Great. And then just secondly, any update or anything that you're seeing in the natural gas business that you would view as kind of positive or negative over the next 12, 24 months?

I think the big positive is going to be the introduction of this 400-horsepower, 12-liter engine. I think that one of the challenges that we've had with natural gas has been just the power of the equipment that's been out there. And that equipment, I think, is going to open up the field to a much broader application. We continue to make progress on introducing natural gas in different locations. And I'll let Dennis elaborate on that.

Yes, I would just add, Art, that the number of fueling stations is increasing significantly. There's about 11,000 out there, roughly, CNG, LNG stations. That compares to about 85,000 diesel fueling stations. And we're seeing the natural gas fueling stations increase at about 30% a year. You've got a lot of investments that's coming in. You hear from some industry experts that once you get to that 5,000 unit range -- 5,000 station range that's kind of the tipping point. So we think it's going to continue to accelerate in terms of interest and growth. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: And within your -- can you have dual service facilities -- Ryder facilities, where you serve both natural gas and diesel?

Yes. Yes, in fact, we have a few of them now.

Our next question is from Jeff Kauffman with Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Greg, best of luck to you as well. Really, most of my questions have been answered, just some quick detail ones. Let's follow-up on the natural gas vehicles. Natural gas vehicles, how much of an investment are you going to be making? And you talked about this higher horsepower 12-liter out in the market. Is it going to be one of those things where your customers ask for it, and then you buy it sometime after that? Or is it going to be where you're going to have a fleet of 50 or 100 or so of these 400-horsepower units on hand? How are you going to manage the natural gas inventory?

Yes, I think, yes, clearly, our strategy is to go into a market, look for a customer that's interested, and then work with that customer to make the investment and the purchase. So no, our plan is not to go out and buy 400 of these on spec and then try to find customers. The good news is that with the knowledge that we have and the expertise that we're gaining in this area, there's a lot of customers coming to us that want to partner and move into these markets. Where we do make the investment is really around the maintenance facilities and really upgrading those maintenance facilities to be able to maintain these natural gas vehicles. So you will see us do that. We're currently maintaining these types of vehicles in California, in Arizona, in Michigan. We're now looking at Louisiana here shortly in the next few weeks, we're going to have some capabilities there, parts of Texas. So we're really partnering with our customers to do that. But no, typically, when we enter a market, it's because we already have the customers who are interested in our, or leasing the equipment. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: All right. But to your point, what you're doing right now is more in that 9-liter engine displacement category and underwriting [ph]?

Right, well, we're beginning to see the 12-liter engines -- the 300 -- 350-horsepower version is out, so we're beginning to see -- to have some activity around that already. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: But if I'm a customer roughly how much more or less, not sure which way it goes, am I paying to use a 12-liter truck versus a natural gas versus a 12-liter truck diesel? Or, obviously, you've got 12-liter engines.

Yes, I think I got that question, Jeff. In terms of how much more are they paying, it varies because where we're moving into are typically locations, states that have -- that are offering grants and subsidies and help. So in some cases, it's -- there's not a difference at all. In other cases, it could be -- as you know, some of these areas, it could be upwards of 50%, 60%, so it depends. And typically, you have to find a customer who's got the application that can offset that cost. When it's an even, it's a no-brainer. But when you've got a 30%, 40% increase, then you've got applications that are going to run enough miles that are going to offset that type of cost increase.

The next question is from Matt Brooklier with Longbow Research.

I wanted to circle back to commercial rental. I know you've had a lot of questions on it. But were there any particular end markets? And do you realize you have a pretty diverse book of business, but particular end markets that stood out as being incrementally stronger during the first quarter?

Dennis?

Yes, I'd point to a couple, Matt. Transportation and warehousing was up. Food and beverage was also up, and not as much, but we did see a pickup from housing also. So those are the 3 I'd point to.

Okay. And roughly, what percentage of your rental book of business is exposed to, I guess, construction markets?

About 10%, in that range.

Okay. And then is there any way to, I guess, segregate the pickup in rental demand between what you saw in these 3 different verticals versus existing customers who are leasing trucks, who maybe leaned a little bit harder on the rental product in the quarter? I'm just trying to get a sense for what -- what was external that drove this incremental demand? Or was it more a function of maybe some uncertainty in the economy? And your, I guess, existing lease customers may be using a higher percentage of rental here in the near term?

Let me let Dennis look at some of those data. But I think the -- probably a good way to look at it is, it really was -- even though those were 3 of the segments, it really was growth across the board, which tells you that there is economic activity, there's product moving, combined with uncertainty, leading to rental, I think is probably a good way to think about it. Now I don't know, Dennis, if you've got anything on the lease customers?

Yes, Robert. Pure rental, Matt, which is where you're not renting for lease support, if you will, waiting for new leases. That was -- we saw a growth in that area. And we did see a little bit of what we call lease extra, where you're looking for additional capacity beyond the lease units that you have. So we saw it. In those 2 areas is where the growth was. So again, pure rental, where you're not leasing already, we saw an increase and a little extra capacity needed in the lease extra area.

Okay, so it sounds like a mix of both.

Right. Right.

The next question is from Justin Long with Stephens.

You've talked about the longer-term goal of top line growth in the SCS segment reaching that high single digit, low double digit level. And it looks like you could be pretty close to that level as we get further through the year. Can you talk about the underlying assumptions that support that outlook? And also, I know you have some new customers you're on-boarding, but the timing of those customers coming online this year?

That's a good question. John?

Okay. Yes, as we talked about starting late last year, we saw a pretty sharp increase in new sales, and we think that's very encouraging in our goal to get to this 7% or so long-term revenue growth in SCS. Now we've been held back -- and we've talked about this before, but we've been held back a little bit mainly by volume in our existing accounts, some headwinds at big accounts. So we've seen -- and you can see it in the results we've published. You can see some headwinds at some of our large high-tech accounts. and some of our large retail accounts. And in one case, where we had an account that had a big bulge in volume early last year and didn't have that same kind of onetime surge this year, so it's mainly been that. Now we do expect our revenue growth to improve in the second half of this year, as we talked about before, as some of these new sales come on. But we also see continuing headwinds at some of these accounts. So it's going to be hard to get all the way to the 7% this year. We probably won't get -- we won't get to the 7% this year. And it's the existing account headwinds. It's also -- some of our automotive accounts have talked about cutting production. So that's going to hold us back from -- maybe we'll get to the 5% by the -- run rate by the end of the year. But we do think, with the new sales we're seeing and we're continuing to see, that over the long term, we can get to that 7% number.

Okay, great. That's helpful color. And I know we're running a little bit long. But last question, I was wondering how much Sandy impacted the first quarter. And going forward, what's your expectation there in terms of the timing of the rebuilding efforts and any impact that could have on your business?

Sandy, yes, I know. That was -- we've been seeing impacts from that around our -- some part of our rental demand, especially in the northeast, obviously, is driven by that. I don't -- we don't know exactly how long that will last. I think beyond that, there's really probably no more significant benefits or impacts going forward.

Yes, I don't know if it's big enough to really even be able to point it out because rental demand, for example, was up in the northeast and certainly in the affected area, but it was really up across the board also. So we are seeing it just kind of blending in a bit with the results.

Our final question today is from David Campbell with Thompson, Davis & Company. David P. Campbell - Thompson, Davis & Company: I just -- all my questions have been answered except one, and that is the number of shares. You mentioned 51.9 million at the end of the quarter, but only 51.4 million average for the quarter, so should we be using 51.9 million for the year?

No, no, David. That's the number that's on our balance sheet where it's a requirement that you disclose of unvested restricted stock that's outstanding as part of that. So the calculation we had given, our plan for the full year was 51.3 million. We actually were 300,000 or 400,000 higher than that in the first quarter. So you probably ought to plan that 300,000 or 400,000 higher, so 51.6 million, 51.7 million type of range is what probably you should use.

I would now like to turn the call over to Mr. Robert Sanchez for closing remarks.

Okay. Well, I want to thank everybody for getting on the call. Certainly, thank you for your interest in our company. And I hope all of you have a safe day, and we'll be talking to you soon.

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