Ryder System, Inc. (R) Q3 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

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Kevin W. Sterling - BB&T Capital Markets, Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Scott H. Group - Wolfe Research, LLC Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated Matthew S. Brooklier - Longbow Research LLC Nicholas J. Bender - Wunderlich Securities Inc., Research Division Justin Long - Stephens Inc., Research Division Thomas Kim - Goldman Sachs Group Inc., Research Division

Good morning, and welcome to the Ryder System, Inc. Third 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 Third 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, Chairman and Chief Executive 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 Robert.

Good morning, everyone, and thanks for joining us. This morning, we'll recap our third quarter 2013 results, review the asset management area and discuss the current outlook for our business. We'll then open up the call for questions. With that, let's turn to an overview of our third quarter results. Net earnings per diluted share from continuing operations were $1.40 for the third quarter of 2013, up from $1.26 in the prior year period. Third quarter results included $0.06 of nonoperating pension cost. The prior year period included an $0.11 charge related to nonoperating pension cost and a tax law change. Excluding these items in both periods, comparable earnings per share were $1.46 in the third quarter, up from $1.37 in the prior year, an improvement of $0.09 or 7%. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up 5%. Total revenue grew 4%. These revenue increases reflect new business and higher volumes in supply chain, as well as lease revenue growth. Page 5 includes some additional financials for the third quarter. The average number of diluted shares outstanding for the quarter increased by 1.6 million shares to 52.2 million. This reflects the temporary pause of our anti-dilutive share repurchase program and the share -- and share issuance being higher than planned due to increased employee stock activity. As of September 30, there were 52.6 million shares outstanding, of which 52.2 million are included in the diluted share calculation. Our third quarter 2013 tax rate was 33.7% and includes the impact of nonoperating pension cost and a pension settlement charge. Excluding these and other smaller items, the comparable tax rate would be 34.1%, which is generally in line with our forecast for the quarter. This rate is below our prior year comparable tax rate of 34.9%, reflecting a higher portion of earnings in lower tax jurisdictions this year. Page 6 highlights key financial statistics for the year-to-date period. Operating revenue was up 4%. Comparable earnings per share from continuing operations were $3.53, up by 12% from $3.15 in the prior year. The spread between adjusted return on capital and cost of capital increased to 100 basis points for the trailing 12-month period, up from 70 basis points in the prior year. We now expect this spread to be approximately 100 basis points by year end and in line with our initial plan, as we make continued progress towards our longer-term target of 150 basis points. I'll turn now to Page 7 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions total revenue grew by 2%. Total FMS revenue included a slight decline in fuel services revenue. Excluding fuel, FMS operating revenue grew 3%, driven mainly by growth in Full Service Lease. Full Service Lease revenue grew 3%, due to higher rates on replacement vehicles reflected in the higher cost of new engine technology. The average number of leased vehicles declined by 1% from the prior year, reflecting the nonrenewal of some low-margin trailers in the U.K., the impact of economic uncertainty and more efficient redeployment of off-lease vehicles. The lease fleet grew sequentially by 100 units at quarter end, reflecting stronger-than-expected sales activity in North America, partially offset by fewer trailers in the U.K. Miles driven per vehicle per day in the U.S. lease power units increased 2%. Miles per vehicle have improved over the past 2 years and are now back to normalized levels. The average age of our lease fleet began to decline in June of 2012, as a result of elevated replacement activity. It continued to improve this quarter and was down by 1 month sequentially or 4 months since the third quarter of last year. Contract maintenance revenue declined 3% due to a shift in vehicle mix, reflecting more trailers and fewer power units. Contract-related maintenance increased 12% since the prior year. A significant portion of this increase is coming from our new on-demand maintenance product, which is in place with several large customers. Commercial Rental revenue was up 3%. Globally, rental demand was down 2% from last year, which was slightly better than expectations, as increased demand in the U.S. was more than offset by lower demand in the U.K. and in Canada. The average rental fleet decreased 4% from the prior year, but was seasonally up 3% from the second quarter. Rental utilization on power units was 79.7%, an improvement of 230 basis points over last year and a very strong absolute rate. Global pricing on power units was up 4%, improving from the 2% growth we realized in the first half, as the rate increase we implemented during the second quarter is taking hold. In used vehicles sales, we saw continued solid demand and good pricing. I'll discuss those results separately in a few minutes. Overall, improved FMS earnings were driven by better Commercial Rental performance and strong Full Service Lease results. Improved lease earnings reflects vehicle residual value benefits and higher rates on the new engine technology. These improvements were partially offset by lower earnings in the U.K., which were impacted by weaker demand and one-time charges. Earnings before taxes in FMS were up 2%. FMS earnings as a percent of operating revenue were 11.1%, unchanged from the prior year. Performance in the U.K. negatively impacted earnings before tax percentage by approximately 60 basis points. I'll turn now to Supply Chain Solutions on Page 8. Operating revenue was up 9% and total revenue grew 8%. These increases are due to new business and higher customer volumes. We saw nice growth in our industrial, high-tech and retailing consumer packaged goods industry groups. Operating revenue from our dedicated offering increased by 10%, reflecting strong sales activity. New sales from dedicated have come from both private fleet conversions supported by outsourcing trends, and from our internal efforts to migrate customers from lease into dedicated, where we realize increased returns. Dedicated achieved double-digit growth despite headwinds from an automotive customer with significantly lower volumes in the year. Supply chain earnings improved 21%, reflecting new business and higher volumes. Segment earnings before taxes as a percent of operating revenue were 7.3%, up 70 basis points from the prior year. Page 9 shows the business segment view of the income statement I just discussed and is included here for your reference. Page 10 highlights our year-to-date results by business segment. In the interest of time, I won't review these results in detail, but I'll just highlight the bottom line results. Comparable year-to-date earnings from continuing operations were $184.5 million, up 14% from $161.9 million in the prior period. 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 11. Year-to-date gross capital expenditures were $1.5 billion, that's down $220 million from the prior year. This decrease primarily reflects lower planned investments in our Commercial Rental fleet. Around lease capital, we continue to see a higher-than-planned percentage of sales being filled with new equipment versus used equipment. We also realized better-than-expected lease sales in the third quarter. As a result, we've increased our full year capital spending forecast to $2.1 billion, above our previous forecast of $1.9 billion. Obviously, the stronger lease sales we've seen recently is encouraging. Additionally, filling a greater percentage of lease contracts with new versus used equipment is also a positive story for us. It reflects greater receptivity from customers regarding the new engine technology, including a desire for fuel savings benefits. Importantly, it also means that we're contracting with customers for longer lease terms on the new equipment. We realized proceeds, primarily from sales of revenue earning equipment, of $337 million. That's up by $27 million from the prior year. The increase reflects more units sold versus last year. Net capital expenditures decreased by $116 million to approximately $1.2 billion. Turning to the next page. We generated cash from operating activities of $890 million year-to-date, up by $122 million from the prior year. The improvement reflects lower working capital needs, lower pension contributions and higher earnings. We generated almost $1.3 billion of total cash year-to-date, up by $31 million, reflecting higher operating cash flow in the current period, partially offset by a sale-leaseback in the prior year. Cash payments for capital expenditures decreased by approximately $200 million to $1.5 billion for the year-to-date period. Company had negative free cash flow of $206 million year-to-date. Free cash flow did improve by $230 million from the prior year due to lower rental capital expenditures and higher cash from operations. Our prior forecast projected full year free cash flow to be around negative $190 million. Given the increase in lease capital due to stronger sales and greater use of new vehicles, we now expect full year free cash flow of around negative $350 million. Page 13 addresses our debt-to-equity position. Total obligations of almost $4.2 billion increased by $186 million from year-end 2012. Total obligations as a percent to equity at the end of the quarter were 251%, is down from 270% at the end of 2012. Leverage is within our target range of 225% to 275%. As we've previously discussed, our leverage has been impacted by pension equity charges, driven largely by a historically low interest rate environment. As of September 30, 69 percentage points of leverage were due to pension equity charges. As market interest rates rise, our leverage will decline, all other factors being equal. This should provide us with additional balance sheet capacity and flexibility over time. We calculate the pension equity charge at December 31 of each year. Given year-to-date asset performance and interest rate moves, we have the opportunity for favorable pension impacts for the first time since 2009. Assuming current discount rates and asset values in our pension plan, the year-end 2013 pension equity adjustment would free up around 15 additional percentage points of leverage. Equity at the end of the quarter was $1.66 billion. That's up by $188 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 15 summarizes key results for our asset management area. We continue to reduce used vehicle inventories, which are at the lowest level in the past 7 quarters. Used vehicle inventory held for sale was 8,200 vehicles, down from 9,100 units in the same period last year and 1,400 units below second quarter levels. Used vehicle inventory is nearing our target range of 6,000 to 8,000 vehicles, following recently higher levels caused by the lease replacement cycle. Used vehicle inventory at year end is expected to be around the top end of our target range. Pricing for used vehicles remains generally stable. Compared to the third quarter of 2012, proceeds per vehicle sold were down 6% for tractors and up 9% for trucks, including heavier-than-normal wholesale volumes due to replacement cycle and the age of the vehicles sold. From a sequential standpoint, used vehicle pricing was unchanged from the second quarter. As our used vehicle inventory approaches our target range of 6,000 to 8,000 vehicles, we expect to reduce the number of vehicles sold through wholesale channels. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by almost 550 units or 10%. Early terminations of leased vehicles increased by around 400 units, but remained well below pre-recessionary levels. Our average Commercial Rental fleet was down 4% versus the prior year, but was seasonally up 3% from the second quarter. I'll turn now to Page 17 to cover the outlook and the forecast. In fleet management, we saw better third quarter performance in Commercial Rental, driven by higher pricing and utilization. We also continue to see strong Full Service Lease results, reflecting higher rates on new engine technology and better residual values. These factors should continue to benefit the fourth quarter. As a reminder, our midyear forecast projected the global lease fleet to remain flat with the second -- in the second half of the year. Due to improved sales activity, however, we saw lease fleet growth during the third quarter of 500 units in spite a headwind of 400 units from the U.K. trailers and now expect growth to continue at an improved pace in the fourth quarter. In addition to improved sales results with our traditional lease products, we're also very pleased with the strong interest in our new products, including on-demand maintenance and natural gas vehicles. While currently small in size relative to our overall business, these products could become an important growth driver by penetrating the historically non-outsourced private fleet and for-hire markets. We continue to make progress on maintenance initiatives, which are designed to address the higher cost of new engine technology. We also continue to expect maintenance cost benefits driven by the elevated number of lease fleet replacements and a reduction in the lease fleet age. In the used vehicle area, we expect solid demand and generally stable pricing, with inventories around the top end of our target range. We anticipate improved FMS results in North America will continue to be partially offset by challenges in the U.K. fleet market. While U.K. results should improve sequentially from the third quarter, we're forecasting them to be below our prior expectations. We remain confident that over time, we'll realize FMS margins at the levels we saw in 2007 and 2008. Given changes in the environment since then, the makeup of the FMS margin may be a bit different and will likely include contributions from growth, benefits from fleet replacement, improving residual values, new products and services and cost management. In supply chain, we expect solid year-over-year growth in both revenue and earnings. Growth rates in the fourth quarter are expected to be somewhat less than in the third due to some lost business and lower forecasted volumes. We are particularly encouraged by sales activity in our dedicated services offering, but we are seeing outsourcing activity driven by CSA regulations and other secular trends. We're also benefiting from our internal initiatives to migrate some customers from lease to dedicated. In the fourth quarter, we expect a higher share count to negatively impact earnings by an additional $0.01 above our prior forecast. This brings the full year impact of a higher share count versus the prior year to $0.12, above our original forecast of $0.06. Finally, a higher tax rate will negatively impact the fourth quarter earnings by $0.02 versus the prior year. Given these factors, we're tightening our full year comparable earnings per share forecast to $4.78 to $4.83 from $4.75 to $4.85. This is an increase of 8% to 10% from $4.41 in 2012. Our fourth quarter comparable earnings per share forecast is $1.25 to $1.30 versus the prior year of $1.26. That concludes our prepared remarks this morning. At this time, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions] The first question today is from David Ross with Stifel. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: With the full service leasing business, you mentioned higher maintenance costs associated with the new vehicle technology. Is that factored into pricing?

It is, David. We review our pricing on an annual basis and sometimes even more frequently than that. And as we've seen these price increases, we have been updating the pricing on a regular basis. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, in addition to that, with the new trucks supposedly being more fuel efficient, are you factoring in, at least for some accounts, the expected reduction in fuel services revenue that you should be getting?

Some of that's built in. But if you remember, our fuel is generally a pass-through regardless of price. There is some margin built in. But some of that reduction that you may get from the higher fuel efficiency, we're looking to probably make that up with new fuel customers we might get through some of the products, like on-demand maintenance. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then about the FMS segment in terms of the margin. A lot of things seem to be going right in the business. The rental utilization is strong. The fleet age is still coming down. Residual values are holding. But we're not seeing as much margin expansion as we might like. Can you kind of give us any more color there?

Yes. I think the key thing in this quarter was really the U.K. If you look at -- we highlighted that the U.K. represented about 60 basis points of margin in the quarter. So had it not been for the U.K., if you just looked at North America, you'd have a 60-basis-point improvement in earnings before taxes percentage. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Is that a percent of operating revenue or total revenue?

Operating revenue, as a percent of operating revenue. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just last question. The press release mentioned a multiemployer pension plan settlement charge. Did you guys buy your way out of one in the quarter? Or are there still any lingering multiemployer plans that you're part of?

Yes. We have a small percentage of our employee base that is represented by unions. And of those, there's a percentage of those that have a multiemployer pension. So as a percent of total employment, it's a very small percentage. However, as we look at some of the risk associated with those, even though they're small, because of the way that the regulations work around that, there's a little bit of a disproportionate risk. So we are looking where it make sense to work our way out of those. But I don't expect those to be material items, just as they come along, if we have an opportunity to convert them, we will.

Right, David. Yes, there's -- that was just an agreement with one union, where we were going to convert them to a 401(k) plan moving forward. There's -- we have probably 10. I want to say, 10-odd total multiemployer plans. So our strategy is to try to address these as they come up. Usually, you do that when the collective bargaining is up for renewal. So it's going to happen, we would expect, I hope, over the next few years. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: And you guys aren't part of Central States, right?

We are. We have a very small presence in that plan.

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

Robert, I want to make sure I understand your comments on the guidance. So you're taking down the full year just by a couple of pennies on both ends. I know you gave a couple of reasons at the end of your prepared remarks. But I mean, would you attribute the adjustment to guidance? I mean, is that mostly the higher tax rate and the higher share count? And if you can quantify the issues in the U.K., kind of what's going on there and how long you expect that to persist, I think that would be helpful as well.

Yes, I want you to know tax rate is really a year-over-year issue, but versus our prior guidance, it's really 2 things. It's $0.01, let's call it a $0.01 for the higher share count, and then a couple of cents for U.K. Because U.K., even though we expect it to get better than the third quarter, it's going to be a little worse than what we had expected it when we gave the guidance midyear.

And what is the issue in the U.K. at this point? And is it something that gets cleaned up by the end of the year? Or do you see that going into 2014?

Yes, it's primarily a result of soft demand, especially around rental, versus what we had expected. The economy in the U.K. seems to be getting a little bit better since what we had talked at midyear. But we're still not seeing a lot of that in rental demand. So that's the biggest headwind that we've got there. We've got a couple of other issues we're kind of working through. We -- the third quarter was impacted by a few one-time items. We had some bad debt in the U.K. that hurt us. So obviously, we don't expect that to recur. But certainly, we think the rental headwind will continue for certainly into the fourth quarter. And I think beyond that, we expect to be able to either offset it or we'd see some pickup.

Okay, that helps. And then just on the leasing business. I guess I'm curious what you think was different here in the third quarter versus what you've been experiencing through the first part of the year? And kind of seeing that lease writing activity pick up, which is something that you haven't talked about recently. And then also, if you can give some color on the cadence of what we should see for the lease fleet. It sounds like that there were 500 units that were added, but 400 units that were lost. I'm kind of trying to get an idea of how to think about the lease fleets for the balance of the year.

Well, yes, let me clarify because I may have misspoken on the first part of the presentation. The lease fleet, including all units globally was up 500 units. That included 400 units of headwind. So had there not been a headwind from the U.K. trailers -- had it not been for the U.K. trailers, lease fleet would have been up 900 units.

Got it. Okay.

So I want to clarify that. I think I'll hand it over to Dennis to give you a little more color. But I think in general, the challenge has been with -- in this uncertain economic environment is getting some traction on customers feeling good about the economy and feeling strong enough about the economy to be willing to sign up to these longer-term leases. And we've had some choppiness in that. And I think, as you saw in the first half of the year, it was a little bit -- we were a little bit softer than we had expected. However, we did see in the third quarter a pickup of customers willing to sign up. Now you can -- I can speculate on what some of the reasons are. I think, certainly, the fuel efficiency of the new equipment is helping us. I don't know if at some point, customers are just realizing that they've got to make some decisions because some of these vehicles have really aged out, and they're looking to make some moves. But we really are encouraged by what we saw in the third quarter in terms of not just the fleet growth, but really, sales activity. So we're expecting that to continue into the fourth quarter and really set us up nicely for 2014. But I can -- let me hand it over to Dennis for some more color.

Robert, I would just add to that, that some of the macro trends, Todd, that are out there such as the new technology, the expense associated with it, not only the acquisition cost, but the maintenance cost. I think that's leading to customers saying, "Hey, maybe I want to look at, at outsourcing." I think also CSA scores is playing into this. And finally, I would say, as you look at the new technology and the training challenges for technicians, some customers are saying, "Look, maybe it's time to look at outsourcing this to a company like Ryder." So I think a lot of those macro trends that we've been talking about for the last several years, I think we're starting to see them play out.

There's no substitute for a little bit more visibility in the economy, a little more certainty would really help. But even in spite of that, I think we saw some good performance and some good activity in the third quarter.

Okay, that helps. And just to get the clarification. So the number of units that we'd expect sequentially in the fourth quarter, a couple of hundred on where you ended the third quarter or how should we think about the fleet going into the fourth quarter?

We're expecting into the fourth quarter, being up another -- even including the U.K., being up about 1,000 units in the quarter, which is one of the reasons why we feel really good about what we're seeing.

Okay. And that's -- the 1,000 is in that number?

No, no -- you're right, 1,000 is in that number, correct. Right because remember the revenue for that usually isn't going to -- you're not really going to see that until you get into the first quarter of 2014.

The next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: John, if I could ask your perspective on SCS. Obviously, a strong result this quarter. I think in the past, you've talked about that business being a 6% to 7% margin business. So the question is, how sustainable is this margin that you experienced this quarter? And maybe if you could spend a little bit of time discussing the mix shift within that segment. I know DCC historically was higher margin than traditional SCS business, and it sounds like you're getting some good growth momentum within Dedicated. So maybe those targets should be rethought going forward? I'm just looking for a little bit of perspective on how we should think about margins in that segment in light of the third quarter result.

Okay. Well, let me start with the growth question. The -- we did get a little higher growth rate, a lot higher growth rate than we expected in the third quarter. It's going to be higher than what we expect going forward by a little bit, too. We've had -- and that's because -- it's mostly because we had strong growth in volumes at existing accounts. We've had really strong sales growth across SCS and especially in Ryder Dedicated, but not just in Ryder Dedicated. For close to 2 years now, where we had a big step up -- maybe it was about 18 months ago, we saw a big increase in new sales. And so now, we're really at a point where if we could just get consistent volume growth at our portfolio of existing customers, then we would see growth rates like this or close to it. But at least in the near term, we don't expect to see that. And so that's why we've been saying 5%, 6% growth, that kind of thing. And so that's the growth side. The margin -- our margin's been consistently improving. And it's been improving across both Dedicated and SCS, the traditional SCS segments. I don't think that there's a big enough difference in margin between the 2 that you should worry about the mix changing the target total margin. I think we're getting margin expansion because we're growing, and that's helping us amortize our -- and we don't have a huge overhead; we have a little overhead, but it's helping us amortize that. And at the same time, we're selling more value-added services. This has been our strategy now for 5 years, is to add capabilities and new services, both in Ryder Dedicated and in our verticals, that create a little more value for customers. And so we're seeing -- over time, we're seeing projects come on with slightly higher margins. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: That's good. That's helpful. Art, on the share buyback and the share dilution discussion here in the fourth quarter, it's understood the impact. But maybe can you help us think about how we should think about dilution going forward as the balance sheet starts to normalize? And presuming, at some point in time, you don't experience that dilution, you're able to at least reengage the anti-dilutive repurchase. But if and when that time comes in '14, what is the point of view on the share count going forward? Are you content with current levels or slightly higher levels and then keeping it at that level? Or do you have a desire to repurchase stock to drive the share count back below 2013, 2012 type levels? I'm just looking for a little bit of perspective on once trends normalize in '13 from a balance sheet perspective.

Right. Ben, I think where we're looking at it right now is we turned it off at the beginning of the year to provide us with some flexibility. We've been seeing a lot of adverse hits from pension and the like. So pension is going to go in our favor, we're going to de-lever more than we thought at the beginning of the year, everything being equal as of right now. So our plan is to take a look at the anti-dilutive at the beginning of the year and make a call. Right now, I wouldn't see -- I would expect, if anything, it would be -- if it was turned back on, it would be on a prospective basis. I wouldn't think we're going to do a look-back as to what happened this year. So that's kind of our view right now. But it's a process we got to go through over the next few months here.

The next question is from Kevin Sterling with BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: You may have mentioned this, and I might have missed it. I'm sorry if I did. Did you give lease miles driven per day? I didn't see that or maybe didn't catch it.

Yes. The lease miles driven per day is up 2%. And we did mention that it was up -- it's already at our kind of historical norms. Not at the peaks yet, but certainly historical norms. Kevin W. Sterling - BB&T Capital Markets, Research Division: Remind me what peak was?

Hang on while they look at that. It's a little bit off from where we're at. 3% more than where we're at now. So another 2%, another 2%, 3% from where we are right now. Kevin W. Sterling - BB&T Capital Markets, Research Division: Okay. So you got a ways to go, okay. But it looks like directionally, we're heading there. Is that kind of the right way you guys thinking about it?

Correct. Yes. And at some point, I think we're in the range now where you could start to see some -- you would normally see some conversion. So I'd say, that also is an indicator of maybe what we saw in the third quarter. Kevin W. Sterling - BB&T Capital Markets, Research Division: Yes. And looking at this, some of this Full Service Lease growth, you're talking about some of your optimism. Is that new customer growth or existing customer expansion? Is there any way to break that down?

It's little bit of both, really. I mean, we are seeing -- I think Dennis mentioned earlier, we're seeing customers coming to us who have currently owned their own fleet and are struggling with some of the items around the maintenance cost associated with the new equipment, the new capital investments. Some of the macro trends that we've been talking about for a while, we're really beginning to see a lot more of that. And then we're seeing some expansion from existing customers, but maybe not as strong. Dennis, you want to?

I agree. It's little bit of both, Kevin. But I would say we're encouraged by what's happening with ownership customers, where, again, they're seeing these challenges and looking for some help. And so I think we're at that point where customers are saying, "Look, with the new technology being so expensive and the challenges associated with training of the technicians..." -- and as I mentioned earlier, the challenges associated with CSA scores being put up on websites, they're looking to a Ryder to say, "Can you help me?" So what we're really encouraged by is the number of ownership customers that are now looking at that total cost of ownership and regulatory challenges that they face and looking to a Ryder. Kevin W. Sterling - BB&T Capital Markets, Research Division: Okay. And just kind of last one here. From what you guys can tell, kind of this increase in Full Service Lease, it really wasn't anything, say, one-time in nature, all of a sudden maybe customers trying to get out in front of a potential hours-of-service crunch, for instance. It's just more so that realizing, "Hey, my equipment has gotten older. This technology is so expensive. I've got to do something." It's just maybe the light bulb all of a sudden going on now. It's nothing as far as you can tell that was onetime that might have triggered a bump?

The only thing that happens around this time is the model year change. So there's always a little bit more activity around that. But we're seeing activity beyond that. And even after the model year change occurred, we continue to see stronger activity. Kevin W. Sterling - BB&T Capital Markets, Research Division: And then your lease pipeline, is it customers really, as far as you can tell, looking for that new equipment that you talked about versus used equipment?

Yes. You get into the fuel efficiency and the attractiveness of that. So they're looking at new equipment and the only thing I'd add is that, as we're talking to these customers, we're also packaging all the value-added services that we can provide. And I think that's very attractive to them also. So yes, there's a lot of customers out there saying, "Look, can I save on fuel?" But also, they'll come to a Ryder where we look at optimizing their fleet. And we're seeing a lot of interest in dedicated also. It's not only the technician challenges, but it's also the driver challenges, which is why I think you saw such strong growth in dedicated this quarter.

The next question is from Anthony Gallo with Wells Fargo.

I guess, first, could you clarify what the reduction in the average age of the fleet was? I thought I heard you say 1 month.

Yes. It was. It was 1 more month. So we're down 4 months from last year.

Okay. So it continues to run about 1 month every quarter?

Correct.

Okay. Should that -- it seems like that should accelerate as the lease fleet expands more rapidly than you were thinking? Or is there any reason why it would not?

You're saying it should expand as the lease fleet grows?

Yes.

Sure. I mean, on the edges, right? Because you're talking about -- if you add 1,000 units it's on a base of 120,000 vehicles. So I wouldn't say that's going to have a huge impact on it. It's more -- the replacement cycle is probably the bigger driver.

Okay, that makes sense. In the dedicated business, I thought you might actually get tripped up there. A lot of the for-hire carriers saw some strains on driver recruiting and actually hours of service within their dedicated. So can you just walk us through how you were able to avoid that, both the driver recruiting challenges and then the hours-of-service challenges?

Okay. Yes, driver recruiting is a big challenge for anybody in this business, and it's a challenge for us. We think we're good at it. We think, in general, this business has an advantage over, say, the for-hire truckload because most of it's short haul and your drivers are home every night. And so -- but it's our business recruiting drivers, and it's not our customers' business. So I think we're seeing some conversions because of that. Hours of service is really -- was a virtually a nonissue for us, we -- mainly because of the short-haul nature of our projects. So we might have had a couple of accounts, where we had to restructure or reengineer the routes and maybe ask for a small rate increase, but it really was no significant issue to us.

That's helpful. And then, Robert, maybe could you expand a little bit on the type of spending you're doing for on-demand services and maybe where you are in that process? Are you 1/4 of the way through it, halfway through it? Just a little color there would be helpful.

I'm sorry, you broke up a little bit. Are you talking about the -- what we're doing around on-demand maintenance?

Yes, the nature of the spending you're doing to get that up and running, and maybe where you are in the process. Are you 1/4 of the way through it, halfway through it, et cetera?

Yes. It is a product that really leverages all of our infrastructure that we have out there, so all the shops and the technicians. We bring on additional technicians if we get a larger fleet. But the management and the infrastructure stays the same. There is some IT spend that we're incurring, but it's really not a big number. You saw some of the -- in the earnings results, we talked about some -- a little bit of overhead increase from some IT spending. There's a small portion of that which is related to on-demand. But I would say there's not a lot of significant capital or investing. It's just really trying to leverage the infrastructure that we have, but...

I agree. I just -- Anthony, I'd just answer the second part of your question, which is, where are we at with rolling this out. And the answer is, we're at the beginning. We've got about 10 customers right now. We're talking to larger fleets in general. And we see that expanding through 2014. There's a lot of interest in getting help with maintenance. I mean, maintenance is kind of the acute pain point that the industry is seeing. And when you look at our 800 shops and over 5,000 technicians, this is something we're good at and something that we're going to offer the industry to help them out with the issues they're seeing.

The next question is from Scott Group with Wolfe Research.

So just in terms of the CapEx going up. It sounds like -- so the CapEx goes up this year and you really see the kind of the revenue and earnings benefit in '14. How do we think about CapEx in '14? Does the higher CapEx this year mean that '14 CapEx can come down year-over-year? Or do you kind of view those independently? If you have any thoughts -- I guess, any thoughts on '14 CapEx.

Well, Scott, if you exclude growth, any additional growth in 2014 beyond whatever units we bought this year, CapEx would clearly go down next year, right, because there's a lot fewer replacement. The unknown, I would say, is still what growth is -- what additional growth capital we're going to need next year. What additional units we're going to have. We want growth. We want to be able to grow the lease fleet. So we don't -- I think that's still the unknown. If there's no growth or very little growth, you'll see CapEx go down and really free cash flow improve. If growth really picks up, then you'll have some additional CapEx, which should be a good thing because we'll get good returns on that, but then delay the free cash flow benefits longer.

Got you. Okay, that makes sense. Maybe within that, do you have a view on at this point on rental CapEx in '14 versus '13?

No, not yet. We still haven't. We usually wait a little longer before we make those decisions because, as you know, rental can be a little more volatile than the rest of our business.

Okay. And just as I think about kind of the earnings outlook for '14, I know you don't have guidance out yet. But I see expectations that we get to kind of low-teens earnings growth next year, then the guidance for fourth quarter is certainly below that. I wanted to ask, do you think we need to see FMS margin improvement to get to kind of low double-digit earnings growth next year? And then what's your confidence that we will see margin improvement at FMS next year? So maybe there's some maintenance offsets to the lower fleet age that we're hearing about this quarter, but maybe U.K. less worse next year? I'm guessing residual values still a positive next year, not sure about gains on sale, not sure if we can keep up kind of this high utilization on the rental side. So some moving parts and maybe you can give us your views on that and, I guess, your level of confidence in margin improvement in FMS next year?

Alright. You started the question, we don't want to get into the outlook for 2014, so I don't want to do that. But I will tell you that, yes, in order to see continued earnings growth, really, we need to have earnings growth in FMS. That is still the largest segment in the company. And that earnings growth, certainly a portion of that is going to come from FSL. And we've talked about in the past that as the fleet gets younger, margins improve. As I mentioned -- as we mentioned in the press release, we're seeing some of the same maintenance cost headwinds that the rest of the industry is seeing. However, we have, over the last 1.5 years, 2 years, have shown that we can manage those costs through our maintenance initiatives and through other parts of the business, whether it's controlling overheads or other things that we do. I expect that to continue. And I expect us, though, to also see contributions from other things, such as residual values continue to hold strong and depreciation benefit from that should continue into next year. We don't -- we haven't quantified that yet, but that should be a benefit. So those are pluses. And then continued strength in our transactional businesses. So you combine that with what we're seeing in supply chain and the good sales and, hopefully, improved volumes -- continue to improve volumes into next year, those should all be positive. So that's, without looking at 2014, that's sort of some of the puts and takes that we see. But still some time to get there, and we still got a lot to learn as we make it through the fourth quarter.

The next question is from Jeff Kauffman with Buckingham Research.

I want to drill down a little bit on U.K., not to take away from the forward growth, but I just want to understand it. If I take your comments, and that's implying the 60 basis points is about $4.5 million of pretax profit that you were out. Can you help me understand how to think about what's temporary and what's a longer-term battle? For instance, you said you had the higher bad debts expense. You said you were out about 400 trailer rentals. How much of the $4.5 million would those have accounted for versus, say, the operating market just being at a lower profit level?

I would -- very simplistically I'd tell you a little less than half is one-timers and the rest is more challenges around rental and some of these other things we're doing.

Okay. And I guess, there was an interesting release you guys had on a small company in Pennsylvania, Macaroni in early October, where they had leased vehicles from you. They had their own private fleet, and now they're taking a lot of that private fleet and outsourcing it with this natural gas conversion option. Can you talk a little -- is that the new model? And can you give us an idea of kind of RFP activity this year, if there's a way to compare it versus 1 year ago? When you're talking about more of these companies kind of stepping over the threshold, is this kind of what you're talking about?

Yes. And Dennis alluded to it earlier. We are seeing more customers that are in ownership looking at leasing. Whether it's full service leasing or it's some of these natural gas vehicles or even some of the on-demand, as ways to help -- to have Ryder help them with maintenance cost or the financing of equipment that they have or introducing them to natural gas vehicles. So there's the secular trends that I think are really helping some of this. And then I think there's some of the things that Dennis and his team are doing around new products and services that are really opening up the portfolio of ways that companies can do business with us and making it easier for them to do business. That was a small example though. But an important one of a customer who was in ownership and really found a solution that Ryder could really help them be more efficient in their business. And I think that is a theme that we're seeing more and more of this year.

Okay. And the RFP activity, I mean, there's no backlog number that we could really measure. But how -- help us understand how these RFPs are different than they were 1 year ago, kind of the magnitude.

I don't -- we don't talk a lot about the sales pipeline. But I would tell you just a couple of things. One is that, we probably are seeing more large deals this year than last year. So larger fleets who had historically maybe been in ownership and been doing maintenance different ways are -- seem to be more interested in doing business with Ryder, whether it's Full Service Lease or under some type of maintenance agreement. And we are seeing more customers or more prospects that are coming from ownership versus what we saw a year ago, where it was mostly trading of full service lease customers among competitors.

The next question is from Matt Brooklier with Longbow Research.

Just wanted to clarify one thing. The increase in CapEx going to $2.1 billion, is all of that increase due to this pickup within lease spend? Or is there anything else in that number?

Yes, Matt. Right, Matt, the increase in CapEx is associated with the lease growth that we were talking about in the second half.

Okay. Can you remind us how much U.K. contributes to FMS roughly?

Yes, Matt. It's about 10% of the operating revenue for the business.

Okay. And then, I guess, off of -- some of Robert's comments to the last question. It sounds like maybe half of that 60 basis points of headwind was onetime-ish. Things still relatively weak within the U.K. during fourth quarter. Would it be fair to assume that we see a little bit less headwind in terms of the margin during fourth quarter? Or is it potentially equal to that 60 bps that we saw in third quarter?

Well, it would be less just because we highlighted about half of that was associated with one-time items. So we're not expecting that to continue. So you should see less impact from the U.K. in the fourth quarter.

The next question is from Nick Bender with Wunderlich Securities.

Could you guys kind of just, maybe this is the best question for Dennis, walk us through a little bit in terms of the rental market? How demand sort of broadly feels there? Obviously, this is the second straight quarter of solid results. Is it more managing the rental fleet in sort of a consistent market? Or are there some more sort of one-off discrete variables that are helping the rental market?

Well, first, from a demand point of view, Nick, as we stated earlier, the U.S. was up year-over-year. The U.K. and Canada were down, but better than our expectations. And yes, from an asset management and utilization point of view, this is something we've been really focused on. As you know, a little over 1 year ago, we came out with a warning when we had too much fleet. And so we've really been focused on our asset management capability and keeping utilization high. And that's helping us quite a bit. So we're going to continue to drive utilization in those high-70s, in that range is our target.

And are you seeing strength in any discrete areas? Or is it just -- domestically speaking of course. Or is it just broadly a little healthier market than obviously we were seeing this time last year?

It's broad strength. I can't point to any particular area where we're seeing a lot of pickup. So just in general, it's been strong. And we see that continuing here in the fourth quarter.

Moving to the SCS side of the equation. Certainly, some -- a nice rebound here for a couple of quarters in some of these verticals. How can we be thinking, moving forward, about the growth rates, particularly in high tech and in retail, which obviously, again this time last year, were comping negatively and certainly seem to be enjoying a rebound. John, you spoke to sort of broad customer wins, but can we look for this kind of growth moving into the back half of the year and then the beginning half of next year?

Yes. I mean, overall, over a long period of time, we're going to see good growth in all those verticals you mentioned. And we've had really good sales performance, especially in CPG. And we don't break that out in our public reporting. We combine it with retail, but that's been a real bright spot. We're looking to -- we're doing some things to build a stronger retail vertical. And so we expect over time to get more sales there and to see good growth there. And we've had good performance in new sales and high tech. On any given quarter, any given -- you're starting to divide the business up into finer and finer segments. And any given customer can have a decline like we're seeing right now in automotive, one customer pulling the vertical down in terms of year-over-year growth rates. But I think the whole point of our strategy is building value and competitive advantage by specializing in verticals. And we're seeing that result in good sales across all the verticals. So over a long period of time, I would expect to see them all grow well.

Got you. I will just finish with one more for Robert. As far as we think about the disposition of used equipment. Obviously, that number came down, like you said, towards the top end of sort of your long-term target range. Do you expect it to move down into the middle of that range as you work through any other equipment? Or we can expect to see used vehicle sales sort of trending in a similar line? And then, conversely, with a reduction of wholesale activity, how much better do you expect pricing to feel as we move forward?

Well, yes. The answer to your question, yes, we expect to get in the range, certainly to start moving into the range here in the fourth quarter. And then, as we get into next year, really bringing those inventories down even further. Because as we get out of the lease replacement cycle, there'll just be fewer units to be sold. And your point on wholesale is exactly right. We will -- as we approach this range, we're going to start wholesaling fewer units and retailing more units. So that should help us on the sales proceeds side, which is good for us in many ways. Not only is it good for our current periods, but it's also good for the residual value calculations that we make on our lease trucks. So that's all good. There's nothing wrong with having -- there's nothing bad about having lower inventories. And that's something that we're really happy that our team has kind of worked through, I think very well this year. And we're now approaching those target ranges on inventory. And again, we should -- we're working now to really reduce the amount of wholesaling we're doing, focus more on retail.

The next question is from Justin Long with Stephens.

I know we're running a little short on time, just a couple of quick ones. First, you mentioned some loss in business in SCS in the prepared remarks. Could you provide a little bit more color on what drove that and the impact it could have as we think about growth in SCS going forward?

Yes. I mean, lost business. You expect to have a certain percent of loss -- amount of lost business every year. You obviously work hard to minimize that. I think what happened -- what we refer to here is that there was a little kind of almost bunching of loss business here, where there's a few big projects coming -- not huge projects, but largish projects coming off in the fourth quarter that'll -- it's still, we still -- this shouldn't cause the growth rate to be below what we've been seeing over the long term. It's just below what we saw in Q3. So it's not a huge impact. And it's certainly nothing -- I mean, the customers we're talking about are generally low-margin customers that were lost on price.

Got you. That makes sense. And maybe, John, if you could talk about the typical length of a contract you're signing up in SCS today? And looking over the next few years, are there any major renewals you see that are coming up?

Average length -- I mean, the typical length is 3 years. There are some that are shorter and there are a few that are longer. So the average is probably a little less than 3 years. So every year, 1/3 of our business -- on average, 1/3 of our business comes up. That's a lot of business and we're always working very, very hard to renew those. It's a huge priority for our team every year. I mean, it kind of feels like every year, there's more business than normal coming up. But it's just, it's probably just about 1/3 every year. And we work very hard to retain that. I don't see any big difference next year. It's probably about the average.

Our final question today is from Thomas Kim with Goldman Sachs.

Robert, obviously, you've been with the company for a while. But as you're settling into the CEO seat, I wanted to ask you. Presumably, the lens at which you're looking at the company now has changed. And I'm wondering, are there any areas within the organization that you feel like are not really critical to the organization or are not necessarily core? I know there's been some questions around other businesses before, but I just wanted to sort of follow-up and see if your perspective has changed at all over the last quarter or 2?

No, Thomas. I've been around a long time. And I remember when I first got to this company that we had a lot of different businesses. And many of them were obviously not core to the businesses that we have today. And a lot of work went into really rationalizing the businesses and getting us to where we are. So as we develop strategies going forward, and we look to how we're going to grow the business, you've heard us talk about really focusing on the 2 businesses that we're on and focusing on penetrating the non-outsourced portions of the business, whether it's on the fleet side or the supply chain side. And doing that with new products and services, but all within the same businesses that we have. That, I think, is the right formula for Ryder for now, is that we have big markets that we can go after in both segments, and we have opportunities to really get after them not only because of the secular trends that we're seeing, but because some of the new products and services that we know we can offer. And we think that those things are going to drive growth. So as I sit here today, I feel really good about the businesses that we're in and the services that we offer, and the synergies also that exist between them, especially as you look at what's going on with our fleet management, Full Service Lease customers that are migrating to dedicated. And I really think that this portfolio of businesses can really provide some exciting growth for us.

If I can just add one more follow-up on the FMS and, in particular, the U.K. side of the operation. As you think about that business in the longer term, just given that Europe is basically an ex-growth or a very slow growth type of environment. How core do you feel like that is to the Ryder franchise and network?

That business -- we've been in the U.K. now for about 40, 50 years, I believe. And we have developed really the same type of market leadership in the U.K. in our business as we have in North America. We also have a very strong management team out there that really does a great job of running the business. So I -- even though if you look across -- synergies across continents are not as obvious, certainly, a lot of the knowledge base that is really critical here in the U.S. around truck maintenance and around some of the operations, whether it's rental or how we dispose the vehicles is shared. And really, we do leverage across the operation. And that really helps us to drive efficiencies in the business. So I do see that continuing. And I see that really continuing to be an important part of FMS and an important part of Ryder. They're in a bit of a soft patch over the last couple of quarters, but they've been good contributors to the earnings of the company. And I expect them to continue to be over the next, over the years to come.

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

Okay. Well, we're just past the top of the hour. So I want to thank all of you for being on the call. And look forward to speaking with you between now and the next call and certainly, on the next one. So everybody, have a safe day.

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