Ryder System, Inc. (R) Q4 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to 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 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 fourth quarter 2013 earnings and 2014 forecast 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, John Williford, President of Global Supply Chain Solutions, is on the call today and available for questions following the presentation. Dennis Cooke, President of Global Fleet Management Solutions, is unable to join us today due to a schedule conflict. With that, let me turn it over to Robert.

Good morning, everyone, and thanks for joining us. This morning, we'll recap our fourth quarter 2013 results, review the asset management area and discuss the current outlook and forecast for 2014. We'll then open up the call for questions. With that, let's turn to an overview of our fourth quarter results. Comparable earnings per share from continuing operations were a record $1.35 in the fourth quarter 2013, up from $1.26 in the prior year. This reflects an improvement of $0.09, or 7%. Comparable earnings per share exclude nonoperating pension cost in both years, and a charge for Superstorm Sandy losses in the prior year. We beat our fourth quarter forecast of $1.25 to $1.30 by $0.05 to $0.10. Operationally, our out-performance was driven by better-than-expected used vehicle sales and Full Service Lease results. Additionally, a lower tax rate contributed $0.03 to the beat. These items were partially offset by increased overheads and a higher share count. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up by 4% to a record $1.34 billion. Revenue growth reflects new business and higher volumes in supply chain, lease revenue growth and higher Commercial Rental revenue. Page 5 includes some additional financials for our fourth quarter. The average number of diluted shares outstanding for the quarter increased by 1.9 million shares to 52.7 million. This reflects the temporary pause of our anti-dilutive share repurchase program during 2013 and the share issuance being higher than planned due to increased employee stock activity. As of December 31, there were 53.3 million shares outstanding, of which, 52.7 million are included in the diluted share calculation. Our fourth quarter 2013 tax rate was 32.5% and includes the impact of nonoperating and other pension cost. Excluding these and other smaller items, the comparable tax rate would be 33.3%, which is below the prior year's comparable tax rate of 33.7%. Page 6 highlights key financials statistics on a full year basis. We realized record results in both operating revenue and EPS. Operating revenue was up by 4% to $5.3 billion. Comparable earnings per share from continuing operations were $4.88, up 11% from $4.41 in 2012. The spread between adjusted return on capital and cost of capital increased to 100 basis points, up from 80 basis points in the prior year. I'll turn now to Page 7 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions' operating revenue, which excludes fuel, grew 3%, mainly driven by growth in Full Service Lease, as well as Commercial Rental. Full Service Lease revenue grew 3% due to a higher rate on replacement vehicles reflecting the higher cost of new engine technology. The lease fleet grew sequentially by 2,100 vehicles in the quarter. This is above our prior expectations reflecting stronger-than-anticipated sales to new customers and competitive wins in North America. On a full year basis, the lease fleet increased by 500 units, including the planned reduction of 1,200 low-margin trailers in the U.K. Excluding the impact of the U.K. trailers, the lease fleet grew by 1,700 units for the full year. We've added a schedule to the appendix on Page 27 so that you can track the changes in our lease fleet, net of the planned U.K. trailer de-fleeting. Miles driven per vehicle per day on the U.S. lease power units increased 1%. Miles per vehicle have improved over the past 2 years and are 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 for the full year. Contract maintenance revenue declined 8% mainly due to a shift in vehicle mix, reflecting more trailers and fewer power units. Contract-related maintenance increased 1% since the prior year. Year-over-year growth was mostly offset by activity related to Superstorm Sandy that occurred in the fourth quarter of 2012. Commercial Rental revenue grew 6%. Globally, rental demand was up slightly from last year, as increase in demand in the U.S. was mostly offset by lower demand in the U.K. and Canada. The average rental fleet decreased 1% from the prior year, but was unchanged from the third quarter. Rental utilization on power units was 78.9, an improvement of 70 basis points over last year and a very strong absolute rate for the fourth quarter. Global pricing on power units continues to improve and was up 4% for the quarter. In used vehicle 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 improved used vehicle results, stronger Commercial Rental performance and better Full Service Lease results. Improved lease earnings reflects vehicle residual value benefits and higher rate on the new engine technology. These improvements were somewhat offset by lower earnings in Canada and the U.K. Conditions in the U.K. have improved versus the third quarter but remain challenging. Earnings before taxes in FMS increased 14%. FMS earnings as a percent of operating revenue were 11.2%, up 110 basis points from the prior year. I'll turn now to Supply Chain Solutions on Page 8. Operating revenue grew by 8% 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 services increased 7%, reflecting continued positive sales activity. New sales in dedicated have come from both private fleet conversions supported by outsourcing trends, and from our internal efforts to migrate customers from lease and to dedicate it where we'll realize increased returns. Supply Chain Solutions earnings before tax improved 6%, reflecting new business and higher volumes, partially offset by $1 million in legal claims. Segment earnings before taxes as a percent of operating revenue were 6.3%, unchanged from the prior year. Please note that Supply Chain Solutions segment earnings reflects a slight revision to the calculation of intercompany profits on vehicles allocated to SCS. Slide 32 provides a reconciliation by quarter for this change which impacts all quarters in 2013. 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 full year 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. We saw double-digit earnings growth in both segments. Comparable full year earnings from continuing operations were $256.6 million, up 13% from 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. Full year gross capital expenditures were almost $2.2 billion, that's up slightly from the prior year. For the year, higher lease spending was offset by lower planned investments in our Commercial Rental fleet. Around lease capital, we again realized better-than-expected lease sales in the fourth quarter. We also continued to see a higher-than-planned percentage of sales being filled with new versus used equipment. As a result, our full year capital spending came in somewhat above our prior forecast of $2.1 billion. Obviously, the stronger lease sales in the second half of 2013 is encouraging. Additionally, filling a greater percentage of lease contracts with new versus used equipment is a positive story for us. This activity reflects greater receptivity from customers regarding the new engine technology, including a desire for fuel savings benefits. Increased new equipment activity also means that we're contracting with customers for longer lease terms. The average remaining lease term for U.S. power units has increased by 9 months in the last 2 years. We realized proceeds primarily from sales of revenue-earning equipment of around $450 million, that's up by $39 million from the prior year. The increase reflects more units sold versus last year. Net capital expenditures increased by $114 million to just over $1.7 billion. The growth in net CapEx reflects a prior year sale-leaseback transaction. Turning to the next page. We generated cash from operating activities of $1.2 billion for 2013, it's up by 8% or $89 million from the prior year. The improvement reflects higher earnings and lower working capital needs. We generated $1.75 billion of total cash during the year, in line with the prior year. This reflects higher operating cash flow and increased vehicle sales proceeds in 2013, offset by sale-leaseback transaction in the prior year. Cash payments for capital expenditures increased slightly at $2.1 billion for the year. The company had negative free cash flow of $386 million in 2013, that's flat with the prior year. This was a bit below our prior forecast reflecting the increase in lease capital due to stronger sales and greater use of new vehicles. Page 13 addresses our debt-to-equity position. Total obligations of almost $4.3 billion increased by $315 million from year-end 2012. Total obligations as a percent to equity at the end of the quarter were 226%, down from 270% at the end of 2012. Leverage is now at the low end of our target range of 225% to 275%. We calculate the pension equity charge at December 31 of each year. As expected, due to an increase in the discount rate and better asset performance during 2013, we had a favorable pension impact for the first time in 4 years, which freed up about 20 percentage points of leverage. The global discount rate has increased 75 basis points to 4.9%, and we are in 13% on total pension assets this year. At the end of the year, our global plans are 87% funded, the highest in 6 years. Equity at the end of the quarter was $1.9 billion, up by around $430 million versus year-end 2012. The equity increase was driven primarily by favorable impact from pension, retained earnings and stock issuances. 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 2 years. Used vehicle inventory held for sale was 7,900 vehicles, down from 9,200 units in the prior year, and 300 units below the third quarter. As expected, used vehicle inventory is back to our typical target range of 6,000 to 8,000 vehicles. This follows recently higher levels caused by the lease replacement cycle. Pricing for used vehicles remained strong. Compared with the fourth quarter of 2012, proceeds from vehicles sold were down 1% for tractors and up 2% for trucks. From a sequential standpoint, tractor pricing was up 2% in the quarter, truck pricing was higher, sequentially, in North America, however, was down 3% globally, due to some unusual sales activity in Europe in the fourth quarter. With used vehicle inventories back to target levels, we're reducing wholesale sales activity, which benefits pricing. The number of leased vehicles that were extended beyond their original term decreased versus last year by around 1,100 units or 14%. Early termination of leased vehicles was largely in line with 2012 and remained well below pre-recessionary levels. Our average Commercial Rental fleet was down by 1% versus the prior year, and was unchanged from the third quarter. I'll turn now to Page 17 and cover our outlook for 2014. Pages 17 and 18 highlight some of the key assumptions in the development of our 2014 earnings forecast. Our 2014 plan anticipates moderate growth for the overall economy. We're forecasting interest rates on new financing to be somewhat higher. Ryder's average financing rate will decline modestly however, as we replace higher-rate maturing debt with new financing at lower rates. In Fleet Management, we're expecting growth in both our Full Service Lease and Commercial Rental product lines. In lease, the number of contracts expiring will return to a normalized level following 2 years of higher-than-average replacement activity. The decline in replacement capital spend is expected to be partially offset by higher growth capital spending driven by improved new sales. Recent replacement and new growth in our lease fleet will lead to further declines in the average age. A younger lease fleet combined with execution on maintenance cost initiatives will more than offset the higher maintenance costs on newer engine technology, leading to improve maintenance cost performance. In rental, we're forecasting improved rental results due to higher pricing and demand. Rental capital spending will be up from last year, primarily due to fleet refreshment, as well as plans for modest increases in the average fleet size. The strong used vehicle pricing results that we realized in 2013 will benefit depreciation rates this year, as these results are blended into our vehicle residual value calculation. Due to the timing of out-servicing activity, used vehicle inventories are expected to increase during the first quarter. Inventories will then decline from the remainder of the year, due to fewer lease replacements in 2014, resulting in lower inventory levels by year end. With lower year-over-year used vehicle inventories, we expect to sell fewer used trucks this year. This headwind will be partially offset by better pricing, as we increase our focus on retail sales. Overall, we expect higher FMS earnings due to growth in Full Service Lease, better performance in Commercial Rental, increased contributions from our new on-demand maintenance offering, improved maintenance cost performance and depreciation changes. These improvements will be partially offset by lower used vehicle volumes and higher strategic investments and overheads. Turning to Page 18. In Supply Chain, we expect revenue growth due to both strong new sales and improved retention. We're also expecting a modest increase in customer volumes. Continued improvement in SCS earnings will be driven by both new business and higher volumes. In terms of corporate actions, in December, we announced the reinstatement our anti-dilutive share repurchase program, we're leveraged now at the low end of our target range. We'll begin repurchasing shares under the program. Despite this activity, EPS for 2014 will continue to be negatively impacted by shares issued in 2013. We're also forecasting an EPS headwind due to a higher tax rate, resulting from increased earnings in higher tax jurisdictions. Finally, we've planned a $100 million sale-leaseback transaction this year to finance a portion of our vehicle capital expenditures. Page 19 provides a summary of some of the key financials statistics for our 2014 forecast. Based on the assumptions I just outlined, we're expecting another record year for operating revenue and comparable earnings per share in 2014. We expect revenue growth to accelerate in 2014 with operating revenue expected to increase 6%, up from 4% growth in the prior year. Comparable earnings from continuing operations are forecast to increase by 10% to 13%, showing nice operating leverage on our revenue growth. Comparable earnings per share are expected to grow 9% to 12% to the range of $5.30 to $5.45 in 2014, as compared to $4.88 in the prior year. Our average diluted share count is forecast to increase by 900,000 shares to 53 million shares, reflecting 2013 share issuance. We project 2014 comparable tax rate of 35.7%, up a full percent from the prior year's rate of 34.7%. Excluding the impact of the higher tax rate, pre-tax earnings are up strongly by 15% to 18%. The spread between return on capital and cost of capital is forecast to narrow 10 basis points to 90 basis points this year, reflecting increased growth capital and lower leverage. If the leverage were unchanged from 2013, the return on capital spread would be consistent with 2013 at 100 basis points. The next page outlines our revenue expectations by business segment. In Fleet Management, operating revenue is expected to increase 6%. Full Service Lease revenue is forecast to grow by 5%, which is the highest organic growth rate since 2007. This is driven by higher fleet count due to stronger new sales, higher lease rates reflecting increased vehicle investment costs and CPI rate increases. We're forecasting a 7% increase in rental revenue. Rental growth is due to higher pricing and demand on a modestly larger fleet with stable utilization. Supply chain operating revenue is expected to grow by 5%, driven mainly by new business and higher retention. Page 21 provides a chart outlining the key changes in our comparable earnings per share forecast from 2013 to 2014. We plan to continue making strategic investments to drive long-term growth in our business. These investments fall mainly into the areas of sales and marketing and customer-facing technology. Strategic investments and other overheads are expected to cost between $0.16 and $0.20 this year. Higher compensation expense is expected to lower earnings by about $0.12 per share this year, primarily reflecting the cost of merit increases and higher medical cost, partially offset by lower planned bonus expense. While we will be buying back shares issued since December 1, 2013, the shares issued earlier last year will reduce earnings per share by $0.09 this year. A higher tax rate is also expected to cost $0.08 per share. In FMS, new products such as on-demand maintenance are expected to increase earnings per share by $0.11. We've been pleased by the favorable customer receptivity for our on-demand maintenance offering. We expect this business to continue to grow in 2014 and beyond by penetrating the private fleet in 4 higher markets in a new way. Commercial Rental is expected to increase earnings per share by between $0.11 and $0.13, based on solid recent trends and a favorable outlook for rental pricing and demand. In FMS, the net impact of residual values, which lowers depreciation expense, partially offset by lower gains on sale due to fewer units sold, is expected to benefit earnings per share by $0.16 to $0.18 this year. As a reminder, our annual update of residual values reflects a rolling multi-year average of used vehicle pricing levels, which now includes the stronger pricing we realized on 2013 sales. In supply chain, new sales and improved retention will lead to revenue growth in all industry groups except automotive. We also expect continued growth in our dedicated services. Revenue growth combined with some margin improvement and supply chain is projected to increase earnings per share by $0.24 to $0.27. The largest driver of 2014 earnings per share improvement is better performance and growth from our contractual FMS product lines. Fleet growth and improved maintenance performance are expected to benefit earnings per share by between $0.29 and $0.33. Following strong lease fleet growth in the second half of 2013, recent strong sales and improved sales outlook this year should drive additional fleet growth. A lower fleet age and continued progress on maintenance cost initiatives is also expected to contribute to higher FMS earnings. In total, these items are expected to result in comparable earnings per share of $5.30 to $5.45 in 2013. I'll turn it over to Art, now, to cover capital spending and cash flow.

Thanks, Robert. Turning to Page 22. We're forecasting total gross capital spending of $2.16 billion for the year, down slightly from last year. A reduction in lease capital will be offset by higher spending in rental and operating property. Higher operating property spending includes around $40 million for the purchase of a currently leased administrative facility. Lease capital spending is forecast to be down by almost $125 million, as replacement activity returns to a more normalized level this year. The lower replacement requirements are expected to be partly offset by higher growth-related lease spending, which is forecast to be $580 million. This includes $430 million of higher purchase cost per vehicle, due to inflation and EPA-mandated emission standard requirements, and $150 million due to fleet growth. We plan to spend $330 million on rental vehicles, primarily to refresh the fleet, as well as for 3% growth in the average fleet size. The outlook for rental demand and pricing remains favorable based on results through January. Proceeds from sales of revenue-earning equipment are forecast to be relatively flat with the prior year. With used vehicle inventory levels back in our target range, increased retail sales will benefit pricing. We are also planning a $100 million sale-leaseback transaction this year. As a result, net capital expenditures are forecast at $1.6 billion, this represents a decrease of almost $130 million from 2013. Free cash flow is forecast to improve to a negative $300 million this year. Please note that free cash flow would be nicely positive excluding growth capital spending in lease. We expect total obligations to equity will increase modestly to 230% at year end, and will still be near the low end of our target range of 225% to 275%. This estimate does not assume any change in pension-funded status. Also, the impact of restarting the anti-dilutive share repurchase plan increases leverage by 14 percentage points for the year. We talked in recent years about the impact that higher growth capital spending has on the business. This page highlights the amount of growth capital spending we've had by year, driven from both fleet growth and higher vehicle investment cost per unit and its impact on our free cash flow. Higher vehicle investment costs are good for the business, over time, in a few ways: it will drive more companies to consider outsourcing to Ryder; and also increases our revenue and earnings on each new vehicle deployed in the fleet. However, in the near term, it means more upfront cash outlay to purchase vehicles. In 2010 and 2011, growth capital was focused primarily on the rental fleet as we started to move past the recession and experience very strong rental demand. Starting in 2012, the largest part of our growth capital spend is for contracted lease units, and this amount has been steadily increasing. The box on the right-hand side of the page highlights 2014 growth spending in lease. A greater number of lease vehicles will require $150 million of capital, while higher per unit costs will require $430 million. Both our earnings and free cash flow will benefit from this contracted growth over the typical 5 to 7 year life of these vehicles. At this point, I'll turn the call back over to Robert to recap our EPS forecast.

Thanks, Art. Turning to Page 24. We're forecasting comparable pre-tax earnings to be up 11% to 14%. With negative impacts from higher tax rate and share count, we're expecting earnings per share to grow 9% to 12% to a range of $5.30 to $5.45 versus a comparable $4.88 in the prior year. We're also providing a first quarter earnings per share forecast of $0.83 to $0.88, versus the comparable prior year EPS of $0.81. The percent of the full year earnings per share forecast for the first quarter is in line with that realized in recent years. First quarter EPS is also being impacted by a greater year-over-year change in the share count and the higher tax rate, which together, impact Q1 EPS by $0.04. That concludes our prepared remarks this morning. We had a lot of material to cover today with both our fourth quarter results and 2014 outlook. As a result, I'd ask that you limit yourself to one question and one follow-up each. If you have additional questions, you're welcome to get back in the queue, and we'll take as many calls as we can. At this point, I'll turn the call back 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: Robert, with the share buyback, it's good to have the anti-dilutive program back, but when would discretionary repurchases again be considered to lower the share count? And or anything -- is there anything authorized at this moment?

No. What we turned back on is the anti-dilutive component of it. I think we're still a bit away from looking at a discretionary program. We're on the low end of our target. But as you know, we'd like to keep a little bit of a dry powder in case of acquisitions. And also, making sure that we stay in the range that we need for our debt rating. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, on the contract maintenance side, that was down 8% year-over-year, is that where the new on-demand maintenance product is? And what was kind of driving that? Was that a tough Sandy comp or something else?

Well, first of all, the on-demand is not in that category, it's in contract-related, which was up 1%. And it would have been up much more had it not been that last fourth quarter, we had a lot of activity in contract-related associated with Superstorm Sandy, as a lot of customer vehicles needed to be fixed up and were damaged in the storm, and that's where it flowed through. We continue to see strong activity in on-demand maintenance. On contract maintenance, what it is, is a change in the mix of the fleet there. We have more trailers and fewer power units. And that's just the mix of the customers that are in there right now. But we're expecting that to turnaround in 2014.

The next question is from Anthony Gallo with Wells Fargo.

I was wondering if you could maybe talk about what's buried in the increase in overhead spending? And maybe tie that in with what the components of the strategic spending are. Both of those seem to be on the rise, and I'm suspecting for good reason. But maybe a little bit of color there would be helpful.

Anthony, yes. For the quarter, the increase in SG&A costs really are tied to compensation-related expense spending, some incentive compensation, as well as increased sales and marketing costs on a year-over-year basis. As you look forward into 2014, a good chunk of our strategic spend is also tied into increased spending around sales and marketing, initiatives, as well as investments and costs associated with customer-facing technology.

And is that -- should that -- I don't want to get ahead of you, but should that continue into 2015? Or should that moderate as you put in place the additional resources?

I think, it was around -- we would expect to continue to make investments in technology. That's not going to change. I mean, the level of our sales and marketing, we would hope, that, we would continue to invest in that when we get the proper pull-through, if you will.

The next question is from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Could you remind us or give us an update on when you would expect the Full Service Lease fleet age to normalize? I know it's tough to quantify sometimes but given the increased level of sales engagement and what you saw in the fourth quarter in terms of the reduction, is there a forecast that you're comfortable with in terms of when we should expect that fleet age to normalize?

Yes. We saw another month decline in the fleet age right around mid-40s -- I think 45, 46 now in terms of average age. So I would expect, next year, it to continue to come down at about that clip. The clip for this year was 4 months so I think, for next year, we're were looking at another 4 to 5 months. I would expect it to stabilize around that 40, 41, 42 months because, if you think about it, 7 year holding period, if it was perfectly matched, you would have a 42 month, 3.5 year average age. So I think in that low 40s. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. And we had always thought about normalizing that lease fleet age as being important to get back to previous peak margins. Should we be thinking about it similarly then? I know you're not going to provide a forecast for 2015, and I'm not expecting you to. But what are some puts and takes as we think to '15 and the lease fleet age does normalize, what would prevent you from getting back to those historic peak margins, all things being equal?

Yes. I think you're going to see -- we're expecting continued progress towards those peak margins in 2014 that's built in here. And some good progress, I'd say, in 2014. I think, beyond that, you're going to see growth really being a larger component of closing the final gap there; and some of the new products and services that we're looking at; continued benefits on the depreciation side because this used vehicles' sales continued to be strong. If they continued strong in 2014, we would expect to get another benefit on the depreciation end as we go into 2015. So all of those items will contribute. But I really do expect this year, we're going to make some continued progress. We did close the year, 2013, at 10%, earnings before taxes percentage for FMS, which I think is an important milestone. So I expect again, that was a 70 basis points move. I'd expect better than that in 2014.

Right, right. We're still a couple of hundred basis points on the low end of our target. And we've been posting 70, 80 basis point improvement in the last -- about 3 years. So in that range, you'll be getting close by '15.

The next question is from Scott Group with Wolfe Research.

So I just want to follow-up on the guidance for leasing revenue growth this year. So the fleet already, before additional growth, it's already up about 1% and you guys have been getting, I don't know, it feels like pricing in that 3% to 4% range. So that kind of gets you to the 5%. Are you assuming any incremental leasing growth? Or am I missing something in terms of some of these moving parts? Because it feels like it could be better than the 5%. But I want to get your take.

Yes. Look, Scott. We built in -- the lease fleet growth really turnaround in the middle of this year, right? So we had a strong third quarter. As you saw now, we had a strong fourth quarter, not only in fleet growth but strong sales activity. So we have worked that into next year. The balance of the year, there's still an opportunity we could do better, obviously. But based on where we are now, what we're seeing in the economy, that's what we've got built in there.

It could be that -- he said 4% pricing, he may have been thinking of rental. We talked about 4% pricing uplift in rental, I thought. So...

Yes. I was saying it felt like pricing on the leasing side was in that 3% to 4% range. I don't know if that's not right. And then, I guess, the other question I've got. So I think you guys just said that you think that FMS margins will be up kind of at least 70 basis points this year. What are you thinking on Supply Chain margins for the year?

John?

Okay. I think our margin percentage came in at 6.3% for this year and that was up from 5.9% in 2012. And we expect to see an improvement next year, it's probably about the same level that we saw in 2013, roughly the same level. The same amount of improvement.

The next question is from Art Hatfield with Raymond James. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Robert, on the on-demand maintenance program, other than looking at changes in contract-related maintenance revenue, are there other metrics that you can give us to kind of show the progress of that particular product?

We are looking at that, Art. We're trying to figure out a good way to provide that going forward. I can give you a little more color in terms of -- we have -- we currently have about 10 customers and they generated, I think it was $12 million, $13 million of revenue in 2013. So still small relative to Ryder, however, we expect that to grow -- to continue to grow at a rapid pace. We're expecting to double the number of customers this year in 2014. We've got a lot of activity, a lot of stuff in the pipeline. And we're really encouraged by the receptivity in the marketplace for this. So again, not a big part of the company yet, but a pretty decent part of the growth story going forward. As you see, we've got it in the waterfall, driving a good portion of that $0.11 that are in that one column there on the waterfall. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Is there a way to quantify its contribution to the pre-tax margin improvement in FMS? Or is it just too small at this point?

No, I think it would be too small at this point.

The next question is from Kevin Sterling with BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: Robert, I think in your Q1 guidance, you talked about a higher share count and a higher tax rate impacting Q1 by $0.04 a share. Is there anything else that went into that thinking for that guidance? And in particular, I'm asking about weather and the impact that, that may have on Commercial Rental, given that's more of our spot business and just given the crazy weather we've had so far to start the year.

Yes. No, the weather, I would say, there's puts and takes, right? Because rental, we should see some benefit from that. However, our lease customers will probably run fewer miles, so that will be an offset. Supply Chain, we should see fewer miles, especially dedicated with what's going on with the weather. So, no, I wouldn't say that's going to be a positive that's not in there. It's probably -- all kind of washes out. Kevin W. Sterling - BB&T Capital Markets, Research Division: Okay. And then looking at your CapEx and kind of drilling down a little bit further. How much, and maybe just talk in terms of percentage levels, how much is Full Service Lease replacement falling? And then also, in terms of percentage level, what type of new growth are we talking about for Full Service Lease?

Well, Kevin, we highlighted in the deck there the growth for Full Service Lease, we had about $150 million of growth spending in there for just fleet count increase. And then we also had $430 million of incremental spend, which really reflects the delta between what it costs for a new piece of equipment today versus the equipment that we're replacing. So there's that 40% to 50% uplift in price right now. We're still experiencing that. That's embedded in those numbers.

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

Maybe just a follow-up on the question about organic growth within the lease fleet. How many units do you have factored into your assumptions for 2014?

We have, if you exclude the Hill Hire de-fleeting, which we really probably need to -- so you could tie it to what's happening with revenue. We're looking at about 2,000 unit growth in the lease fleet. And again, a lot of that is driven just by what we've seen in the fourth quarter sales of 2013 that we know is going to flow into '14.

Okay. And so the 2,000 would be new units, it's not the -- it's not 2,000 average units over the whole year? You're expecting to add 2,000 units incrementally?

Right, right. The average is actually going to be up. If you exclude Hill Hire, the average will be up 3,000 units.

Right. Okay, that makes sense. And then, Robert, for my follow-up, I mean, just thinking about the accretion guidance that you have factored in for FMS, the $0.29 to $0.33 this year. Going back to last year, that was closer to $0.40. And my impression was a lot of that was maintenance and maybe not all of that was fully realized, depending on how the year came together. But to me, it feels like this year you've got organic lease fleet growth stronger than what you had last year. You still should be getting the maintenance tailwind as the lease fleet renews. Is there something else that's offsetting that? And in your prepared remarks, I think you talked about the technology related to the new equipment, is that impacting some of the maintenance benefit maybe that you have previously expected? Or is there something else going on in FMS that maybe the entire earnings accretion isn't as strong as we would've expected based on what you had laid out in prior years?

No, I think it's what you originally stated. I think, if you look at we expected at the beginning of last year, the improvement that we expected there, I think that was muted by some of the challenges with maintenance on the new technology and some of the initiatives that we had talked about that really got a late start, if you will, in the year. Also, a lot of our growth really came in the second half of the year, which is -- which really obviously drives some of that benefit. But going forward, I think it's continuing to work on the maintenance cost side, which we made really good progress in the second half. And I feel really good about that going into 2014. The challenges around the new technology are a double-edged sword, they're tough for us but they're driving more outsourcing in the industry. So I would tell you, net-net, they're a positive. So I still -- I think that, going into this year, with the growth that we're seeing and continued progress on the maintenance side, that's how we're getting to the $0.29 to $0.33, which, as you point out, is lower than what we had originally expected last year. But it'll be higher than what we actually realized in 2013.

The next question is from Jeff Kauffman with Buckingham Research.

Quick question. How -- using the wholesale channel to dispose of excess vehicles, what do you think it -- I guess, cost is probably not the right word. But what do you think it cost you having to dispose those vehicles through the wholesale channel as opposed to the retail channel?

The difference between wholesale and retail tends to be around 30%, so that's probably a good estimate. And we're expecting this year to move more towards retail. And that ratio of retail to wholesale might move another 300 to 500 basis points towards retail. So that will give you an indication of kind of what's going on there. And again, used vehicle pricing is more challenging as is rental demand to forecast than some of the contractual stuff. But the market has been really healthy for several years now, and we're seeing that sort of stabilizing. So if we can continue where we are right now, I think it bodes well for 2014.

Okay. And then along those the same lines. If we look at the mix of vehicle disposals, say, tractors versus trucks versus trailers, is there a meaningful shift that you're anticipating in those mixes of vehicles sold, 2014 versus 2013?

I don't believe so. I'm going to -- somebody -- I have somebody here kind of looking into that. But I don't believe that we've got a significant change there. Yes. The biggest delta there, Jeff, is really just in the count from the number of units we're going to sell. We're just going to sell fewer units because there's a smaller inventory. And obviously, as we wholesale less, the count comes down. Overall, for the cash flow of the company, though, it's going to be a positive.

The next question is from Matt Brooklier with Longbow Research.

So I was pleasantly surprised to see your rental revenue accelerate in the quarter. Just wanted to get a sense for what drove that? What types of customers are using more rental? Then I have a follow-up question regarding the rental guidance.

Rental has been very strong for the last couple quarters. Really started off at the beginning of the year. As you know, we had a rougher year in 2012. And really, ended the year very strong. I think the team has really managed through this very well. We are running at historically high utilization levels, which can make it more challenging to get vehicles to customers. But we saw a lot of demand in the fourth quarter. You have your typical demand from parcel type companies and companies that are transporting goods for the season. But as we got into the first quarter, I'll tell you that demand has continued to be seasonally strong in January. So we're expecting, at least as of right now, we're seeing rental continue to be strong, and the team doing a great job of managing under a tighter utilization environment.

Okay. And then the 7% growth at rental in '14, I'm assuming that, that's a function of January being better, x some of the seasonality moving out, and just more conviction that the overall truck market is feeling better and maybe accelerating here.

Well, actually, a lot of that is driven by rate. We're expecting to see rate continue to go up maybe another 4% in 2014. And if it heats up a little bit more, you might get a little more out of it than what we've got in there now. But primarily, what we've got in there now is rate...those pricing [ph].

The next question is from Justin Long with Stephens.

With the balance sheet improving in recent quarters, is it fair to say that you'll be focused more on acquisition opportunities in the next year or 2? And along those same lines, I was just wondering if you could talk about the level of activity you're seeing in that M&A market as well.

Yes. Justin, I'm not sure that we'll focus more on it. I think we have been and continue to be focused on it. I think the issue is just finding the right opportunity. We're seeing steady activity. I wouldn't say it's heated up. But we continue to be in the market, looking for both on the Fleet Management side where we have opportunities to find companies, regional competitors who are looking to maybe exit the business and we could pick up customers, and good operations that way. And on the supply chain side, where we could pick up additional capabilities that fit into our verticals. I think we're going to continue to really look at anything that's in the marketplace that fits that criteria.

Okay, great. That's helpful. And as a follow-up, with dedicated and logistics, you're signing multiyear contracts, and I was wondering if you could talk about the typical lead time and visibility in these businesses. As we sit here today, do you have pretty clear line of sight to the SCS growth you forecasted for 2014, based on the business you've already won? Or do you need incremental contracts in order to hit that guidance?

We're pretty close now. I mean, we expect to land a lot of new sales during 2014 like we did in 2013. But you're right. There is a long lead time, both in winning the deal and then doing the start up and getting revenue on. And so a deal we win in July we're only going to start it up in -- towards the end of the year and get a little revenue from it. We can kind of see what we think we're going to win for the next couple months right now. So we're not all the way there but we're pretty far along in getting to our number. And like I said, we have a very strong pipeline in SCS. And so we had a great year in new sales in 2013 and we expect to have at least as good a year in 2014.

Our final question today is from Anthony Gallo with Wells Fargo.

I think I heard you say that the lease fleet growth that you expect for 2014 is based on business that was booked roughly in the fourth quarter, is that correct?

No, I think that's a good chunk of it. I think, obviously, we still expect some continued in the second half of the year, but we have less visibility to that. I would tell you that we had, as I mentioned, a very strong third quarter in terms of we saw some fleet growth and we saw good sales activity. Fourth quarter, we had very strong fleet growth and very strong sales activity, that would tell you, a very, very good environment. So that's 2 quarters in a row. Now is that a trend? We'll see. I think if we have another strong first quarter, it starts to really look much more like a trend, and I think gives us more visibility into the second half. But right now, what we've built-in is the stuff that we know and then some -- a little bit of continuation, but certainly, not overextending ourselves in the second half.

That makes sense. And then we didn't get to talk about where that's coming from. Is it small accounts? Is it big accounts? Is it any particular areas of retail? Is it industrial? Just any color you could put there would be helpful, Robert.

We're seeing activity, really, like I said since the middle of the year, really across the board. And I would tell you, we -- part of it is we are seeing some of the macro trend impacts that we've talked about in the past where customers that are -- that were doing their own maintenance and buying their own trucks are moving and really looking to go to a leasing model, so we're encouraged by that. That probably, if you look at the overall addition of trucks that we've put into the fleet, it probably makes up about 1/3 of the growth that we're seeing. We'd like that to be a larger percentage over time, as we do a better job of penetrating the non-outsourced fleet. But we're encouraged by what we're seeing in there. On the dedicated side, we're also seeing customers, that are used to doing their own fleet and their own transportation, that are now moving to dedicated. So both of those, I think, have really helped to drive a favorable trend in sales as we enter the year.

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

Okay. Well, thank you, operator. Thank you, everyone, for coming onto the call. We look forward to seeing you as we go out on our roadshows and our visits to conference -- conferences. Have a safe day, and we'll talk to you soon.

Thank you. This concludes today's conference. Thank you for joining. You may disconnect at this time.