Ryder System, Inc. (R) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to Ryder Systems, Incorporated First Quarter 2015 Earnings Release Conference Call. All lines are in a listen-only mode until after the presentation. [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 first quarter 2015 earnings conference call. I’d like to remind you that during this presentation you will 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 Diez, President of Dedicated Transportation Solutions and Steve Sensing; President of Global Supply Chain Solution are on the call today, and available for questions following the presentation. With that, let me turn it over to Robert.

Good morning everyone and thanks for joining us. This morning we’ll recap our first quarter 2015 results, review the asset management area and discuss the current outlook for our business. Then we’ll open up the call for questions. With that let’s turn to an overview of our first quarter results. Comparable earnings per share from continuing operations were a record $8 for the first quarter of 2015, up from $0.92 in the prior year. This is an improvement of $0.16 or 17%. Our results came in above our first5 quarter forecast range of $0.95 to $1. The beat was driven by better than expected rental demand and execution on our maintenance productivity initiatives, partially offset by foreign exchange and higher insurance cost. Also contributing the first quarter outperformance was a net benefit of $0.03 from an atypical fuel pure margin benefit and other onetime items as well as $0.02 in plant marketing spending that was delayed to later in the year. First quarter comparable results exclude non-operating pension cost of $0.06, and professional fees of $0.02 associated with cost savings initiative. Operating revenue which excludes fuel and subcontracted transportation revenue was up by 5% to a record $1.3 billion for the first quarter and grew in all business segments. As a reminder beginning this quarter, operating revenue now excludes fuel revenue for all three business segments. Excluding the impact of foreign exchange operating revenue grew at 7% for the quarter. Total revenue declined primarily due to lower fuel cost passed through to customers. Page 5, includes some additional financial information for the first quarter. The average number of diluted shares outstanding for the quarter was consistent with the prior year at 53.1 million. During January we bought 69,000 shares at an average price of $88.84 under a 2 million share anti-dilutive repurchase program announced in December of 2013. To date we purchased 1.4 million shares at an average price of $80.74 under this program. Following January's repurchase activity we temporarily paused additional share repurchase through at least mid-year as our balance sheet leverage is nearing the high end of our target range. We are evaluating the timing for resuming anti-dilutive share repurchased in the second half of the year. Excluding pension cost and other items, the comparable tax rate was 37%, slightly below our prior year. The spread between adjusted return on capital and cost to capital increased 30 basis points to 120 basis points. On a full year basis we now expect this spread to be in the range of 140 to 150 basis points, which is above our prior forecast range of 130 to 140 basis points. I will turn now to page 6 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions operating revenue, which excludes fuel, grew 5%, driven mainly by growth in full service lease and commercial rental. Excluding the impact of foreign exchange, FMS operating revenue was up 7%. Full service lease revenue increased 5% or 6% excluding foreign exchange due to higher rates on replacement vehicles, reflecting the higher cost of new engine technology, and fleet growth. One a year-over-year basis the lease fleet grew organically by 4200 vehicles including the planned reduction of 400 low margin trailers in the UK. Excluding the UK trailer impact, the lease fleet grew by 4600 vehicles year-over-year, sequentially from the fourth quarter the lease fleet increased by 2000 vehicles which exceeded our expectations. In addition, we had record first quarter lease sales which provided us with continued momentum for lease fleet growth. Based on the strong sales activity in our pipeline were increasing our full year forecast for lease fleet growth by a 1000 to a 5000 vehicles. Miles driven per vehicles per day on U.S. lease power units were unchanged versus the prior year and continued to run at normal historical levels. The average age of our lease fleet has leveled off as expected following declines over the prior two years. Contract maintenance revenue increased 10%, primarily reflecting the benefit of a significant new contract signed earlier in the year. Our contract maintenance fleet grew organically by approximately 3,700 vehicles from the prior year, reflecting the sales activity. Contract maintenance revenue increased 5% reflecting sales activity from the last year. Our contract maintenance fleet grew organically by approximately 4800 vehicles from the prior year and is up a 1000 vehicles sequentially. Contract related maintenance revenue decreased 5% from the prior year, reflecting lower levels of ancillary and transactional maintenance work. Included in contract related maintenance are 6500 vehicles serviced during the quarter under on-demand maintenance agreements. This number is up 16% sequentially although it declined year-over-year due to less activity with an individual on-demand customer. We continue to see good market receptivity of this service and have good potential for future revenue growth as we further develop activity within already signed accounts. We're finalizing implementation of system and process enablers to support the broader roll out of this product and remain on track for our planned mid-year launch. Commercial rental revenue was up 8% or 10% excluding FX. The increase was driven by higher than expected demand and improved pricing in North America. The average rental fleet grew by 5% from the prior year. Rental utilization on power units was 73.4%, which is consistent with the prior year and reflects ongoing favorable demand trends in rental. Global pricing on power units was up 5% which was above our expectation of 4%. In used vehicle sales we say strong demand and pricing. I'll discuss those results separately in a few minutes. We realize an atypical benefit in fuel margin in the quarter due to the rapid and significant fall in fuel prices as wholesale prices fell more quickly than retail prices. We do not expect a similar earnings benefit in the coming quarters. Overall, FMS earnings increased year-over-year due to strong rental performance, higher full-service lease results and increased fuel margin. Commercial rental performance benefitted from higher than expected demand and higher pricing and a larger fleet. Better lease results reflect residual value benefits and fleet growth. Higher year-over-year earnings were partially offset by one time benefits in the prior year. Earnings before tax in FMS increased 17% reflecting nice leverage on revenue growth. FMS earnings has___ as percent of operating revenue or 10% up a 100 basis points from the prior year and better than expected. I'll turn now to dedicated transportation solutions on page 7. Operating revenue grew by 6% due to new business and higher volumes. Total revenue was down due to lower fuel cost passed through to customers. Operating revenue is being impacted in the first half of the year due to the timing of new sales and the ramp-up period of some accounts. We anticipate operating revenue in the second half will be at or near double-digit levels. DTS earnings increased due to new business in a higher volumes partially offset by higher insurance cost. Segment earnings before tax as a percent of operating revenue were 5.4% down 20 basis points from the prior year. Higher insurance costs negatively impacted EBIT margins by a 100 basis points. Longer term without targeting DTS three tax margins on operating revenue to be 8-9% up from the prior target of 7-8%. We anticipate margin improvement to come from growth and leverage on our infrastructure, opportunities to drive efficiencies in a dedicated model and addressing a handful of low margin accounts. I'll turn now to supply chain solutions on page 8. Operating revenue grew 4% due to new business and higher volumes primarily in technology and the technology in CPG industries. Higher than expected volumes were partially the result of rerouted shipments to the West Coast port disruption. Partially offsetting these increases were lost business from the prior year in and the automotive industry and FX. SCS operating revenue grew 6% excluding foreign exchange. SCS earnings before taxes were up 20%. The increase was primarily due to new business, higher volumes and lower start up costs partially offset by higher insurance cost. Segment earnings before tax as a percent of operating revenue were 5.3% 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. 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 10; first quarter gross capital expenditures were just over $650 million. It's up 57 million from the prior year. This increase reflects planned investments in our commercial rental fleet in light of strong demand. We realized proceeds primarily from the sales of revenue earning equipment of nearly $100 million, its down about 30 million from the prior year. The decrease reflects a lower volume of vehicles sold while pricing remains strong. Net capital expenditures increased by 19% to $556 million. Based on strong demand in rental, we plan to invest an additional $80 million for growth of an additional 1,000 vehicles or 2% in our rental fleet. This will increase our forecast for gross capital expenditures to 2.63 billion for the full year up from around from our prior outlook of 2.55 billion. Turning to the next page, we generated cash from operating activities of around $280 million for the quarter, up by 40 million from the prior year. This increase was driven primarily by higher cash-based earnings. We generated approximately 390 million of total cash during the quarter up $11 million from the prior year as higher operating cash flow was offset by lower sales proceeds. Cash payments for capital expenditures decreased by $25 million to 553 million for the quarter. The companies free cash flow was negative 162 million for the quarter above the prior year of 198 million. With the additional rental fleet growth now planned free cash flow is expected to be negative $380 million for the year as compared to our prior forecast of negative 300 million. Page 12 addresses our debt-to-equity position. Total obligations of $4.9 billion increased to $184 million from year-end 2014. Total obligations as a percent to equity at the end of the quarter increased to 270%, up from 259% at the end of 2014. Leverage increased due to a vehicle investment and a currency translation adjustment of $57 million during the quarter, which resulted in lower equity. With leverage currently toward the higher end of our target range of 225-275% we elected to temporarily pause our anti-diluted share repurchases during the quarter and will evaluate the timing to resume repurchases in the second half of the year. We now forecast leverage at year end and the 260-270 range as compared to our prior forecast of 260. This includes the impact of our increased capital expenditure forecast and the timing of anti-diluted share repurchase resumption. Equity at the end of the quarter was $1.81 billion down 7 million from year end 2014 primarily impacted by currency translation adjustments offsetting earnings. At this point, I will hand the call back over to Robert to provide an asset management update.

Thanks Art. Page 14 summarizes key results from our asset management area. Used vehicle inventory held-for-sale was 5,800 vehicles, down from 7,200 units in the prior year and 300 units below the fourth quarter. Used vehicle inventory was slightly below our target range of 6000 to 8000 vehicles. Pricing for used vehicles was strong for both tractors and trucks. Compared with the first quarter 2014 proceeds from vehicles sold were up 14% for tractors and up 11% for trucks. From a sequential standpoint, tractor pricing was up 2% and truck pricing was up 8% versus the fourth quarter of 2014. We saw improved pricing in all used vehicle sales channels. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by 55 units or 4% and remained below recessionary levels. Early termination of leased vehicles increased by about 80 units and remained well below recessionary levels. I’ll turn now to page 16 to cover our outlook in our forecast. We're pleased to start 2015 with such a strong quarter. We're particularly encouraged by continued momentum in lease sales and fleet growth, strong rental demand trends and good execution in our maintenance initiatives. In full service lease we had two consecutive record sales quarters and way they were bus pipeline were raising our forecast for fleet growth by a 1,000 units to 5,000 vehicles. We're continuing to see a modest uptake in the percent of lease sales coming from first time outsourced customers with the average over the past year at around a third of new trucks sold. In rental, we plan to modestly increase the size of our fleet based on strong demand conditions. We now expect our full year average fleet to grow 5% while our outlook for rental pricing remains at about 4% for the year. In on-demand maintenance we're pleased to continue strong maintenance receptivity in our new service. We're completing the implementation of IT and process-related work to support a broader launch of this product. We continue to sign new fleets under on-demand maintenance agreements with over 40 customers signed today and are focused on driving increased levels of maintenance activity with fleets already signed. We're pleased with the progress we've made in our maintenance productivity initiatives and continue to find ways to mitigate higher maintenance costs associated with new engine technology. The strong used vehicle pricing results that were realized in 2014 are benefiting depreciation rates this year as these results have blended into our vehicle residual value calculation. We continue these strong proceeds across all sales channels and good demand conditions. In supply chain we saw stronger than anticipated revenue in the first quarter. We’re focused on driving higher sales to offset some of the customer network redesigns that we’ll forecast the pressure revenue later in the year. We continue to expect strong earnings improvement in SCS as we move passed some of the challenges from last year in that segment. In the dedicated segment we continue to see good sales activity supported by macro trends and company’s specific initiatives. We expect DTS operating revenue to grow in the mid single digits for first half and act one year double digits in the second half of the year. Our second quarter comparable EPS forecast is a $1.58 to $1.63 versus the prior year $1.44 and reflects the impact of higher expected insurance cost in DTS. Based on our strong first quarter performance and outlook, we’re increasing our full year comparable EPS forecast to a range of $6.40 to $6.55 up $0.15 from $6.25 to $6.40. This represents a year-over-year increase of 15% to 17%. That concludes our prepared remarks for this morning. At this time I’ll turn the call over to the operator to open up the line for questions. In order to give everyone an opportunity, I’ll ask you to limit yourself to one question and one related follow up if clarification is needed. If you have additional questions you’re welcome to get back in the queue and we’ll take as many calls as we can. Operator?

Thank you. [Operator instructions]. The first question today is from Todd Fowler with KeyBanc Capital Markets.

Great, thanks. Good morning everyone and congratulations on a good start to the year. Robert, maybe just to start with the increase in the guidance and you’ve given us some broad brochures but if we think about the $0.15 at both ends. Can you help us think about the buckets that are driving that, how much of that would be rental, how much of that would be FMS and then it also sounds like that there is some headwinds on the insurance side, I mean how much is insurance working against you in the $0.15 increase.

Yes. The beat in the forecast or the raise in the forecast is primarily coming from FMS and I would say that’s really spread across rental, which we continue to see benefits there and full service resource in the lease fleet increased, as well as we’re also getting better than expected maintenance cost improvements. So, the combination of those three, you can always look them as a generally evenly spread across those or what’s driving the benefit. There is some headwind for insurance that’s still is TBD but we’re probably looking at for the next quarter for probably looking at $0.01 or $0.02.

Okay that helps. And then it looks like the gains are at least maybe up a little bit kind of flattish year-over-year, I think in you original guidance you actually had them being about the $0.07 headwind are gains now user equipment gains trends better than what you were expecting with your initial guidance is that factored into the updated guidance here.

They’re really not trending a whole lot better it’s really a balance of years we expected to get more some headwinds side, we still think that’s coming and that’s fixed into our forecast.

And then just for my follow up, you know with leverage where it’s right now it’s kind of a good time to have at least a reason why you’re having a promise good CapEx side. Are there any other leverage that you can pull with respect to cash flow other than you suspending the entire diluted share repurchased to kind of adjust the leverage on a near term basis or anything else you can do from a balance sheet from a cash flow perspective sales respects that can help the leverage near term.

Yes. What we have from sales respects certainly planned but that’s not going to affect it significantly, I think also as you might have measured a lot of our capital is really for vehicles for lease and for rentals. So, there are too many other lavers as part of this…

Yes, I know Robert is right. Obviously sales aspect shouldn’t affect the leverage metric overall as we look forward it depends on what happens with retention that maybe a laver if it turns in our favor as we look forward also just the business itself around working capital like the better we can manage working capital that will also help leverage.

Okay. But its timing for now its investing in the field and cash flow will come later on.

Yes, absolutely. This is all good stuff because we're really seeing record lease sales and that's what's driving me the capital along with strong rental demand, which is also driving some additional capital.

Thank you. The next question is from Scott Group with Wolfe Research.

Hey thanks. Good morning guys. So wanted to ask you about the on-demand and I know you -- I think you said you're planning a broader role out in the middle of the year. Can you tell us how big of a market is this potentially for you and how quickly do you think the revenue can [indiscernible]. Any color do you have on kind of a margin profile of the business?

You all, let me just answer briefly, just so you know where we're at. We've been talking about a midyear rollout here, probably since last year. There is a lot of IT and process work we needed to get done. The IT work is done, it's been rolled out. We're now really working on the process and making sure that we got the right engagement from the field on all this. So we are -- we feel pretty well positioned for the -- a midyear rollout. The market for this we think is pretty significant and it is -- if you think about 8 million vehicles there is only about 10% that are currently outsourced, the rest of those are due in maintenance somewhere with somebody. They are either doing it themselves or they're going to a dealership and that’s the market that we can tap into for this and I'll let Dennis elaborate on it, but you know because we are really focussing initially on some of the very large fleets that otherwise would not be doing business, would not be full service leasing. So we think this is an opportunity to get in with them, but.

Yes. It is, Scott. I would just add that there is a lot of interest in these large fleets. When you think about running your fleet across North America and dealing with hundreds if not thousands of other vendors and it being able to go to more of a one stop shop with rider, where you got consistent quality and potentially lower cost and getting better uptime, there is a lot of interest. So we've been preparing ourselves to handle that demand. We’re pretty excited about it and we'll be rolling it out in a larger way here midyear.

I think, you answered the question about how quickly we think you can ramp up, and one of the things we're leaning -- we've been, as you know, working on this for a couple of years, is that, you have to first find the customer. And then you've got to get the trucks to come in and we think we're pretty well positioned for that because we got a pretty broad field operation. We've got people locally that can speak to the local managers to get the vehicles in, but it is that two-phase type process that we are currently working on even for the 40 customers we have to get that. So we think the volume for the 40 still has a lot of opportunity and we're going to be working on that and really hoping to drive some of the second quarter, I'm sorry the second half increase in on-demand.

And in margins?

Margin is a lot getting into the details. I would expect it slightly higher than what you see in our current, which is 30, and if you look at -- if you look at our rental and lease margin, gross margins are about 30%. So we would expect this to be higher. But obviously last commitment from the customer and also less revenue per vehicle, because we're not going to be doing all the maintenance on the vehicle, we're just going to be doing smaller pieces of it. Okay. And then in terms of the rental fleet, so I understand that things go really good. This is historically a segment where things can turn quickly and may be we're -- may be we're getting a little bit later in the cycle. Talk us through the rationale of why you feel comfortable adding to the fleet now and then how quickly you think you could turn off that spigot if you need to.

Let me address first the cycle issue because I think this cycle has been very different than any other cycle. At least I -- since I've been with the company. It's been a much slower recovery since '09 and much more elongated and I would tell you even though we've had -- we've got a pretty good economic environment. It still feels like we haven’t really had a strong recovery yet. So, we're seeing very good demand trends across many sectors. I wouldn’t say it's not even just one and we're seeing broad increases in demands. I think that’s what's making us more comfortable. We do some econometric modeling and the econometric modeling shows even with we're not up 2.5 to 3% GDP growth that we still should have the demand to cover the vehicles that we're adding, but Dennis could you add some more color?

Yes, Scott. First let me address the demands items and what we're seeing. With the lease fleet growth above what we had originally forecast, we've got to support those vehicles with rental vehicles. So that's one driver of the demand. Next you've got on-demand that we just talked about; as it increases you also got a need by those customers for rental vehicles. And finally as we looked at our turn downs in the first quarter, they were above where we would like them to be. And through one of the lower of those per customer satisfaction purposes, and frankly its revenue we will deal on the table. So that's the demand side. And those are turned down being able to respond to that. You've got two major levers to pull. First is to out-service or get vehicles prepared for the used-vehicle sales when they are older in the rental fleet and we've been delaying a lot of that because the demand has been so significant. When you look at used vehicle inventory, it's at the low end of the range. It's below our target range of 6000 to 8000. So we could quickly de-fleet through the out-servicing process. In addition where you will take those used vehicle in rental and sell them into a lease application if you want to de-fleet and not back to other rental unit. So we get those two levers to pull. And in 2012 we saw a downturn in demand, we did just that, and it took us well under six months to get the fleet right sized. So we feel pretty comfortable with our position to right size the fleet quickly.

The next question is from Thomas Kim with Goldman Sachs.

I wanted to ask the following with regard to rental. It's great to see that this business has done well. I am curious in terms of the timing of delivery of the CapEx and then where the trucks are? Are you planning to deploy them in terms of region or industries?

Thomas, it's Dennis. First in terms of delivery, we will see a few of them in the third quarter and the majority will be in the fourth quarter, in that third and fourth quarter. So we will see the impact in the second half. In terms of the demand, we're seeing it across the U.S. and Canada. So we will be deploying them to all of the regions and we're seeing it as Robert mentioned earlier, across several industries. So it is broad-brushed in terms of the demand increase. And you will see it really help us during the peak holiday season.

And again some, I am just wondering, what is the theoretical maximum utilization rate? I am wondering like how much could you actually continue so that the assets and maybe drive up utilizations to 80% to 85% and then perhaps try to keep CapEx down? I think we’ve kind of talked about this before. But if you just help here remind us how that could potentially -- what you could potentially do just maybe drive utilization higher?

Let's talk about utilization over the whole year, right. And I think you've seen when we get up in that high 70s utilization, that's when turned down that Dennis just alluded to, start to get too high. So our existing customers are unable to get access to our rental trucks, becomes a problem for us. So we think that high 70s is probably the upper limit, high 70s. And as you start touching 80, you're probably getting too high and the turn downs are too much.

The next question is from David Ross with Stifel.

Can you talk a little bit on FMS, how much would the lease fleet growth is due to better than expected growth at SCS and dedicated, or just overall how much the growth and supply chain dedicated to driving the lease fleet growth. And then just a clarification question, I guess in SCS on the insurance cost. I would have thought insurance cost is a bigger issue and dedicated in that supply chain, to just kind of where those would be coming from, whether it is BIPD or worker's comps, something else?

The lease we grow -- supply chain dedicated, combined are about 10% of the FMS lease fleet. So I think it's been growing proportional. I don’t think there has been a disproportional amount. When you combine the two, I don’t think there is a disproportional amount of growth. And Art, can you answer that question on insurance?

Around the insurance, David, it's more of the function of the supply chain, and the prior year we had favorable development in prior year claims whereas this year we didn’t see that same favorable development. So it wasn’t so much that the current year was going the wrong way. We just didn’t have as much of a profit year-over-year. And it was related to both vehicle liability and workers comp.

The next question is from Ben Hartford with Robert W. Baird.

With regard to the leverage and comments around the leverage here, does it preclude any sort of acquisition, we haven’t spoken about acquisitions and for little while we’ve been focus on the lease fleet growth obviously we have momentum there. Just wondering if there is an opportunity for an acquisition within FMS to materialize does they cannot say the balance sheet preclude that have some opportunity, could you address that.

Yes. Ben, I don’t know where – we don’t see it is really been a constraint remember the FMS acquisitions in typically accrete of immediately there is a low integration risk, there is a not a whole lot of risk in those. We don’t see leverage levels that we are at now to be in an issue.

Okay. And are there any further or closer to potential deal on the FMS side like it’s been a little while we have addressed it, so, I know they come as they come but how do you feel about potential acquisition?

Yes. You know Ben, I can’t comment anything like that but I can tell they do come as they come and we’re certainly always first or typically the first one to call the ones available and we’re pretty good at doing these deals when the time is right. So, we’re certainly ready for them it’s just a matter of when the sellers are ready.

Okay, if I could get one quick follow up on the used truck sales side. What is the mix of retail versus wholesale disposals this quarter relative to year a ago and maybe can you give us a target as to what you’re expecting for the full year. What’s embedded in the guidance?

Yes. Ben, we were at 74% for the quarter that’s up 500 basis points year-over-year and you know our target is north of that 70% in that range. So we’re right there right now and obviously with inventory being low we continue to push more retail mix in benefit from the proceeds.

The next question is from John Mims with FBR Capital Markets.

Robert, may I ask you on the lease fleet guide and [indiscernible] 5000 trucks. How you are thinking about the sales pipeline you did at 4600 in the first quarter. Just trying to conceptualize if that’s just kind of frontend loaded sales cycle but you see that benefits over the course of the year or that’s a number that theoretically just keep ticking up every quarter as you get closer to closing to these deals from the back half.

Yes. Remember that if you think about the last year it was pretty lumpy, right. You had some growth in the first quarter then we were down in the second, slight flat and slightly down and then we really started growing in the second half of the year. So the year-over-year comps get tighter in the second half but the 5000 is based on what we’ve seen today and some expectation for the balance of the year. Could it get better, absolutely? But I think we’re early in the year so we still have to kind of let the year revolve.

But John, also keep in mind the 4600 you are referring could be the year-over-year increase in our fleet. So the fleet itself is up 2000 unite in Q1 and our full year target is 5000. So we still have some work to go to get to the 5000.

Sure. That’s fair. And let me ask you too on the guidance in regards to on demand roll out some point in the middle of the year is that included is any kind of accretion from that included in the guidance now or any kind of ramp up that you would see in the back after the year kind of great deal on top of the guindace.

Yeah. That’s included, if you remember on the last call we had the water fall, we had about $0.15 coming from [indiscernible] other things. So, that’s consistent, we’re still consistent with that amount.

Okay. So no changes there.

No changes.

Thank you.

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

On the maintenance side, have you been approved yet to do any warranty work for the OEMs or is the third party maintenance going to be just kind of non-warranty oriented stuff.

John, we have been approved for warranty work?

Can you elaborate on which OEM’s?

No, I don’t want to get into that but we have been approved for warranty work and we’re doing that today.

The OEMs that you have been approved for is more or less than 50% of the name [indiscernible] that are out there.

I would answer this way it’s the majority fo the name plates that we have in our fleet and we typically do the business with.

That’s helpful. Thank you. Can you talk a little bit about in terms of the roll out of this can you talk about how you do it number of locations at a time, is it kind of a phased in deal? Is it the entire network that you are doing this through? Can you just elaborate a little more on that?

Yes John what we do is again we’re targeting large fleets and we’ll negotiate with the given customer a labor rate and the parts rate; and the labor rate is based on geography. And once that’s established, we open up literally the entire network. Now some of our shops are more prepared than others and that’s exactly we’ve been working on and then it gets down to working the change management if you will on a decentralized basis where you get fleets comfortable with using our shops versus the vendors that they were using historically. We liken it to what we did with national rental several years ago where we would sign a national rental agreement and then you need to literally sell locally those customers to utilize your rental capability. Even though you’ve got a national headquarters negotiated agreement, you got to drive demand locally and that’s literally how it works it on demand. We sign a national headquarters driven agreement and then we need to get folks comfortable with our maintenance on a local basis and that’s exactly what we’re doing.

And then my last question, on the rental you’re talking about taking delivery, most of the increase in rental equipment in some in 3Q but a lot in 4Q, what tides you over between now and then to kind of meet those needs? Is it do you anticipate maybe slowing down the number of vehicles being pumped through the sales channel? Do you put any of that equipment maybe coming off a lease into rental for a short period until you take delivery of this equipment? Just how do you go ahead and start maybe not missing some of the revenue opportunities that you talked about?

You read our playbook. We do just that. We take units coming off the lease and we won’t out-service them. We’ll put them into the rental fleet if they got more life. We’ll delay the out-servicing of units which we’re very cautious of because we got demand obviously in the used vehicle side more at the low end of the inventory target range that we got, but that’s exactly we do to increase units available for rental, we’ll do what we call a least to rental so units coming up lease we’ll put them into the rental fleet and we’ll delay the out-servicing of older piece of equipment in the rental fleet.

Should we then slow down the amount of forecasted truck sales given that I mean -- I'm just trying to get an idea on the kind of the gives and takes in the model if you are keeping more for rental, then maybe slowing down on the sales side? I mean how best to model that?

John that’s in the math already. From used vehicle point of view we’ve already factored that in.

Thank you. The next question is from Matt Brooklier with Longbow Research.

Can you just remind us the fuel service revenue and the profits related to that? Is that all reported within FMS or does that -- is there some fuel profits that get booked at SCS or DTS?

Well in terms of where they get booked there is some that gets booked in DTS and supply chain and they get eliminated total, but it all runs through FMS and in terms of what happened in the quarter I’ll just elaborate a little bit on that is that there was a big drop in fuel pricing when there was a significant drop that quickly usually wholesale prices drop quicker than retail. We do have some of our customers that are on a more of a market based price if you think about our rental customer, our rental customers and things like that. And we got a benefit a one-time benefit I would say because of that rapid drop, but we don’t expect that to recur. And typically when it goes the other way retail moves up more quickly in line with wholesale.

And then Robert, I think you mentioned that there was some I think benefit from West Coast port congestion situation and what you do in SCS. I'm just curious to hear if that was meaningful in terms of SCS margin in the quarter?

Yes, not-not, I wouldn’t say it’s very meaningful. There was – certainly had some benefit because of the disruption as you know when things get a little hairier in our business, it usually gives an opportunity to show what we can do and this was one of those cases, but no I wouldn’t say it was a meaningful number and I’d say that we really expect that to be primarily behind us going forward.

And then you touched on it in terms of the rental fleet maybe getting a little bigger this year part of that is to support what’s going on in the on demand push that it’s going to pick up as the year progresses. So it sounds like we’re getting some opportunities to cross the commercial run product into these on demand customers. Maybe if you could just touch on some of the other products that you potentially see as a good fit for these on demand customers and kind of the cross selling opportunities.

The other way it is. It’s really increased demand, not only from on demand but also from existing lease. Our new lease customers also have been driving that. But in terms of cross selling opportunities John if you want to go through some of the…..

Yes, I mean it’s as you’ve customers coming in for maintenance math. We also look at selling fuel for example and then as they get comfortable with the quality of our maintenance they get to know us. Then we look at contract maintenance and even selling up the full service lease or maybe they were interested in it before. So it really is an opportunity for us to open the door to that 90% of the market that doesn’t outsource today and sell on variety of services.

Thank you. The next question is from Justin Long with Stephens.

Hey guys congrats on the quarter. This is actually Bryan taking the call for Justin today. But I was just wondering switching over to dedicated could you just provide an update on the pipeline you are saying in that business I know focus area has been trying to convert full service lease customer and dedicated contracts and do you think that conversion activity can accelerate in the next few quarters?

Yes. Let me just give you an idea of where we are at and then I’ll pass it over to John. One of the exciting drivers for growth and dedicated for us has been this opportunity to up sell customers who are in full service lease to dedicate it. We saw great activity in 2013, we saw another great year actually 2013 and 2014 in terms of the amount of these collaboration type sales or up selling. So we think they are still more opportunity to do even more and Dennis team along with John’s team are working collaboratively to find where we can help customers by having them outsource more of this activity including in this case we include the driver to write us. So we think we’re still probably early in the process of continued to grow that business. Its not going to happen overnight. It’s going to be multi-year effort. But I think now John’s team working Dennis have got a lot of opportunity to continue to build on that so John. If you want to…

Yes, Bryan this is John. Just a few things to add there one of the things we continue to see is the macro trends out there in the industry are really helping us. So if you look at the pin points around drivers, you look at the pin points around capacity as well as safety performance for some of our prospects that continues to drive higher levels of sales activity for. So the pipeline has grown and continues to grow. But going back to what Robert said around collaboration, we do continue to see good momentum. We’ve seen two consecutive years of the increase growth from collaboration sales. We expect that to continue in 2015 and as we gain momentum we’ll see that continue to accelerate.

Alright, thanks and just as a follow up. I know you guys recently rolled out the improved cost of ownership tool. But could you frame up how this is improved your ability to reach out potential customers? Maybe if you can just speak to the cost of ownership events they had last year and how many trucks that would represent or any other way you could help us get some perspective on the additional touch points that great.

If we look, we’ve talked about third of our growth coming from privately conversions. I would tell you that a good chunk of that is really is a result of our TCO model or TCO tool because what it does is allows our sales person to have a discussion around the facts where the customers has an ownership has to suppose an emotional discussion of what they think it should be versus what it is. So there is a lot more fact based discussion around what the ownership costs are versus what Ryder could potentially do the activity for and we are finding that we typically can find ways to bring value cost savings to customers early on an addition to the incremental service. So I would say that we’re still early in the process in terms of continuing to leverage that tool. But we’ve have seen meaningful benefits from it certainly in 2014 and I would tell you that a good portion of that third – fourth business that’s coming from ownership is as a result of the TCO tool, so Dennis do you want to add to that.

Yes I’d just add to your comments Robert that we found with our customers that as the acquisition price and the maintenance cost have increased for the new technology vehicles. This is becoming a more significant part of the cost base that our customers are seeing, so you’ve got the finance department and CFOs that are seeing this are concerned about it and so when we come in and typically historically had a sale to the transportation department of the company. Now we’re elevating the discussion with the TCO tool to the CFO in the finance group and as a result the dialog is different than we’ve had in the past. It’s a richer discussion around the total cost of the vehicle, so we’re seeing a lot of opportunities from ownership customers that we didn’t see before.

Thank you. The next question is from Casey Deak with Wells Fargo.

Just go back to the lease fleet guidance. The increase that you have there, how much of it would you say comes from existing customers versus any competitor conversions versus what you’ve been talking about with the new outsource clients? I’m really just trying to get a take on the health of your core client base as it looks for the remainder of the year.

Yes remember a third of it is customers that are new to outsourcing. The rest of the two-thirds I would tell you, the larger percentage is with new customers. I would – on a net basis, our existing customer base I would tell you is beginning to grow a little bit, but still not a meaningful part of the growth because at a 2% -- I guess we’re looking at 2.5, maybe to 3% GDP growth. I wouldn’t expect there to be growth in the existing customers fleets. We’ve always said we’re probably and along with OEMs we’re looking at 3% to maybe 4% GDP growth before you would see something like that. So I would say there’s still the majority of it is customers new to outsourcing and then new customers that we’re winning from competition.

And just a quick follow up on that. Where would you say the biggest impact you’re getting from your enhanced marketing efforts, is it in the dedicated area? Is it just lease customers coming over? Can you comment a little bit on that where it’s helping you the most?

Yes I think I’d say it’s really across the board because remember that this campaign is an awareness campaign, right, it’s to help the market understand all the different services that Ryder offers. So now if you look at total number of leads the majority of them or the larger percentage are going to go to FMS, but that’s where the larger customer base in market is. But it really is helping all three segments and helping to explain all the services that Ryder can offer and all the ways that we can help companies with their fleet management supply chain activities. So I would say it’s really having an impact from a lead standpoint it’s having an impact across all three.

Thank you. The next question is from Jeff Kauffman with Buckingham Research.

Just some quick detail questions. Of those 42,000 rental vehicles, how would you ballpark how many of those should be supporting full service lease and where is that number today? Whether you look at as a percentage or how you think about it?

Well that number fluctuates, but I’ll let Dennis give you the stats of where we’re at now.

Yes so if we Jeff if we look what we call lease support and then we call it pure rental for customers it’s not related to lease support. For first quarter 41% was for lease support and 59% was for the pure rental customers and we’re seeing growth in both. We’re sourcing demand for pure rental and for lease support and obviously the lease support is being driven by the lease fleet count that we’ve discussed earlier, but again 41%, 59% respectively.

And where will we see those ratios kind of hover in? What do you consider to be kind of a normal level of lease support?

It’s in that target that 40-60 range. I mean it could go to 30% or it could go the other way depending on how much demand we have from our lease customers, right. If you kind of look at it from the standpoint of the first call, if you will, with lease customers. We have a lease agreement and we're using rental vehicles to support that. The pure rental market is a very big market. And we use that really not only to grow as the market grows but also to fill in when cust-owned vehicles are available from a lease customer.

Okay and just to follow up on that, I tracked vehicles on revenue per vehicle and I think one of the few things that surprised me the other way this quarter was it looked like that average revenue per vehicle dropped. In terms of the growth rate, I'd seen most of last year versus first quarter this year, closer to between 1% and 2% depending on whether it was rental or lease. Could you help me understand whether that was more a kind of the uptick is the numbers because you added a lot of vehicles, or where there may be unusual circumstances because you did mention in your comments that you thought that the average revenue per vehicle probably be up about 4% for the year?

Are you talking about the rental fleet or on the lease fleet?

I am actually throwing both of them in there, but I got about 2% on lease and 1% on rental, I was just a little surprised by that.

Yes, that could be a lot. It could be mix, I mean if you look at our rate FX is another piece. Our rate per vehicle in rental, we know it's a 5%. So it's just what we are charging per vehicle per day. And then in terms of what else could be affecting it, it could be mix. You could have more light duty or trailers versus trucks in any one period. You could have some of that. But other than that you know there is no -- you saw something that we're holding on or worried about.

Okay so when you talk about 4%, you're talking about the rate per vehicle and you're not making any call on the mix of vehicles?

Correct, rate per vehicle per day in rental. So if you think about what's the cost of rental truck for a day, it's up 4%.

The next question is from Kristine Kubacki with Avondale Partners

Most of my questions have been answered. I just found a follow up, and forgive me if I missed this. On the contract related maintenance and the decline there, you mentioned in your comments about an individual customer that didn’t repeat the sales. I am wondering if you can give us a little bit more color there? And was that expected in the quarter?

Yes, Kristine, we're in the pilot phase still, if you will, on this. We have a handful of customers that whatsoever now 30 to 40 customers that we're dealing with. This is one of the earlier customers and there has just been a volume drop-off as they've done different things with different parts of their fleet. So it’s not really something of much concern. Our focus is really going after all the additional customers that we've added and bringing more of their vehicles into our facilities and this customer over time could bring those vehicles back also.

Thank you. And I am currently showing no questions. I would now like to turn the call over to Robert Sanchez for closing remarks.

Okay, thanks everyone for being on the call. We're right near the top of the hour. Hopefully you got a good flavor of where things are added. It's a great quarter and these are looking pretty favorable for us at this point. So we are excited about the balance of the year. So hopefully we will see you guys in the next few months and have a safe day.

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