Ryder System, Inc. (R) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to Ryder Systems, Inc Second 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 second 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; 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 second 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 second quarter results. Comparable earnings per share from continuing operations were a record $1.65 for the second quarter 2015, up from $1.44 in the prior year. This is an improvement of $0.21 or 15%. Our results came in above our second quarter forecast range of $1.58 to $1.63. The beat was driven largely by better than expected supply chain results. Second quarter comparable results exclude non-operating pension costs of $0.05 and professional fees of $0.02, which were partially offset by $0.03 benefit from tax law changes. Operating revenue which excludes fuel and subcontracted transportation revenue was up by 6% to a record 1.4 billion for the second quarter and increased in all business segments. Excluding the impact of foreign exchange, operating revenue grew by 8% in the quarter. Total revenue decline primarily due to lower fuel costs faster to customers as well as foreign exchange. Page five includes some additional information for the second quarter. The number of diluted shares outstanding for the quarter increased the 53.3 million shares, up from the 53 million shares in the prior year. In January, we temporarily pause share repurchase activity because our balance sheet leverage was near in the high-end of our target range of 225 to 275, because our leverage still near the high-end of our range share repurchase activity remains temporarily paused. We’ll evaluate resuming anti-dilutive share repurchases later in the year. Excluding pension cost and other items, the comparable tax rate was 37.2%, consistent with the prior year. The comparable tax rate was in-line with our expectations for the quarter and did not results an EPS our performance during the quarter. Page six highlights key financial statistics on a year-to-date basis. Operating revenue was up 5% to 2.7 billion, comparable EPS from continuing operations were 2.73, up 16% from the prior year. The spread between adjusted return on capital and cost to capital widen to 140 basis points, up by 50 basis points from the prior year driven primarily by higher leverage. On a full year basis we now expect this spread to be at least a 150, up from our prior forecast of 140 to 150 basis points. I will turn now to page seven and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions operating revenue, which excludes fuel, grew 6%, driven mainly by the growth in fully service fleets and commercial revenue. Excluding the impact of foreign exchange FMS operating revenue was up 8%. Full service lease revenue increased 5% or 7% excluding foreign exchange due to fleet growth and higher rates on replacement vehicles reflecting the higher cost of new engine technology. Excluding the planned reduction of 300 low margin trailers in the UK, the lease fleet grew organically by 6,000 vehicles year-over-year. Sequentially from the first quarter the lease fleet increased by 1,300 vehicles excluding UK trailers. In addition we had a record lease sales for the third consecutive quarter which provides us with continued momentum for lease fleet growth. Based on our strong sales activity and pipeline we are now expecting the full year lease fleet growth of 5,000 to 6,000 vehicles, above our prior forecast of 5,000 vehicles. Miles driven per vehicle per day on U.S. lease power units were unchanged versus the prior year and continue to run at normal historical levels. Contract maintenance revenue increased 6%, reflecting strong sales activity last year. Our contract maintenance fleet grew organically approximately 2,300 vehicles from the prior year, but was down 1,400 vehicles sequentially due to our customers loss in the quarter. Looking ahead, we expect nice fleet growth in this product line as we sign a significant new customer in July that will more than offset the customer loss during the second quarter. Contract related maintenance revenue was unchanged from the prior year, included in contract related maintenance our 8,300 vehicles serviced during the quarter under on demand maintenance agreements an increase of 28%, both from the prior year and sequentially. We have now signed 50 on demand customers and have significant opportunity to increase volumes within these accounts as well as add new customers. Commercial rental revenue was up 8% for the quarter or 10% excluding foreign exchange. The increase was driven by higher demand and pricing in North America. Rental revenue growth was particularly strong in the U.S. which was up 13% for the quarter. Rental revenue grew by 9% with our lease customers and by 7% with our rental only customers. The average rental fleet grew by 6% from the prior year. Rental utilization on power units was 78.1% consistent with the prior year. Utilization increased by nearly 80 basis points in the U.S. but was offset by lower utilization in the UK to some unusual vehicle replacement activity, global pricing on power units was up 4% in line with our expectations. To date, rental trends remain favorable for the month of July with the majority of the growth units already placed into service. In used vehicle sales we saw strong demand in pricing. I will discuss these results separately in the few minute. Overall, FMS earnings increased year-over-year to the higher full service lease results in strong rental performance. Better lease results reflect fleet growth and vehicles residual value benefits. Commercial rental performance benefitted from strong demand and higher pricing on larger fleet. These benefits were partially offset by strategic investments in sales and marketing and technology. Earnings before taxes in FMS increased 8%. FMS earnings as a percent of operating revenue were 12.8%, up 30 basis points from the prior year. Foreign exchange negatively impacted pretax earnings percent in FMS by 20 basis points. I will turn now to dedicated transportation solutions on page eight. Operating revenue grew by 6% due to new business, higher volumes and increased pricing. Total revenue was down 4% due to lower fuel costs passed through to customers. DTS earnings decreased during the quarter primarily due to higher self insurance costs partially offset by new business. Segment earnings before taxes as a percent of operating revenue were 7% down 80 basis points from the prior year. Self insurance cost negative impacted EBT margins by approximately 140 basis points. We expect improved margin comparisons in the second half for the year driven by new business as we move fast the high insurance cost we experienced during the first half of 2015. I will turn now to supply chain solutions on page 9. Operating revenue grew by 6% to the higher volumes in new business especially in the consumer package goods and technology sectors as well as higher pricing partially offsetting these benefits was loss business from the prior year in the automotive industry and foreign exchange. SCS operating revenue grew 9% excluding FX. SCS earnings before taxes were up 56%, the increase was due primarily the higher pricing, lowest startup cost which normalizes compare to the prior year and higher volumes. These benefits were partially offset by higher compensation cost. While we expect supply chains year-over-year earnings to be up in the second half, we don't anticipate the same magnitude of an increase as comparisons will move fast last year startup cost issues. Segment earnings before tax as a percent of operating revenue were 8.7% in the quarter, up 280 basis points from the prior year. Page 10 shows the business segment view of the income statement I just discussed and is included here for reference. Page 11 reflects our year-to-date results by business segment. In the interest of time I won’t review these result in detail, but I will just highlight some bottomline results. Comparable year-to-date earnings from continuing operations were 145.6 million up 16% from the prior year. At this point I will turn the call over our CFO, Art Garcia, to cover several items, including capital spending.

Thanks, Robert. Turning to page 12; year-to-date gross capital expenditures were approximately $1.5 billion. It's up nearly 200 million from the prior year. This increase reflects planned investments in our lease and commercial rental fleets in light of new lease sales activity and a strong rental demand environment. We realized proceeds primarily from the sale of revenue earning equipment of $212 million, down 63 million from the prior year. The decrease reflects expected lower volumes of vehicle sold with a smaller inventory and a change in mix of unit sold. Pricing by vehicle class has remained strong. We also executed a $156 million sale lease back transaction during the quarter. Net capital expenditures increased by 11% to $1.1 billion. As outlined in the press release, we’re evaluating whether the structure of both the second quarter and prior year sale lease back transactions qualify for off balance sheet treatment as currently reported. If they don't we would add back approximately $365 million of revenue earning equipment and debt onto the balance sheet. If made, the change in treatment would not be material to our reported financials including net earnings in any individual period. And would not materially impact our total obligations or total obligations to equity metrics as off balance sheet leases were always included in these measures. Mostly importantly the accounting treatment does not change, the economic benefit to riders funding cost from these transactions. We expect to finalize the accounting treatment for inclusion in our second quarter 10-Q which will be filed on or before August 10th. Turning to the next page, we generated cash from operating activities of around $650 million during the first half for the year up by a 109 million. The increase was driven primarily by the timing of pension contributions and higher cash based earnings. We generated just over a $1 billion of total cash year-to-date up 200 million from the prior year, as the sale lease back in higher operating cash flow more than offset lower used vehicle sales proceeds. Cash payments for capital expenditures increased by $74 million to 1.3 billion year-to-date. Company’s free cash flow was negative 281 million year-to-date above the prior year of negative $410 million, if we determine that the sale lease back transactions do not qualify for off balance sheet treatment reported free cash flow would be approximately $430 million negative year-to-date. Additionally our full year free cash flow forecast was moved to negative 630 million as compared with the prior forecast of negative 389. Page 14 addresses our debt to equity position. Total obligations of $5.2 billion increased by around 470 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 primarily due to vehicle investments as well as foreign exchange. Equity at the end of the quarter was $1.9 billion, up 95 million from year end 2014 primarily due to earnings. At this point, I'll hand the call back over to Robert to provide an asset management update.

Thanks Art. Page 16 summarizes key results from our asset management area. Used vehicle inventory held for sale was 5,900 vehicles down from 6,300 vehicles in the prior year and 100 vehicles above the first quarter. Used vehicle inventory is at the low end of our target range of 6,000 vehicles to 8,000 vehicles. Pricing from used vehicles was strong for both tractors and trucks. Compared with the second quarter of 2014 proceeds from vehicles sold were up 10% for tractors and up 11% for trucks. From a sequential standpoint, tractor pricing was up 5% and truck pricing was up 4% versus the first quarter of 2015. We saw improved pricing in all vehicle sales channels. The number of leased vehicles that were extended beyond their original lease term decreased versus last year by around 765 units or 23% year-to-date and is well below recessionary levels. This reflects a lower number of lease contract explorations this year. Early terminations of leased vehicles increased by about 120 units year-to-date but remains well below recessionary levels. I’ll turn now to page 18 and cover our outlook and forecast. We're pleased with the performance this quarter and year-to-date. We're particularly encouraged by continued momentum in lease sales and fleet growth, strong rental demand and pricing trends and improved performance in our supply chain business. In full service lease we've had three consecutive record sales quarters and with a robust pipeline expected to grow by 5,000 vehicles to 6,000 vehicles this year above our prior forecast of 5,000 vehicles. We continue to see around a third of new truck leases coming from customers new to outsourcing and are now also seeing nice growth from further penetration within current customer accounts. In rental, we're pleased with strong demand and pricing trends that have continued into July. We now expect our full year average fleet to grow 6% versus the prior forecast of 5% while our outlook for rental pricing remains at 4% increase for the year. Rental was benefiting from new customers. We're adding in lease and on demand as most of those new customers are now renting trucks from us. We've also increased our penetration into large national rental only accounts which provide good demand as well as better visibility into future rental needs. Finally we're seeing some private fleet renting a greater proportion of their overall fleet needs due to capital constraints stemming from higher vehicle purchase cost and a desire for increased flexibility. We're pleased with the continued strong market receptivity for our new on demand maintenance service. We've completed the IT work to support expansion of the product. We're increasing the sales team who can sell on demand we'll be introducing it to a significant prospect pool at a large carrier conference we're holding next month. We also have significant opportunities to realize higher volumes within the 50 fleets already signed to-date. We're pleased with the progress we've made on our maintenance productivity initiatives and continue to find ways to mitigate higher maintenance cost associated with the new engine technology. In used vehicle sales we continue to see solid demand, conditions for most vehicle types and strong pricing across all sales channels. In supply chain we're expecting revenue and earnings growth rates to slow in the second half reflecting network redesigns at some customers and some lost business. In the dedicated segment we expect single digit revenue growth -- high single digit revenue growth and improved earnings comparisons in the second half driven by new sales and improved self-insurance expense. Our third quarter comparable EPS forecast is a $1.82 to $1.87 versus the prior year of $1.63. Based on our second quarter performance, we’re raising the low-end of our full year comparable EPS forecast range. The new range is a $1.64 to a $1.55 per share compared to the previous range of $6.40 to $6.55 a share. This represents a year-over-year increase of 16% to 17%, we’ll correct that. The new range is 6.45 to 6.55 per share compared to the previous range of 6.40 to 6.55 a share. This represents a year-over-year increase of 16% to 17%. That concludes our prepared remarks for this morning. At this time, I’ll turn it over the operator open up the line for questions. In order to give everyone an opportunity at the limit yourself to one question and one related follow-up, if clarification is needed. If you have additional questions you’ll welcome to get back in the queue and we’ll take as many calls as we can.

Thank you. [Operator Instructions] The first question today is from Ben Hartford from Baird. Your line is open.

I guess Robert when we just start conceptually growth is obviously positive with full service lease growth accelerating. How do you first reconcile, what we’re seeing with regard to Class A order activity moderating obviously weaker spot market activity on a year-over-year basis with the accelerating trends that you’re seeing growth on a full service lease side, it’s on a related note within rental utilization that are related follow-up on that?

I guess in a very high level. Class A orders have moderated, but production still strong. And the orders some of the moderations will maybe a lot of the OEMs are already sold out for the balance of the year. Because of the way we procure in the way that we have slight each reserve, we have a lot of slight each left, we’re about a 100 days out on a new order right now. So there is plenty of room available with us. So I don’t believe as the drop in orders is a drop and demand for trucks. In addition to that, we’re certainly benefiting from some of the macro trends that we’ve been talking about of more people moving to outsourcing and moving to leasing and we think we’re see in the benefit to that especially as we leverage some of the new tools that we have replace around total costs of ownership. So I think that is really what’s driving what we’re see in our company and in our industry. As a relates to rental, I think there is a lot of different things. Well it’s continue to be very strong it’s continue strong through July. A lot of that is coming from some of the new lease and on-demand customers that we’re saying. We also seen some customers, who are looking at leveraging rental a little better as the cost of vehicle is gone up so significantly. If you go back to the time vehicles cost a lot less some of them would have extra vehicle setting around for when they needed them. And I think because of the higher cost now the rationalize those and really counting on rental as a way of supplementing and really meaning that peak demand.

And then I guess into the context accelerating growth some my point FMS margins and the leverage or the expansion this quarter is being a little or needed than expected. So in the context both pull through growth accelerating rental demand remaining healthy, the introduction of this on-demand maintenance product. How should we think about FMS margins over the course for the next several quarters and even several years in the context of what appears to be an improving structural growth outlook for the company?

Okay. I’ll let Dennis to answer.

Yes Ben. If you look at first quarter or EBT when up 17% and obviously it was 8% in the second quarter. Really what impacted first quarter when you compare it was what we discuss previously which was fuel. You had the prescript of this decline in fuel pricing or the fuel costs. And the retail price of the pump came down a little slower. We benefited from that as we said there was a big difference between Q1 and Q2. As we look at the second half of the year, we feel really good. Growth is really being driven by both lease growth as well as rental following it. We also fuel coming with that. So, we feel good about top line growth and we feel like we're going to return to double digit growth in the second half. As we look forward, we don't think that's going to stop based on the trends we're seeing.

Thank you. Our next question is coming from David Ross from Stifel. Your line is open.

Yes. Good morning, gentlemen. Focus this morning on supply chain. Your record margin in supply chain solutions. Was there any gain sharing in there or rather, onetime items.

Yeah, there's, we've got a little bit in there also some one time projects that we have for a couple of key customers in the quarter.

Ok, and that's one of the reasons that the growth should decelerate in the back half. You don't have those any more.

Correct.

And then, a lot of times we hear about new business on the supply chain side, is it negative for margins due to startup costs, but it sounds like the new business you got this time might have startup costs, but there were even more startup costs a year ago. Is that true?

Yeah. David, last year if you remember we had some of the challenges in our startup with a high tech account, and we talked about that last year as really negatively impacting the second quarter, so we're now getting, you know, startup costs have gone back to more normalized rates and we're getting the benefit on a year over year basis.

Ok, so it’s not that there was no startup costs for the new businesses.

Correct. Correct. Just the normal run rate.

Ok, and then last question on that SEShad is the better pricing that you mentioned, was that due to, kind of, contract renewals and as a contract came up you were able to get better pricing because you're doing something different for them or sticky or its just kind of a better mix where you had the higher growth as accounted or you just had better pricing.

Yeah, I would say it’s a combination of the two, right, some that come up for renewal and a handful that we need to improve our pricing structure as well as some more integrated accounts that we had that allow us to change our pricing there.

Thank you. Our next question comes from Justin Long of Stephens. Your line is open.

Thanks and good morning, guys. First question I wanted to ask, you know, there is potential to get a final rule on ELVs in the back half of the year. It looks like the schedules for our September now. Could you talk about how that could impact your business. Is the main benefit you could see from this an impact on rental pricing or do you think this could even be a catalyst to drive increased outsourcing as well.

Yeah, I think that anything that tightens the market in terms of the supply side which it would do, because obviously some folks would drop off, I think it’s good for the equipment side, for the [indiscernible] side rental. And as companies we [indiscernible] aptly in order to offset some of the capacity that goes away. Include on the dedicated side. I think as companies struggle with dealing with more complexity and more tight capacity markets, I see some more opportunities on the dedicated side.

Ok, great. That's helpful and you know, secondly, I know there's several pits and takes when we think about the impact of a rising interest rate environment on your business but could you walk through your take on what you think the net tailwind or headwind you expect to see at ten rider from the rising interest rate environment.

Yeah, I think you can head it in a couple of different ways. One is in the shorter end of the curve, if interest rates rise we will get impacted by that, where we have a component of our portfolio is variable rate debt. Estimate that at typically a hundred basis point move in the short end with probably increase our expenses by 10 or 11 million dollars. I think on the longer end as rates rise, you know, we actually price that into business that we're quoting to our lease customers. So we think we should be able to pass that through as it occurs and then we'll go out into the market and actually fund the debt at those rates. We think an overall rising environment will help us on the lease end. We think as the cost of borrowing moves up, it actually makes the outsourcing proposition a little more attractive to customers. Also on the longer end we do have some unfunded pension liabilities that will benefit from the rising discount rate. So we see that probably as a net net positive.

Thank you. Our next question comment comes from Scott Group from Wolfe Research. Your line is open.

So can you give a little bit more color on strategic investments that you talked about in the release on FMS and just update that wise? And is that an ongoing number income think about or is that's a kind of more onetime we should start to go in at back half?

Yes, Dennis?

Yeah. So Scott we are investing significantly in sales. We have also invested in marketing and yeah we will continue to invest in it as we continue to see the growth opportunity. I think some of those investments will start slow. As you look at comparables with last year, we are investing pretty heavily in the second half of last year, so you will not see the same growth rate, but we see an opportunity. We are going to keep investing in sales and marketing going forward. I would also say IT. As we look at IT and what we have done to prepare for on demand and what we needed to do in that arena. You will continue to see those investments as we prepare for that growth and refresh our legacy systems. But that same growth rate that you saw in the first half year that will begin to slow a little bit.

Okay. And then just going back to rental for a second. The comments were helpful, but there's clearly a lot of concern in the market about what could happen to rental. Do you think slowing pace of growth there or even stopping the growth on the growth on the fleet there, just maybe at least something off the table now, but to protect ourselves in case the rental market eventually exposes maybe some other indicators --?

Yeah. We tend to manage our rental fleet pretty conservatively. We have a lot of indicators that we look at on a real time basis. And obviously we always try to model out as best we can, but been the company long enough to know that it can sneak up on you. So we watch it very closely, watch it daily, the important thing is we have a lot of different avenues of how to downsize the fleet very quickly, not only just selling vehicles, but also redeploying vehicles pretty rapidly as we have started a rental lease program several years ago that we have kept in place. So we have got a lot of different avenues, but to redeploy equipment, but I can tell you that demand has been very healthy and it continues to be very healthy. We have not seen a slowdown we have been looking forward as we have seen some of the data that's out there, but I think this is the only explanation I can see is that this just kind of tie into everything else. We are seeing around more outsourcing. We are growing the lease we are growing on demand. Those customers need additional trucks. We are trying to be very disciplined about growing the fleet relative to what we are seeing on the lease side and the contract side and we are still within all those parameter, rental will still be within 20%, 25% of revenue for after mass which has always been our target. So our goal is to stay disciplined, stay in that range. And the minute we see something slowdown, if we do see that we will respond quickly.

Thank you. Our next question comes from Matt Brooklier from Longbow Research. Your line is open.

Hey. Thanks and good morning. I just wanted to go back to the FMS division. I know there's been a couple of questions on margins. But I am trying to get my arms around revenue accelerating, you did have margin expansion, but it maybe was not that we would have anticipated. I am trying to get my arms around if there anything else in the quarter that was kind of onetime in nature that maybe was a headwind in terms of FMS margins.

Yes. I will let Dennis elaborate a little bit, but the one item keep in mind versus last year's UVS, used vehicles sales, we have fewer units that we are selling. And that's creating some headwind versus last year which we expected, but that being offset on the earnings line by the improvements that we have seen in depreciation expense also, but if you look at margin percent that will create some headwind. But we are expecting year-over-year earnings and Dennis mentioned its really kick backup into that double-digit range in the second half for the year. Tell us anything else from that.

No, I just reiterate what I said before is also in the second half we continue to expect the topline to continue to accelerate year-over-year and that's going to fall through, so as growth is really going to drive some of the bottom line and Robert mentioned in his opening comments, our productivity initiatives that we are seeing on the maintenance side, we’re getting a lot of traction on the cost side and that's obviously going to be help margins also going forward. Yes I want to make sure we don't lose sight of the fact that we’re seeing a fleet growth in FMS on [upper] sell side of 6000 vehicles, I mean that's a number that we really had not contemplated getting to that level when we started the year, it certainly not a couple of years ago. So I think it’s very encouraging that we’re beginning to really see the type of growth that we had thought of and dream of several years ago in terms of seeing more customers coming into outsourcing and more customers looking at full service fleet as a solution. So in that type of an environment, I think we had always talked about we would get back to the 12% to 13% earnings leverage in FMS, or gain to that high end of that, high 12s maybe 13 this year with that type of growth I would expect us now to see us even go pass that high end and continue to grow. So I think we’re in a pretty good place right now in terms of having the contractual part of the business really beginning to pick up steam which is really what we’ve always try for.

Okay. Good to hear and then maybe for our -- what you guys looking for in terms of gains on vehicle sales in the second half of this year?

As we stated, we started the year with our gains would be less year-over-year that hasn’t really change, you saw that plan a little bit in the second quarter, we think that will continue in the fourth quarter, so should be down year-over-year but probably more as even in the fourth quarter.

Thank you. Our next question is from John Barnes from RBC Capital Markets. Your line is open.

Hey thanks guys. I have couple of questions here on, one on rental just going back to that given the concern just around freight volumes in the spot market and this goes to a little earlier question, given the robust amount of rental that you are doing right now, are you seeing any customers that maybe or hesitant on the lease side, because they just maybe there is a little uncertainty around there that are choosing to go to rental route that if they get an indication one way or the other is to way economic backdrop kind of plays out to lead to maybe a little bit more demand on the lease side or are you seeing anything that worries you there that a customer is making the decision that maybe suggested the economies not quite as good as hope for?

Yes, I don't think there is a large amount of customers that we’re seeing make any decision like that I think if you look at our lease pipeline it’s just as big as it’s been a long time, we’ve had three consecutive quarters of record lease sales of -- so customers are signing up to long term leases. I think some of that has to do with the newer technology that's come out for [indiscernible] and those more expensive you are getting more fuel efficiency which customers are see in a good pay back on that. And then customers have also held up for a long time to make some of these decisions around capital and are to the point where they ready to make them, so I don't think that we’re seeing a large number of customers say, I’m going to read for much longer instead of leasing, I think what we are seeing is some customers are looking at their whole fleet and saying, or a historically would have a couple old unit sitting on the sidelines in case I needed one during a peak period.

Now with the new cost equipment that's lot more expensive there is less of that to go around as much units are sitting around, so they are relying more on rental as opposed to surplus units within their own fleet in order to meet that peak demand, I think that's one of the new launches that we’ve seen over the last quarter, but Dennis anything else on that?

Yes, John I would just add that again when you are looking at lease fleet growth like what we are seeing now, rental is a key support for that growth and so as we continue to see the lease fleet growth, you are going to continue to see the demand on rental increase in addition to the customers who are just looking to take care of surge capacity with rental and doing that rather than caring these very expensive vehicles in their fleet. So you got that and also add that we’re looking at term down, so as we look at customers who are coming and asking for units and when we are running, approaching 80% utilization. Lot of times we're going to turn customers away and backing the real customer to satisfy or that's just unacceptable. So that's something that we're monitoring all the time and we're not going to allow that to happen, so we're just not seeing a slowdown in rental.

Yes you -- there's been a couple of other rental companies out there obviously put up results that have scared everybody, that's why I asked the question I mean great growth [indiscernible]

In other industries?

Yes I think that's the problem is you get. You guys are kind of, right you're at the truck leasing which you're the only one out there that anybody can really analyze and so you get this rental business and other industries that are clearly under pressure and there's that trying to extrapolate one out to the other.

Yes I'm not sure that would be true, that's true in our industry in general. I think in our industry in general -- probably still seeing some other things strength that we see.

And then my follow up is on the sale leaseback discussion you had in your press release, can you just elaborate a little bit as to what caused you having to go back and then look at these things? I mean you've done sale leasebacks as long as I've been covering the company. What popped up now? Was there some change in the rules that you're having to go back and look at to get a new auditor? I mean what flared this issue up?

John no it's -- the structure is the same. I think the rules are fairly consistent what they have been. I think it's kind of what you're saying to a certain extent you get a new set of eyes looking at it, they haven’t changed auditors or anything like that, but you look at it [indiscernible] people look at things different ways and so some good points have been raised and that's what we're going to spend the next couple of weeks addressing.

Thank you. Our next question is from Jeff Kauffman from Buckingham Research. Your line is open.

I heard your commentary on on-demand maintenance and I guess I'm just a little surprised with the ramp up that I haven’t seen the top-line grow a little bit more year-to-date, so is this something -- I kind of based on the customer growth you're sighting, what kind of rate do you think this could grow at in the second half?

Yes well let me just say we had always talked about a launch in the middle of the year, so that's -- you really haven’t seen that in the second quarter numbers yet. We're expecting to really get more of that benefit in the second half of the year. As I mentioned we have a carrier conference now next month where we're going to be talking about 200 large carriers that do business with us on the supply chain side about offering the service to them, so we feel pretty good about that. And I think there's still plenty opportunity even to get with the 50 accounts we've had to-date get additional penetration within those accounts, so in terms of growth rates I think we talked about remember at the beginning of the year we talked about ODM the on-demand maintenance potential providing the bulk of $0.10 a share to $0.15 a share so we still think we're in that range and a lot of that really coming more in the second half now, but Den you say anything else on that?

No I would just as we stated the number of unique vehicles that we touched was up 28% both sequentially and year-over-year and Jeff we expect to see that accelerate in the second half. The product is being received well. Customers are getting a quality repair, they're getting consistency for their fleet across North America. It's an exciting product. There's a lot of interest in the 50 customers we've signed up, there's real opportunity to penetrate those fleets and that's exactly we're focused on. So I think you're going to see the number of touches accelerate here in the second half.

I think the key thing for this product is that FMS is a multi-billion dollar segment so it'll be a while before it becomes a meaningful part of the whole revenue story however if you look at revenue growth and earnings growth it can certainly be a meaningful part of that story over the next couple -- a year to two years.

Understood. And then the follow up if I look at the type of vehicle that you're seeing more of the demand in because not all of your lease fleet are the same types of vehicles. Is there a difference in terms of whether customers are asking more for kind of large over the road trucks more straight trucks or kind of medium-duty product versus say trailer? Could you just give us an idea if there's a difference in the type of equipment you're seeing demand is now?

Dennis?

Yes for on demand, it just varies Jeff.

No not for on demand, I'm sorry for FMS.

Overall, no we’re seeing it’s increasing across the board. I really can’t point to straight trucks are up, tractors are up, trailers, I mean we’re seeing an increase on lease fleet across the board.

Yes, if you look at the increase on the lease fleet, it’s coming from customers that are new to outsourcing and new to leasing. And then it’s coming from customers that are currently doing business with us. But have part of their fleet with either another provide or doing it themselves. And we’re see more of that business coming our way also. So what we’re see and this move towards more outsourcing even within our existing customer based.

I’d add to that Jeff, it’s interesting. We tend to find that we’re I’d say 18 months ahead of what others are seen, just because the size of our fleet. We touch about 215,000 vehicles now. And so we were telling you about the year and half, two years ago around the complexity with the new technology is really being seen by everybody else. And you got a lot of folks we were saying this new technology is difficult and we need help, which is really accelerating this trend towards outsourcing.

The next question is from Todd Fowler from KeyBanc Capital Markets. Your line is open.

Robert, I wanted to ask on the guidance. I know you had some comments in your prepared remarks. But I just want to make sure I understand how you’re thinking about the full year. In the second quarter, it was a little bit about the high another range that seems like some of that was some special project work in the supply chain business. But you’re expecting the lease, we could be a little bit larger, the rental fleet could be a little bit larger, it sounds like rental demand trends are good. What’s the thought process and just tight in the bottom and why at the top end of the guidance move up with what you’re seeing right now in the lease and rental side?

Yes was a two set for top end? So I would say was a meaningful bit I think as you mentioned some of that was some special stuff and supply chain. We are expecting the full service lease fleet to grow higher than what we had a quarter ago, but a lot of that is going to be in the tailwind of the year which is an impact the earnings this much this year. And then you’ve got some tailwind from less anti-dilutive share repurchase that we’re going to do that kind of offset that [indiscernible]. So I still thought we’re, the prudent thing to do was to raise bottom end and keep the top and where it is and allow that you to continue to progress.

But nothing and kind of underlying demand trends or anything like that it’s more on the magnitude beat here in the current quarter not being significant and then yes another things on the share side, it’s not that you’re seeing something different trends in the back half of the year?

No, I mean think about it, we’re still expecting year-over-year increases of 16% to 17% full year guidance. So we’re expecting double-digit earnings growth, continue double-digit earnings growth in the second half of the year. And really seen each of the business segments continue to grow nicely we have a little of a slowdown in supply chain. But dedicated really kick and backend after we get pass some of the self-insurance challenges as we’ve had in the first half of the year. And then FMS really continuing to see earnings growth and really picking up the earnings growth in the second half.

And just one follow-up, I think in the past you’ve talked about the percent of rental revenue that comes from your lease business. Could you remind us what that is and can you also maybe help us understand how much of the rental revenue comes from national accounts or you’ve got some visibility into the fourth quarter maybe related to omni-channel or ecommerce? And then kind of how much of the rental revenue you think is more consistent I guess in nature versus transactional?

Todd, its Dennis. Our lease support from rental is about 40% of our rental demand as fluctuate quarter-to-quarter, but in the neighborhood of 40% and then from our local pure rental or customers just renting is about 60% of the demands in that range.

Thanks a lot for the time this morning guys.

Our next question is from Kevin Sterling from BB&T Capital Markets. Your line is open.

The increase you’re talking about for the lease fleet 5,000, 6,000 vehicles. Are you keeping your CapEx guidance for the full year 2.6 billion or should that increase on touch base on which are CapEx guidance for the full year still 2.6 billion?

Yes Kevin still not same raise we gave before.

And Robert you touched on the lease vehicle growth positive sales and units and I think you said maybe a third coming from new customers, extending with existing customers. But I mean it really sounds like to me you are really kind of knocking down some of the doors or walls of customers that have never leased before and you are really getting some nice penetration. So maybe could you put in context for us, 6,000 lease vehicle today in the history of your company, my guess is we have not seen that since probably prior to the great recession. And I also love to hear your perspective, I am guessing you probably feel as you have knocked down some of these doors of customers have not leased in the past sales 6,000 is not feeling. So maybe could put in perspective the 6,000 where it has been impacted your company and maybe where it could go?

Yes. Putting the 6,000 in perspective I have been with the company 22 years and in the 22 years -- 6,000 unit full service lease growth. So this is new uncharted territory for us, it is clearly I think coming from, been driven by this macro trend of things getting much more complex in the industry along with many of the sales and marketing changes that we have made over the years and this push really to get after that 90% of the market that does not outsource and does not lease. And if you think about we play in a very small percentage of the market in full service lease and rental, now we are really trying to extend to that 90. So 6,000 as exciting as it is for us I think we are still in the early innings. And I think there is still a lot of room to continue to find ways to grow. I think we have talked about overtime really leveraging all the infrastructure that we have in maintenance at our 800 shops. And as we get passed that you are going to see us then continue to add locations if we need to as we continue to grow. So it is a very exciting time I think for us here. Just even only looking at full service lease, but then you look at what we are doing around on demand you look at the growth that we are driving is dedicated and you look at the new things that we are doing around supply chain. This trend towards outsourcing in on the fleet side and then on the supply chain side I think is really beginning to catch its strive and we are very well positioned to play into it and we have got and I think we have got the right organization of right sales and marketing group to get out. So Dennis anything else.

Yes. Robert, I would just add to that that as exciting as the topline is which you mentioned earlier about productivity initiatives and our focus on this new technology and being able to really accelerate that productivity is currently important which is, it's always a topline, it's also Kevin as you look at it is with that complexity of the new technology it's being able to expand the margins. And that's what the productivity initiatives are so important with really focused on that also is being as productive as we can with this new technology.

Clearly that's a big part of the story, yes. Alright. Kevin, one thing I wanted to get back to you obviously on so I was clear on that, around the upper end of the range on vehicle count. So we factor in current views around vehicle for CapEx as well as showing up -- it brings down -- CapEx and it would be required to the 6,000 units. So it's not a marginal change after that that's why we have to change our guidance around that.

Thank you. Our next question is from Tom Kim from Goldman Sachs. Your line is open.

This is Tom Daniels on for Tom Kim. I just have a one question regarding used vehicle sales pricing, up again 11% and 10% year-over-year respectively. How much of the mix shift towards retail from wholesale has kind of played out here. And what should we thinking about in terms of risk to pricing going forward?

Yeah. I think I will let Dennis give you some more detail. But I think what you are seeing is we have now gratitude to more of our traditional mix of retail versus wholesale, I think on a global base we are about 70% retail in the U.S. to about 75%. So we are kind of at the right mix right now. And really what we are seeing is continued price increases as demand for used trucks continues to be relative strong. And also beginning to see some inflationary increases, because we are now beginning to sale the O7 [ph] technology that actually costs more. So some of that is just we would expect it because the vehicles, original cost of the vehicle is higher.

So I would expect that to continue as long as demand continues to be reasonable and we are getting into a period where we have tight supply because we’re selling vehicles in 2007 and 2008 which not a lot of vehicles are built or we have in our fleet, so I would expect tight supply and as always we have moderate demand for we’re going to be in a pretty good shape, anything else on that?

No, we continue to work our export channels also taking vehicles offshore and Tom the only thing I would say is that the post of seven technology in the quarter we had about 40% of our sales were post 07 and approaching little over 50% of our inventories post 07 and we’re seeing the proceeds that we expected from that technology, so we feel good about things in general going forward.

Post 07 technology, how much more expensive is that than the prior?

That was a 10% to 15% increase in price.

Thank you. Our next question is from Casey Deak from Wells Fargo. Your line is open.

Thank you. Just wanted to look at asset management for a minute there is been a lot of focus on early terminations and that number still appears to be good, but looking at redeployments and extensions going down considerably from the year ago period, is that just your customers appetite for the new technologies is it on the redeployment side especially is it for those vehicles mainly going into rental and not included in that, if you could…

Yes, I think it’s the fact that you have customers willing to sign up for the new stuff its very attractive and also we have fewer units terming out this year, we have fewer units are getting at the end of the lease terms, so fewer units are available I guess to redeployed also, so I think those are the really the two big drivers.

Okay. And one of the signs with staying with the fleet dedicated on the fleet counter if I ended the quarter and the average was about the same so -- were sales muted in the quarter and dedicated as you are looking at debt you get a better sense in the outlook for the rest of the year and had those numbers come to equal out?

John?

Yes, with regard to the dedicated numbers you saw, the fleet was up 400 units about 6%, so that's consistent with the revenue growth is on the quarter, you’ve heard in Robert’s prepared remarks, we are looking to accelerate that as we get further into the year, we did have a nice quarter of sales, so we’re encouraged by the second quarter sales and that's going to help accelerate the sales growth in the second half.

I think just important to note that the -- it really the self insurance challenges in the quarter were really the big headwind and dedicated but once we get pass those, we should return to pretty meaningful earnings growth there.

Thank you and our final question for today comes from Scott Group from Wolfe Research. Your line is open.

Just couple of things, on demand can you give some color on the large customer that you lost and then should we expect any startup cost with the new customer or startups in general as you ramp up this business?

Yes, first the large customer was a customer from the early days and we don't expect to see that going forward Scott, so like I said before, we expect to see continued acceleration in the product.

Okay. And Robert, I thought your commentary on margins was important in that you can get maybe to a new upper end of the range that comment about getting above 13%, do you think that's realistic for next year?

Well, when I got to give guidance for next year yet, so I’m really talking about over the next several years, I just look, it’s simple math, right, if we could grow the topline across the businesses as we’ve been doing leverage some of the infrastructure particularly in FMS and we’re with really the contractual part of our business growing of the [indiscernible] there is no reason why we should be able to real expand those margins to get them above historical levels. Got it.

Scott, I want to come back to your question, because you asked about an on demand customer, we didn’t lose an on demand customers, the contract maintenance customer that we mentioned early on and so we haven't really lost on demand and on demand will fluctuate based on the need I mean this is on demand it's a contract product but its consumed on an on demand basis and we expect to continue to penetrate these 50 customers and we expect to sign up more going forward because of the attractiveness of the product.

Yes, just to be clear so there's really meaningful startup cost associated with getting a customer up and running.

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

Okay, well we're at the top of the hour so I want to thank everyone for their continued interest in Ryder. Have a safe day.