Ryder System Inc. Q4 2008 Earnings Call Transcript

| About: Ryder System, (R)

Ryder System Inc. (NYSE:R)

Q4 2008 Earnings Call

February 4, 2009 11:00 am ET

Executives

Bob Brunn – Vice President of Investor Relations and Public Affairs

Greg Swienton – Chairman and Chief Executive Officer

Robert Sanchez – Chief Financial Officer

Anthony Tegnelia – President of Global Fleet Management Solutions

John Williford – President of Global Supply Chain Solutions

Analysts

Dave Ross – Stifel Nicolaus

Jon Langenfeld – Robert W. Baird

Ed Wolfe – Wolfe Research

John Barnes – BB&T Capital Markets

Art Hatfield – Morgan, Keegan & Company, Inc.

Alex Brand – Stephens, Inc.

Todd Fowler – Keybanc Capital Markets

Operator

Welcome to the Ryder System, Inc. fourth quarter 2008 earnings release conference call. (Operator Instructions) I would now like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

Bob Brunn

Thanks very much. Good morning, and welcome to Ryder's fourth quarter 2008 earnings and 2009 forecast conference call. I'd like to begin with a reminder that in this presentation you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors.

More detailed information about these factors is contained in this morning's earnings release, and in Ryder's filings with the Securities and Exchange Commission.

Presenting on today's call are Greg Swienton, Chairman and Chief Executive Officer and Robert Sanchez, Executive Vice President and Chief Financial Officer. Additionally, Tony Tegnelia, President of Global Fleet Management Solutions and John Williford, President of Global Supply Chain Solutions, are on the call today and available for questions following the presentation.

With that, let me turn it over to Greg.

Greg Swienton

Thank you, and good morning, everyone. Today we'll recap our fourth quarter 2008 and full year 2008 results. We'll review the asset management area and provide our 2009 outlook for the business and after our initial remarks, we'll open up the call for questions.

And we do have a lot to cover today, so let me get right into the overview of our fourth quarter results on page four. Net earnings per diluted share were $0.19 for the fourth quarter of 2008, as compared to $1.24 in the prior year period. EPS in this year's quarter included a $0.90 charge related to restructuring and other items.

The restructuring item included charges related primarily to the previously announced discontinuation of supply chain operations in South America and Europe, as well as workforce reductions mainly in the United States.

EPS in the prior year, in '07, included a $0.06 benefit related primarily to changes in Canadian tax laws. So excluding these items in each year, comparable EPS was $1.09 in the fourth quarter 2008, as compared to $1.18 in the prior year. Comparable EPS came in better than expected in our December commentary when we anticipated being at the low end of our forecast range of $1.03 to $1.13. The better-than-expected performance was mainly due to lower safety and insurance costs, and a lower tax rate.

Total revenue for the company was down by 18% from the prior year. Total revenue reflects the impact of the previously announced change from gross to net revenue reporting for subcontracted transportation with one supply chain customer. In addition, lower fuel services revenue and unfavorable foreign exchange rate movements.

Operating revenue, which excludes FMS fuel, and all subcontracted transportation revenue is down by 7%. Operating revenue was negatively impacted by unfavorable foreign exchange rates of 5%, lower commercial rental revenue, lower automotive volumes and lower fuel cost pass-throughs to customers. These negative impacts were partially offset by contractual revenue growth, including acquisitions.

On page five, in fleet management, total revenue declined 10% versus the prior year. Total FMS revenue was impacted by a 25% decrease in fuel revenue, reflecting lower fuel costs passed through to customers and lower volumes. Operating revenue, which excludes fuel, was down 4%.

Contractual revenue which includes both full-service lease and contract maintenance was flat, but was up 4%, excluding foreign exchange.

Commercial rental revenue decreased by 15%, or down 11% excluding foreign exchange, reflecting a slowdown in the global economy. Gains from the sale of used vehicle were lower by $1 million, reflecting fewer units sold out of a smaller average used vehicle inventory.

Net before tax earnings in fleet management were down by 15%. Fleet management earnings, as a percent of operating revenue, were lower by 170 basis points, to 11.7%.

FMS earnings were negatively impacted by commercial rental results and foreign exchange. These negative impacts were partially offset by improved contractual business performance and accretive earnings from our acquisitions.

Turning to the supply chain solution segment on page six, total revenue decreased 35%. This is largely due to a change to net revenue reporting on subcontracted transportation business with one customer that was previously reported on a gross basis. The reporting change did not impact operating revenue or earnings.

Operating revenue was down by 13% due to lower automotive volumes and an unfavorable foreign exchange rate impact of 7%.

Fourth quarter net before-tax earnings in supply chain were 21% lower than the prior year. Net before-tax earnings as a percent of operating revenue declined 50 basis points to 5.1%. Supply chain's earnings were negatively impacted by lower international operating results and, to a lesser extent, by lower automotive activity. These impacts were partially offset by reduced compensation costs.

In dedicated contract carriage, total revenue was down by 13% and operating revenue was down by 12%. The revenue decline was related to non-renewed contracts, lower volumes and lower fuel costs passed through to customers. Net before tax earnings in DCC improved by 4%.

Earnings in the quarter benefited from improved operating margins and efficiencies. DCC's net before tax earnings, as a percent of operating revenue, were up by 160 basis points, to 10.3%.

Page seven highlights key financial statistics for the fourth quarter. I already reviewed our quarterly revenue and EPS results. The average number of diluted shares outstanding for the quarter was down by 2.6 million to 55.5 million shares. In December of 2007, we announced both a $300 million discretionary share repurchase program and a 2 million share anti-dilutive repurchase program.

During the fourth quarter we didn't repurchase any shares under either program, in accordance with our prior announcement that these programs were temporarily caused due to unusual credit market conditions. To date, we have not resumed these programs and we continue to monitor market conditions for potential continuation in the future.

Remaining availability under the $300 million program totals $130 million. Remaining availability under the 2 million share program totals 637,000 shares. As of December 31 there were 55.7 million shares outstanding.

The fourth quarter 2008 tax rate was 67.9%, as compared to 35.6% in the prior year period. The current period tax rate reflects the impact of non-deductible restructuring charges partially offset by the reversal of tax reserves. The prior year tax rate reflects the benefit from a change in Canadian tax law. So excluding these items in both years, the comparable tax rate would be 37.9% in the fourth quarter 2008, as compared to 38.7% in the prior year.

Page eight highlights key financial statistics for the full year. Operating revenue was up by 1%. Comparable earnings per share were $4.49, up 7% from $4.21 in the prior year. The average number of diluted shares outstanding were 56.8 million, down by 3 million shares. Return on capital, which is calculated on a rolling 12-month basis, was 7.3% versus 7.4% in the prior year.

I'd like to turn now to page nine to discuss our fourth quarter results for the business segments. In Fleet Management Solutions, total revenue decreased 10% primarily due to foreign exchange and lower fuel costs passed through to customers. Operating revenue, which excludes fuel, was down 4%, but was up 1%, excluding foreign exchange. Lease revenue was flat, but was up 4% excluding foreign exchange, driven primarily by our recently closed acquisitions.

Miles driven per vehicle per work day on U.S. leased power units were down 6% versus the fourth quarter 2007. Contract maintenance grew by 2%, or by 4% excluding foreign exchange. The revenue increase reflects continued new sales to the private fleet market, which resulted in an increase in the number of units under contract maintenance agreements.

Rental revenue decreased 15%, or 11% lower when excluding foreign exchange. U.S. rental revenue declined by 10% due to a 5% smaller average fleet and a 2% reduction in pricing on power units. U.S. commercial rental utilization on power units was 70.8 % down 580 basis points from 76.7% in the fourth quarter 2007. We also saw softer demand in the U.K and Canadian markets. Fleet Management Solutions earnings were down 15% or 12% excluding foreign exchange due to lower commercial rental results partially offset by improved contractual business performance.

In Supply Chain Solutions total revenue was 35% lower in the quarter largely due to the change from gross to net revenue reporting I discussed previously. SCS operating revenue excludes subcontracted transportation and therefore excludes the impact of this change. SCS operating revenue is down 13% reflecting lower automotive volumes and an unfavorable foreign exchange impact of 7%. SCS net before tax earnings declined $3.9 million for the quarter. Net before tax margin was 5.1% down 50 basis points from the prior year but up 140 basis points from the third quarter 2008.

Earnings were negatively impacted by lower international results and to a lesser extent by lower automotive revenue partially offset by lower compensation costs. In dedicated contract carriage total revenue is down 13% and operating revenue is down 12% due to non-renewed contracts, lower volumes and lower pass-through fuel costs. DCC’s net before tax earnings were up by 4%. Net before tax margin increased by 160 basis points to 10.3%, due to improved operating results and efficiencies.

Total Central Support Services costs were down by $6 million due primarily to lower compensation cost this year and higher severance cost in the prior year. The portion of Central Support costs allocated to the business segments and included in the segment net earnings was down $700,000; the unallocated share, which is shown separately on the P&L, decreased by $5.3 million. Net earnings were $10.6 million including restructuring and other items of $64 million. Comparable net earnings were $60.3 million as compared to $68.3 million in the prior year.

Page 10 highlights our full year results by business segment. In the interest of time I won’t review these results in full detail but will just highlight the bottom line results. Comparable full year net earnings were $254.8 million as compared to $251.9 million in the prior year and this represents an increase of $2.9 million or 1%. And at this point I’ll turn the call over to our Chief Financial Officer Robert Sanchez to cover several items beginning with capital expenditures.

Robert Sanchez

Thanks, Greg. Turning to page 11, full year gross capital expenditures totaled approximately $1.3 billion up by $74 million from the prior year. This was driven by higher spending on contractual leased vehicles of $86 million partially offset by lower planned spending on transacttional commercial rental vehicles of $48 million. We realized proceeds primarily from the sale of revenue earning equipment of $265 million down by $109 million from the prior year. This decrease mainly reflects the planned reduction in units sold as a result of having a smaller used vehicle inventory.

In 2007 we executed $150 million sale lease back but did not have a sale lease back in the current year-to-date period. Including proceeds from sales and the 2007 sale lease back net capital expenditures were approximately $1 billion up by $333 million from the prior year. We also spent $247 million on three fleet management acquisitions closed in 2008, Lilly in the northeast U.S., Gator in Florida and Gordon in Philadelphia as well as supply chains acquisition of CRSA Logistics.

Turning to the next page you’ll see that we generated cash from operating activity of approximately $1.3 billion for the year up by $153 million from the prior years. This increase was mainly due to reduced working capital needs from improved accounts receivable collections and lower cash taxes. These increases were partially offset by a reduction in net earnings.

Depreciation increased largely due to spending on contractual leased vehicles primarily from acquisitions. Including the impact of used vehicle sales we generated approximately $1.6 billion in total cash down by $109 million from the prior year. The decline was primarily due to the $150 million sale lease back in the prior year.

Cash payments for capital expenditures were approximately $1.2 billion down by $83 million versus the prior year. Including all capital spending the company generated $349 million of positive free cash flow in the current year. This was down $26 million from the prior year which included the $150 million sale lease back.

On page 13, total obligations of approximately $3 billion are up by $72 million as compared to the year end 2007. The increased debt level is largely due to spending on acquisitions and net stock repurchases. Balance sheet debt-to-equity was 213% as compared to 147% in the end of the prior year. Total obligations as a percent of equity at the end of the quarter were 225% versus 157% at the end of 2007.

Our equity balance at the end of the quarter was $1.35 billion down by $543 million versus the year end 2007. Equity was reduced due to an increase of $332 million in our pension equity charge largely as a result of the declining market values in our pension investment portfolio. I’ll discuss our pension plan in more detail in a few minutes.

Equity was reduced due to the share repurchases of $256 million, currency translation losses of $181 million and dividend of $52 million. These combined items more than offset our net earnings for the year. At this point I’ll hand the call back over to Greg to provide an asset management update.

Greg Swienton

Thank you, Robert. Page 15 summarizes key results in our U.S. asset management area. At year end our used vehicle inventory for sale was 6,300 vehicles, down slightly from the prior year but up by 1,700 units from the end of the third quarter. The increase from the third quarter is due to both seasonal outsourcing of rental units and softening rental and used vehicle demand trends.

We sold 3,200 units during the quarter, down 42% from the prior year on a smaller average available inventory. As you may recall in the fourth quarter 2007 we sold a large number of used vehicles at whole sale levels in order to substantially reduce the size of our rental and used vehicle fleets. In the fourth quarter 2008 we sold fewer units but sold a larger proportion through our retail outlets where we received better pricing.

Proceeds per vehicles sold were up by 5% on tractors as compared to the fourth quarter 2007 primarily due to the larger percent sold at retail prices. Proceeds per unit on trucks were unchanged versus the fourth quarter 2007. Both truck and tractor proceeds per unit however, declined by 7% to 8% from the third quarter reflecting softening pricing levels as well as a change in the types of units sold.

At the end of the quarter approximately 7,600 units were classified as no longer earning revenue. This was up only by 200 units from the prior year but it was up by 2,000 units from the third quarter due to a higher used vehicle inventory. We expect our used vehicle inventories to be modestly up from current levels during 2009. Our total U.S. commercial rentals fleet in the fourth quarter was down on average by 5% from the prior year. We continued to reduce our rental fleet during the quarter as a result of softening demand and we will continue to closely monitor and respond to market conditions as they evolve.

Let me now move into a discussion of our 2009 outlook. Pages 17 through 19 highlight some of the key assumptions in our 2009 plan and the most likely opportunities and risks for the business related to these assumptions. Our 2009 plan does not anticipate any recovery in the global economy this year. In fact, we expect a continued very weak economy with additional contraction. This results in difficult comparisons for us versus 2008 especially in the earlier part of the year. The key risk to our overall economic outlook would be an even more severe decline than we’ve already anticipated.

Our forecast assumes interest rates will remain at current levels. Our forecast results would benefit if long term interest rates declined further due to an easing in the credit environment. However, further rate volatility would be a negative impact to our outlook.

We anticipate that the current unfavorable environment for foreign exchange, which impacted our fourth quarter results, continues throughout 2009. A stronger U.S. dollar would have a negative impact primarily on reported revenue from the international markets we serve.

As Robert will outline shortly we expect to generate positive free cash flow again this year. There are several potential legislative measures that may be enacted related to pension plans and tax laws and it is possible that this legislation would result in our free cash flows above our current forecast. If we elected to make additional contributions to our pension plans beyond the levels included in our forecast, however, this could reduce cash flow for the year.

Our current EPS projection assumes that we don’t resume our share re-purchase program in 2009. We continue to monitor the credit environment and consider other factors related to the re-purchase program. Our EPS forecast would increase if we decided to resume the program this year.

On page 18 in Fleet Management we anticipate slowing contractual net sales due to the weak global economy. While downsizing of customers fleets beyond our expectations would negatively impact our outlook, any acquisitions that we haven’t announced are not included in our forecast and would benefit our EPS projection.

We’re assuming significantly lower demand in the transaction of commercial rental area with lower price levels. Our projections would be hurt by weakening beyond the levels I’ll outline in a few minutes.

In the used vehicle sales area in 2009 we expect to sell a similar number of used vehicles as in the prior year. We do anticipate however, that the weak economy will result in lower pricing levels on units sold as well as higher carrying costs. We expect our used vehicle inventory to be modestly up from current levels; additional softness beyond our forecast range could negatively impact used vehicle pricing and results. Given the backdrop of a much lower demand environment we’ve heightened our focus on cost reduction opportunities particularly in the maintenance and overhead spending areas.

Turning to the next page 19 in Supply Chain and Dedicated Contract Carriage we anticipate lower overall volumes with our existing customer base and significant volume reductions with our automotive customers. We’ve already reduced our exposure to the automotive industry and have a strategic objective to increase our penetration of non-automotive segments. We’re looking at both organic sales and acquisition opportunities to achieve this objective. As always, any additional acquisitions that haven’t been closed are not included in our forecast.

A weaker than expected economy could result in softer freight demand, decreased volumes and plant closures with existing accounts. We will be paying close attention to these areas throughout the year and implementing appropriate mitigating actions if needed.

We have a heightened focus on customer retention and new business development in both supply chain and DCC. While the economy has the potential to drive additional volume reductions in lost business, conversely, we may benefit from additional customer outsourcing as companies look to reduce their cost in this environment.

As we announced in December we’ve taken proactive steps to exit underperforming international markets and contracts. We expect these actions to proceed [break in audio] year. These actions will improve our EPS outlook primarily in 2010 due to the timing of these closures which will occur throughout the current year.

Finally our forecast assumes an increased impact to Ryder from potential customer bankruptcies in these segments. Significant negative impacts of one or more large customer bankruptcies however, could adversely impact our projections.

On page 20, turning to key financial statistics for our 2009 forecast, we expect operating revenue to decline by 5% to 11% in 2009. Comparable earnings are forecast to decline by 25% to 41% to a range of $151 million to $190 million in 2009.

Comparable earnings per share are expected to decrease by 24% to 40% to a range of $2.70 to $3.40 in 2009 as compared to $4.49 in EPS in the prior year.

Reported EPS are forecast to be $2.60 to $3.30 per share versus the $3.52 reported in 2008. This $0.10 EPS difference versus our comparable $2.70 to $3.40 I already mentioned is due to carryover restructuring charges for actions we already announced in the fourth quarter 2008.

Our average share count is forecast to decline to $55.9 million diluted shares outstanding from $56.8 million in the prior year. The share count decline stems solely from the rollover impact of the portion of the $300 million share re-purchase program that was executed in 2008. We haven’t factored any impact from the potential resumption of this program into our projections since we haven’t made a decision to date to restart the program.

We project a tax rate of 41% down from 42.9% in 2008. Our return on capital is forecast to decrease from 7.3% in 2008 to a range of 5.8% to 6.8% this year due to lower earnings.

Page 21 outlines our growth expectations by business segment. We’ve shown growth rates both on an as reported basis and excluding the impacts of foreign exchange and fuel in order to help identify some of the drivers of our projections.

In fleet management contractual revenue growth in lease and maintenance is forecast to be up by 1% or up by 4% excluding foreign exchange. While there’s relatively more uncertainty around transactional commercial rental demand, we’re anticipating a revenue decline of 15% or 12% excluding foreign exchange.

FMS operating revenue which by definition already excludes fuel is forecast to be down 2%. If you also exclude the foreign exchange FMS operating revenue is expected to be up 1% as higher contract revenue fully offsets lower transactional rental revenue.

Supply chain operating revenue is expected to decline by 20% or by 13% excluding fuel and foreign exchange impact. The forecasted revenue decline is driven by significantly lower volumes especially in the automotive industry, as well as due to our announced exit from certain international markets and contracts partially offset by new sales activity. Dedicated contract carriage operating revenue is forecast to decline by 10% or by 4% excluding fuel. This forecast reflects lower volumes partially offset by new sales activity.

Page 22 provides a waterfall chart outlining the key changes in our comparable EPS forecast from 2008 to 2009. The weak global economy is expected to result in significant impacts to our transactional rental and used vehicle sales businesses. Each of these areas is forecasted to have a negative impact of $0.50 to $0.60 per share in 2009.

Both the economy and industry-specific issues related to our Supply Chain automotive customer base are expected to cause a negative EPS impact of $0.25 to $0.35 this year. We anticipate improvements in several areas to partially offset these significant negative headwinds. The headcount reduction of around 700 positions that we announced in December will result in additional EPS of $0.40 in 2009. We expect a rollover benefit from both the acquisitions that have been closed and the shares that have been re-purchased to date of $0.08.

As I mentioned earlier we don’t include any potential benefits from additional acquisitions or the resumption of the share re-purchase program in our forecasts. The remaining improvements in our plan are anticipated to come from revenue growth, operational improvements and other cost reduction initiatives. The net benefit of these items is forecast in a range of $0.13 to $0.53 per share. Taken together these operational items are forecast to result in comparable 2009 EPS of $3.55 to $4.25 per share before including the impact of several non-operational items.

The non-operational items include pension, foreign exchange and taxes all of which we expect to be headwinds this year. The most significant of these is pension expense which we forecast to increase by $0.69 per share. Robert will review this in more detail on the next page. In addition we expect foreign exchange to result in a negative $0.11 impact and taxes to result in a negative $0.05 impact. So including these items our 2009 comparable EPS is forecast to be $2.70 to $3.40 per share.

I'll now turn it over to Robert again to cover the next few pages.

Robert Sanchez

We wanted to touch on our pension expense forecast due to the significant increase projected for this year. As a reminder, we froze our U.S. pension plan for most employees effective January 1, 2008. As a result most U.S. employees are not accruing new benefits under the plan; however, they retained benefits accrued prior to the termination date.

We also froze our Canadian pension plan for most employees effective January 1, 2010. In 2008 our global pension expense was $3 million and we forecast this to increase to $65 million this year. The major driver of the increase was the decline in the asset value in our plans due to the overall market's performance in the latter part of 2008. The actual return on plan assets is below the assumed return and this item alone caused a $71 million increase in pension expense.

A change in the discount rate, principally in our international plans, will benefit pension expense by $15 million this year. There were several other minor impacts as well with the reduction in the expected return assumption increasing expense by $5 million, and the cash contributions to the plans reducing expense by $4 million. For those who are interested we plan to publish a pension white paper in the next few days which will include much more detail related to our pension expense.

The next page highlights the margin targets in each of our segments at the mid-point of their projected ranges. In 2009 on the basis of segment net before tax earnings to operating revenue we're projecting FMS margins to decline by 340 basis points to 9.7%. This is driven largely by the significant impact we anticipate from higher pension expense as well as the transactional, rental and used vehicle businesses, partially offset by cost reduction and other initiatives.

We're forecasting Supply Chain margins to remain stable at 3.2%. This is driven primarily by negative volume impacts particularly in the auto segment partially offset by cost reductions and other initiatives. We won't see the full benefit of the margins of exiting certain international markets and contracts this year as these closures will occur during the course of the year.

Dedicated margins are expected to improve by 40 basis points to 9.6%. An upgraded contract portfolio along with improved operations and other items are expected to more than offset the volume-related impact in this segment.

Page 25 provides detail regarding our capital spending plans. Our capital forecast is comprised of two pieces; capital that is spent to replace vehicles which will result in no net increase in revenues and capital spent on growth that will increase the revenue base of the company.

In 2009 replacement capital for full service lease represents the bulk of our spending and is expected to be between $780 million and $855 million. The number of leases up for renewal is somewhat above the average for this year. However, we expect to meet some of this demand through increased lease extensions. In addition, we'll also focus on opportunities to redeploy used vehicles and leased vehicles from the rental fleet.

Growth capital for lease is forecast at $20 million as new outsourcing activity driven by our sales initiatives is largely offset by contraction with existing customers related to the economy. The growth portion of our capital is project to result in $8 million of higher reported annual lease sales, lease revenue. Due to the slow global economy we don't plan to spend any new capital in commercial rental this year.

Turning to page 26 we're forecasting total gross capital spending in the range of $900 million to $975 million down by approximately $300 million to $350 million from almost $1.3 billion in 2008. Proceeds from sales of primarily revenue-earning equipment are forecast at $255 million, down by $10 million from last year. As a result net capital expenditures are forecast at $645 million to $720 million, down by approximately $300 to $350 million from the prior year.

Free cash flow is forecast at $325 to $400 million. The change from the prior year's free cash flow of $349 million is due to the lower net capital expenditures offset by lower earnings, a forecasted increase of $99 million in cash taxes and a forecasted $80 million in increased pension expense contributions. Based on these projections and including the $81 million paid to date for the recently acquired Edart acquisition total obligations to equity are forecast at 178% to 188% down significantly from the 225% at the prior year end.

At this point I'll turn the call back over to Greg to review the EPS forecast.

Greg Swienton

On page 27, as I previously mentioned, our full year comparable 2009 EPS forecast is for a range of $2.70 to $3.40 per share. We're also providing a first quarter EPS forecast of $0.40 to $0.50 versus a comparable prior EPS of $0.96 last year.

First quarter comparisons are more challenging in this softer economic environment as our earnings were relatively stronger in the first half of 2008 during a much better environment. Additionally, we expect particularly challenging comparisons in supply chain due to declines in auto production levels in the first quarter 2009.

Many transportation companies have elected not to provide revenue or earnings forecasts in the current environment. We however, are continuing to provide this information due to the strength and relatively higher visibility of the substantial contractual portion of our business. As I discussed earlier on the EPS waterfall chart there is more uncertainty related to the transactional portions of our business and as a result our EPS forecast range is significantly wider than in recent years.

In turning to the next page let me briefly summarize the key points in our 2009 plan on page 28. We're working to manage through the negative impact of last year's stock market performance on our pension plan, as well as the impact of the weak global economy on our transactional, commercial, rental and used vehicle businesses.

As a result we're focused on implementing cost management and restructuring opportunities to address our results. Even in this soft economic and transportation environment we continue to convert new customers to outsourcing solutions with Ryder in all of our business segments.

We're also strongly focused on customer retention and continuing our initiatives in the sales and marketing areas. We'll benefit from our prior acquisitions and continue to evaluate additional acquisition opportunities. The combination of organic sales and acquisitions should allow us to continue to grow contractual FMS revenue excluding the impact of foreign exchange.

In Supply Chain we've taken and will continue to take steps to reduce our exposure to the automotive industry through increasing diversification of industries vertical-served. We've also increased our focus on Dedicated Contract Carriage where we see strong growth opportunities and solid margins. And finally we're taking the appropriate steps to manage our capital spending and fleet size in this soft environment. These steps will result in a continued strong balance sheet and positive free cash flow.

That does conclude our prepared remarks this morning. We've covered a lot of material in today's call so I'd ask that in the interest of time that you limit yourself to two questions each. If you then should have additional questions you're welcome to get back in the queue and we'll take as many calls as we can.

At this time I'll turn it over to the operator to open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question today is from David Ross – Stifel Nicolaus & Co.

David Ross – Stifel Nicolaus & Co.

First question is on dedicate, Greg, I guess it was a little bit worse than we had expected on the revenue side. What was I guess the reason the customers did not renew? Was it customer bankruptcies? Was the dedicated operation not what they needed at this time? Could you talk a little bit more about that?

Greg Swienton

I think that you did see the earnings declines, I mean the revenue decline, but we had an earnings increase by 4% so that continues to increase. I would say that perhaps in the cases of some lost business, apart from the lost volume from the customers we retained, you have a pretty competitive environment out there. And with truckload and LTL with a lot of capacity, you can expect that there is a lot more competition and a lot more rate issues and some of that business we're not retaining. John Williford if you would want to add anything, you can.

John Williford

The only thing to add to that is the – like in prior quarters, the customers we lost tended to be customers with lower operating margins than average and so in the fight in the re-bids on these customers, we weren’t as aggressive. We certainly weren’t willing to go into a loss on these customers and those are the accounts we’ve tended to lose.

David Ross – Stifel Nicolaus & Co.

And then on the supply chain side, you mentioned diversifying away from auto. Currently I guess you have high tech telecom and consumers as the other sectors. Are you just beefing up efforts in those areas or are you branching out to new verticals?

Greg Swienton

We are branching out to more verticals and we’d like to have a greater presence in those, which I think is the right way to diversify. And John, if you would like to add anything?

John Williford

We’re starting a retail CPG vertical and that’s where CRSA acquisition fits in. You can see the guy we hired in Asia comes out of that industry segment and we expect to hire someone to lead this vertical in the next couple months. And yes, you’re right, we are beefing up our – adding energy into coming out with new products in the existing verticals that we have that are all ready pretty strong like high tech and aerospace.

Operator:

Your next question is from John Langenfeld – Robert W. Baird.

John Langenfeld – Robert W. Baird

On the commercial rental side, you talk about this incremental hit to earnings in 2009 of being, what is it, $0.50 to $0.60? Could you compare that to what do you think the incremental hit was in 2008 on that one?

Greg Swienton

Tony, do you have some ballpark estimates?

Anthony Tegnelia

John, it was more so in the 25 to 30 million range, in that if I compare '08's decline to '07. So it’s pretty much at the right-hand side of the range, it will be double in '09 versus '08 compared to what we saw in the '07 to '08 period and that’s because of the double dip that we’re experiencing now, which is much more severe than a more normal cyclical decline.

Greg Swienton

So we expect a lower fleet and some more pressure on pricing.

John Langenfeld – Robert W. Baird

Can you explain or just talk a little bit about the qualitatively retention trends, extension trends, what you’re seeing with the pipeline as well on the leasing side?

Anthony Tegnelia

I think on the pipeline we continue to see a growth but as I said in earlier calls, the pipeline is really aging because customers are deferring some of their decisions until they have some better feel of how their businesses will perform over the next four to three quarters, something in that range. As a result, we are seeing more of a desire for extensions for units to come to term.

Typically our extensions are 12 to 16, 18 months and their preference is to make, in that regard, lesser of a longer term decision. So we do plan on more extensions in '09 because of that and that’s good for us during this fiscal year '09 because of what’s happening in the environment and our desire also to preserve capital .

We are also moving some of our rental units to lease as well so that we more quickly adjust that fleet level to demand and those would go into lease and also preserve some capital. But the pipeline does remain strong even though they are taking a bit more time to make decisions and we would like to see more extensions in '09, which is consistent with how the customers are thinking as well.

Operator:

Your next question is from Edward Wolfe – Wolfe Research.

Edward Wolfe – Wolfe Research

First, on the guidance for first quarter, I mean it hit the mid range of 40 to 50. I’ve got to assume contribution margins are cut in half basically in the first quarter from, let’s call it 8.3% a year ago, down to somewhere in the 4% to 4.2% range. Is there something that’s particularly egregious that’s going on in first quarter? Is the pension expense mostly going on during that period, what’s going on with that guidance?

Greg Swienton

The pension expense is equally spread throughout the year, so it’s the same impact in each month and each quarter. It has a bigger impact in the first quarter where you generally have lower revenue earnings to begin with.

We are also facing stronger comparisons especially in Fleet Management but I think if there’s probably really, really one big impact, it’s in the automotive production declines, which really hit in the first quarter. And we will be struggling to earn profitability in margins in the Supply Chain due to that in the first quarter.

Edward Wolfe – Wolfe Research

That’s very helpful. The second question is, if I look on slide 22, where you kind of broke up the ups and downs. For used vehicle sales, you’ve got a $0.55 hit, which if I reverse out, is about $49 million change year-over-year and I’m just trying to understand the gain on sales for all of '07 were $39 million. So are the gains on sales going to become a negative or is this spread in other expense lines?

Robert Sanchez

The gains will not become a negative. What you’re seeing there for the most part, that 50 to 60 million amount is pretty much a 50/50 split between a reduction in gains; we still will have positive gains in '09 as I had said and half of that is from reduction in gains and also half is because of our carrying cost increases. As the proceeds for vehicles decline, we re-value the inventories that we have on hand. So that’s about a 50/50 split of that $50 to $60 million but there will be positive gains in 09.

Edward Wolfe – Wolfe Research

Is some of that in depreciation?

Robert Sanchez

Somewhat yes.

Operator

Your next question is from John Barnes – BB&T Capital Markets.

John Barnes – BB&T Capital Markets

Greg, as you’ve looked at the credit markets and given what you guys do, have you given any thought to actually hitting the debt markets? And how do you feel – the credit markets, are they open to you at this point?

Greg Swienton

I’d say that the credit markets are open to us. The commercial paper continues. The medium term notes are open to us. We still don’t like the rates. I think they’re still a little bit high. Robert, would you like to comment further?

Robert Sanchez

No, I think that’s right. If we need to go out to market for a medium term note we can. We’re not too excited about the rates where our bonds are trading now, so right now, what has turned, I think more favorably over the last month or so is the commercial paper rates have come down versus where they went in September and certainly also in November. So we have gotten some help there but medium term notes are still certainly at rates that we’d rather not go out in.

John Barnes – BB&T Capital Markets

And then as a follow-up to that, first, can you just elaborate a little bit on when you think you might get back in the market on your share re-purchase and if you don’t like the prices that your medium term debt's trading at right now would you consider buying some of that back instead of equity?

Greg Swienton

I think the decision to re-enter will really depend on the health and availability generally of liquidity in the marketplace and that will have a great deal to do with it. I think when we feel comfortable enough that money is freed up and the rates are good, we’ll reconsider it. That I don’t see in the near term. And Robert, if you’d like to comment further?

Robert Sanchez

No, that’s right. And also in terms of buying back our own debt, in this environment that’s not something we’re looking to do, certainly as the markets are still pretty tight. Plus we do have commercial paper balances out there that we can work with. So, we do still have a lot of capacity in terms of available borrowing and that helps – that certainly helps us through the year. We don't see those balances dropping a whole lot throughout the year, so we think we’re still in pretty good shape as it relates to liquidity.

Greg Swienton

The other thing I’d mention is that we’d still want to have some capability for appropriate acquisition. We want to maintain that possibility and someday this economy is ultimately going to turn around as they all do, and we want to be in a good strong market position.

Operator

Your next question is from Art Hatfield – Morgan, Keegan & Company, Inc.

Art Hatfield – Morgan, Keegan & Company, Inc.

I’m with Morgan, Keegan. Thanks for your time, gentlemen. On the asset management update, you note that proceeds for [Uniform] tractors were up 5% and that for trucks it was flat in Q4 compared to the prior year. But yet your inventories improved quite substantially sequentially from Q3. Are you kind of hanging on to price too much do you think? Or should we expect that pricing to really come in over the next several quarters?

Greg Swienton

I’ll let Tony address that.

Anthony Tegnelia

Well, we did see a bit of an uptick in the fourth quarter for two reasons. We were unusually low in the third, but also we did some accelerated out servicing of our rental fleet towards the end of the third and into the fourth quarter particularly because we saw the deteriorating demand for rentals. So that did spike it up a little bit in the fourth quarter from the rental fleet. We will see as we go into '09 deterioration in the average proceeds for trucks and also for tractors. More so for trucks then we do see for tractors, and that’s because of a very strict asset management policy that we have.

We do not want the used vehicle inventories to swell throughout the year or particularly at year end '09 because of such an uncertainty going into 2010. So you will see some deterioration those proceeds as we maintain the inventory levels pretty much at the $6,000 to $7,000 range as we near year end '09.

Art Hatfield – Morgan, Keegan & Company, Inc.

And then additionally, I guess this would probably be for you too, Tony, on the early terminations, I know you talked about the extensions, but that was down year-over-year in '08, but did you see that number accelerate in the back half of the year?

Anthony Tegnelia

We really didn’t see it accelerate in the back half of the year. And it was down in '08 compared to '07. We’re looking more so in '09 pretty much the same level that we saw in '07. We are getting a number of requests from customers to reduce their fleet sizes and their average mileage per unit does decline somewhat as well as the freight demand really falls.

So you may see some role determinations rise a bit in '09, but we’re prepared for that with our asset management structure and how we manage our used vehicle sales operation.

Greg Swienton

It’s been pretty well under control. When you look at the chart on the appendix on page 40, if you've got the presentation there, both early terminations and early replacements are at lower levels then they were in '07. So I think it’s been pretty well managed.

Operator

Your next question comes from Alex Brand – Stephens, Inc.

Alex Brand – Stephens, Inc.

I may have missed this on the guidance, but can you run through again what your FMS contract renewal assumptions are and especially tied into that what kind of rate pressure are you expecting on those renewals?

Greg Swienton

We historically have not shared for competitive purposes actual renewal rates. Tony can comment about what kind of pressure he’s seeing in the marketplace generally.

Anthony Tegnelia

Well, I think generally we are seeing some real pressure in the marketplace. As customers do have the desire in some instances to reduce the size of their fleet. There is a lot of competition to try to maintain the positions that people have with those customers. But for the most part we’re projecting our organic growth rate in '09 to be largely the same as it was in '08.

And we do have the strong pipeline. We have over 300 commissioned sales people out there, all that have very hearty quotas, so we think we’ll fare well on the contract side of the business as we go into '09.

Alex Brand – Stephens, Inc.

It sounds like there’s going to be a white paper on pension expense so I can take a look at that in a couple of days. But can you just – I want to make sure I understand the cash for the pension expense make up this year is the $67 million, and then does that get you fully funded?

Anthony Tegnelia

No, that won’t get us fully funded. But the cash we’ve got in the plan for the year is $100 million. And that is in the current environment that would get us to about a 65% funding ratio for ERISA purposes. So depending on what happens with the legislature out there, that funding percentage may be higher if some of the legislation that’s out there gets passed.

The only other – the other thing I’d point out on cash flow is that there’s a part of the stimulus package that’s out there. There’s a bonus depreciation legislation which really ended in December, but if they’d extend that, that would give us an improvement in free cash flow about $70 million. So that’s an upside on the free cash flow.

Operator

Your next question is from Todd Fowler – Keybanc Capital Markets.

Todd Fowler – Keybanc Capital Markets

Greg, back on the waterfall slide the improvement that you have in revenue and operational improvements in 2009 to $0.13 to $0.53. Can you talk a little bit about what some of the examples would be that would drive that, and how you end up at the higher range versus the lower range that you’ve given for the full year.

Greg Swienton

Sure. You can expect new sales in there, so in this environment we think we’ve got good sales opportunities and good business. But there’s a range, it depends on how much we can close, when – how fast it will close in the year because that has everything to do with when the revenue actually begins.

In addition, we’ve got assumptions for what we can save in the way of costs and efficiencies and it depends both to degree and the timing on when those would be implemented. So it’s hard in this environment to pinpoint all that because there’s so much uncertainty.

And there’s a little bit of risk factor in there as well. We’ve continued to get more news in automotive that there’s some downturns and slowdowns in production that three weeks ago we wouldn’t have forecast. So there’s a lot in the mix and that’s the reason for the breadth of that range.

Todd Fowler – Keybanc Capital Markets

Is the bigger driver their sales opportunities and organic growth? Or is the bigger driver their more efficiencies and cost saves?

Greg Swienton

They may be fairly equal.

Todd Fowler – Keybanc Capital Markets

Okay, fair enough. And then for a follow-up on the cash flow, if you’re looking at the commercial rental suites with no capital expenditures or no improvements to the fleet this year, how long can you continue to hold off investing in the fleet?

What’s the age of the fleet and is that something that as you downsize and work through the fleet, that you don’t see CapEx requirements for the next 12 to 18 months, or is it something that once you get to the end of this year you’re going to have to reinvest maybe a little bit more heavily then historically to bring down the fleet age again?

Anthony Tegnelia

Well Todd, as we see demand in '09 we’re intending to reduce our truck fleet from 10% to 15%, our tractor fleet from about 5% to 10%. So that will bring us into the earlier part of 2010 which is one of the lowest level fleets we’ve had for some time. We can – we’ll be fine through '09 with that fleet reduction.

Getting into the season for 2010 there probably will be some CapEx getting into the season for 2010, which typically is about the May delivery time, but that will depend on the economic environment that we see going into 2010. So the demand continues to soften and continues to deteriorate.

We try very expeditiously using our UVF operations to have the right asset level calibrated with demand and so we’ll watch demand levels, decide what refreshment is required. Probably mid-2010 there’ll be some increases in capital expenditures, to refresh only though perhaps, not necessarily to increase the fleet at all.

Operator

Your next question comes from Edward Wolfe – Wolfe Research.

Ed Wolfe – Wolfe Research

Just a follow-up, in your guidance, Greg, you noted for the full year that you’re assuming that things don’t get better. What’s kind of your underlying GDP or industrial production or whatever you look at that you’re using?

Greg Swienton

GDP may be negative. Industrial production when you look at the ISM gauges and reports, they’ve been at low levels for quite some time so we don’t have a tight correlation to what GDP may be to a specific level of revenue earnings, etc.

But we’re thinking that for 2009 it will be – it would definitely be negative. Industrial production may be down 7%, 8%. Real GDP may be down 2.5%. That’s kind of broad numbers we’re looking at.

Ed Wolfe – Wolfe Research

Okay, so these are pretty grim based estimates in your opinion?

Greg Swienton

Yes, and until we see some evidence to the contrary that's the way we're going to plan it.

Ed Wolfe – Wolfe Research

Makes sense. I understand that.

Operator

Your final question is from John Langenfeld – Robert W. Baird.

John Langenfeld – Robert W. Baird

Two follow-ups, where did that commercial rental end the quarter? What was December down 20% or more?

Greg Swienton

In revenue?

John Langenfeld – Robert W. Baird

Yes.

Greg Swienton

We'll check the exact sheet.

Anthony Tegnelia

Rental revenue for the quarter was down about 7% overall for revenue pretty much. I'm sorry, it was down 10% – 10%.

John Langenfeld – Robert W. Baird

Maybe I'm misstating my question, the rental, the commercial rental was down 15% all in. I guess I'm wondering where it actually ended in the month of December. In the month of December was it a lot worse?

Anthony Tegnelia

Yes. I'm sorry, I thought you were speaking to the total quarter. There is no question that the demand for rentals is deteriorating meaningfully and it was really 17% to 20% in the month of December. And we will continue to see throughout all of '09 more than likely mid-teens decline in demand and therefore that will translate into revenue for the rental product line. And that is what's reflected in these numbers; that's why the waterfall has about a $50 million to $60 million decline, a decline in price levels and also a decline in demand and that's what's driving this $50 million to $60 million.

John Langenfeld – Robert W. Baird

And then the other question was how did the miles driven on leased tractors trend in the quarter?

Greg Swienton

I think we announced 6% reduction in miles. I think that was for all units. Are you asking specifically about tractors?

John Langenfeld – Robert W. Baird

Yes.

Greg Swienton

Yes. I don't have the breakdown.

Anthony Tegnelia

Generally speaking it will be about the same.

John Langenfeld – Robert W. Baird

About the same?

Anthony Tegnelia

About 4% to 6% for the tractors as well.

Operator

Thank you. At this time I'd like to turn the call back over to Mr. Greg Swienton.

Greg Swienton

All right. Well, I thank everybody for their paying attention to the two question limit and that worked out well. We got to everybody's questions. In fact some got back in queue, so we're a little bit over 12:00 noon. I thank you for your participation and your questions. Have a good, safe day.

Operator

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

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