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Executives

Robert S. Brunn - Vice President of Corporate Strategy & Investor Relations

Gregory T. Swienton - Executive Chairman and Chief Executive Officer

Art A. Garcia - Chief Financial Officer and Executive Vice President

John H. Williford - President of Global Supply Chain Solutions

Robert E. Sanchez - President of Global Fleet Management Solutions Business

Analysts

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Kevin W. Sterling - BB&T Capital Markets, Research Division

Peter Nesvold

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Alexander V. Brand - SunTrust Robinson Humphrey, Inc., Research Division

Edward M. Wolfe - Wolfe Trahan & Co.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

A. Brad Delco - Stephens Inc., Research Division

Dan Moore

Ryder System (R) Q4 2011 Earnings Call February 2, 2012 11:00 AM ET

Operator

Good morning, and welcome to the Ryder System, Inc. Fourth Quarter 2011 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objection, please disconnect at this time. I would like to introduce Mr. Bob Brunn, Vice President, Corporate Strategy for Investor Relations for Ryder. Mr. Brunn, you may begin.

Robert S. Brunn

Thanks very much. Good morning, and welcome to Ryder's fourth quarter 2011 earnings and 2012 forecast conference call. I'd like to remind you that during this presentation you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission.

Presenting on today's call are Greg Swienton, Chairman and Chief Executive Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Robert Sanchez, 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.

Gregory T. Swienton

Thanks, Bob, and good morning, everyone. Today, we'll recap fourth quarter 2011 results, review the asset management area and discuss our current outlook and the forecast for 2012. And as always after the initial remarks, we'll open up the call for questions. So let me begin with an overview of the fourth quarter results.

Beginning on Page 4, net earnings per diluted share from continuing operations were $0.92 for the fourth quarter 2011, up from $0.80 in the prior year period. The fourth quarter results include a $0.05 charge for restructuring costs related to the Hill Hire acquisition. Excluding this charge, comparable EPS was $0.97 in the fourth quarter 2011, up from $0.65 in the prior year. This is an improvement of $0.32 or 49% over the prior year period. Fourth quarter EPS was at the top of our forecast range of $0.92 to $0.97. We achieved strong results in Fleet Management with significantly better Commercial Rental performance, accretive acquisitions and improved Used Vehicle sales results. Supply chain generated strong earnings improvement driven by the TLC acquisition, favorable insurance claims development and new business.

Our total revenue grew 17% from the prior year and our operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, increased 16% with double-digit growth in all 3 segments. The increase in revenue reflects both the benefit of our recent acquisitions and organic growth.

Turning now to Page 5, which includes some additional financial statistics for the fourth quarter. The average number of diluted shares outstanding for the quarter declined by 300,000 shares to 50.7 million. During the fourth quarter, we repurchased approximately 153,000 shares at an average price of $50.21 under our 2 million share anti-dilutive program, which expired in December 2011. A new 2 million share anti-dilutive program has been approved with an expiration date of December 2013. There has been no activity to date under the new program.

As of December 31, there were 51.1 million shares outstanding, of which 50.7 million are currently included in the diluted share calculation. The fourth quarter 2011 tax rate was 34.8%. This compares to 16.4% in the prior year, which last year reflected a favorable tax settlement of prior tax years and an expired statute of limitations. Excluding these items in 2010, the comparable tax rate would have been 35.9% versus the 2011 comparable tax rate of 34.4%.

Page 6 highlights key financial statistics for the full year. Operating revenue was up by 16%. Comparable EPS from continuing operations were $3.49, up by 57% from $2.22 in the prior year. Adjusted return on capital was 5.7% versus 4.8% in the prior year, as growth in earnings outpaced growth in capital. And as anticipated, we now have a positive spread between adjusted return on capital and cost of capital of 20 basis points for the full year. And this represents an improvement in the spread of 150 basis points from the prior year.

I'd like to turn now to Page 7 to discuss some of the key trends we saw during the fourth quarter in each of the business segments. In Fleet Management, total revenue grew 13% versus the prior year. Total FMS revenue includes an 18% increase in fuel services revenue, reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes fuel, grew 12%, mainly due to higher Commercial Rental revenue and acquisitions.

Contractual revenue, which includes both Full Service Lease and Contract Maintenance, was up by 4%. Full Service Lease revenue grew 5% versus the prior year. The average lease fleet size increased 8% from the prior year's fourth quarter, largely due to acquisitions.

On an organic basis, excluding acquisitions, the global lease fleet increased sequentially from the third quarter by approximately 1,000 vehicles, reflecting both improved new lease sales activity and higher retention rates.

Miles driven per vehicle per day on U.S. lease power units were down 2.6% from the prior year, but were up slightly on a sequential basis from the third quarter. We've analyzed the small variance in mileage and do not see it as an indicator of softening lease demand. In fact, lease sales activity has remained strong.

We realized strong growth in Commercial Rental revenue of 38% reflecting improved global demand, a larger fleet and higher pricing. The average Rental fleet increased 31% and was up by 13% excluding the acquisitions. Global utilization on rental power units remained strong at 78.9%, up 100 basis points from last year. Global pricing on power units was up 8% versus the prior year. In Fleet Management, we also saw a stronger Used Vehicle results during the quarter, reflecting a continued strong demand environment. And I'll discuss those results separately in a few minutes.

Improved FMS results were partially offset by higher maintenance costs, investments in sales and marketing and higher compensation-related expenses. Earnings before tax and Fleet Management were up 41%. Fleet Management earnings as a percent of operating revenue increased by 180 basis points to 8.6% in the fourth quarter.

Turning to the Supply Chain Solutions segment on Page 8, both total and operating revenues were up by 26%. Revenue increased due to the Total Logistic Control acquisition in December 2010 and organic new business sold. Improved earnings in this segment were largely driven by increased revenues and favorable insurance development. In total, SCS earnings before tax were up by 44%. Supply Chain's earnings before tax as a percent of operating revenue increased by 70 basis points to 5.5% for the quarter.

In Dedicated Contract Carriage, total revenue was up by 29%, and operating revenue was up by 23%. This growth reflects the Scully acquisition and higher fuel cost pass-throughs. DCC's earnings before tax increased 7% versus the prior year. This increase was driven by favorable insurance claims development, partially offset by lower operating performance. As a result, DCC's earnings as a percent of operating revenue were down by 70 basis points to 4.8%.

Page 9 shows the business segment view of our income statement, which I just discussed, and is included in the package for your reference.

Page 10 highlights our full year results by business segment. In the interest of time, I won't review these results in full detail but will just highlight the bottom line results. Comparable full year earnings from continuing operations were $180.6 million, up by 54% from $117 million in the prior year.

And at this point, I'll turn the call over to our Chief Financial Officer, Art Garcia, to cover several items beginning with capital expenditures.

Art A. Garcia

Thanks, Greg. Turning to Page 11, full year gross capital expenditures totaled $1.76 billion, which is up $672 million from the prior year and is in line with previously expected levels.

Spending on leased vehicles was up $420 million from the prior year, mainly reflecting improved sales, as well as higher investment costs on new vehicles. Capital spending on Commercial Rental vehicles was $622 million, up $244 million due to both refreshment and planned growth of the rental fleet. Approximately $100 million of this rental spend was to replace rental vehicles that were transferred to the lease product line and signed on lease contracts with customers. So this portion of rental capital spending is really related to lease activity.

We realized proceeds primarily from sales of revenue earning equipment of $300 million, that's up $66 million from the prior year. This increase reflects higher Used Vehicle pricing for the full year, partially offset by fewer units sold. In addition, we received proceeds of $37 million from the sale and lease back of revenue earning equipment in the fourth quarter.

Including these sales, net capital expenditures increased by approximately $570 million to just over $1.4 billion. We also spent $362 million in 2011 on acquisitions, primarily related to the purchases of Hill Hire and Scully.

Turning to the next page. We generated cash from operating activities of just over $1 billion during 2011, that's up $14 million from the prior year. Higher earnings and depreciation net of gains more than offset the impact from changes in working capital. We generated approximately $1.4 billion of total cash for the year, up by over $100 million from the prior year due to higher Used Vehicle sales proceeds, as well as proceeds from the sale lease back.

Cash payments for capital expenditures increased by approximately $630 million to almost $1.7 billion. The company had negative free cash flow of $257 million for the year. Excluding a discretionary pension contribution of almost $50 million we made in the fourth quarter, free cash flow was in line with our prior expectations. Free cash flow was down $515 million from the prior year's positive free cash flow, due mainly to higher planned investments in vehicles that will generate revenue and earnings in 2012 and future years.

Page 13 addresses our debt-to-equity position. Total obligations of approximately $3.4 billion are up almost $600 million compared to year-end 2010. The increased debt level is largely due to higher vehicles capital spending and acquisitions. Total obligations as a percent to equity at the end of the year were 261%, up from 203% at the end of 2010 and at the low end of our target range of 250% to 300%.

Our leverage calculation was impacted by a pension equity charge that was determined at year end, based on planned discount rates and asset values. Due to lower discount rates and lower actual investment returns, year-end leverage increased by 30 percentage points due to our pension plans. This impact is greater than the 10 to 20 percentage points we estimated during our third quarter call.

Our leverage ratio is now back within our target range for the first time since 2000. Even at this level, we continue to have balance sheet flexibility to support expected organic capital spending and acquisitions activity.

Our equity balance at the end of the year was $1.3 billion, down by $86 million versus year-end 2010. The equity decrease was driven by net pension charge of $173 million, partially offset by earnings.

Before I turn the call back to Greg, I wanted to remind you that starting this quarter, we revised the consolidated view of our income statement to provide additional revenue and expense detail. Both the old and new version of our consolidated P&L is included in the earnings press release tables we published today. 3 years of quarterly history under the new format are included in the appendix to these slides and are also available for download on our website at investors.ryder.com by visiting the Interactive Analyst Center.

At this point, I'll hand the call back over to Greg to provide an asset management update.

Gregory T. Swienton

Thank you, Art. Page 15 summarizes that key results for our asset management area globally. At the end of the quarter, our global Used Vehicle inventory for sale was 6,300 vehicles, up by 1,100 units or 21% from the fourth quarter 2010 and is well within our target range. We sold 4,200 vehicles during the quarter, up 5%.

We saw a continued strength in Used Vehicle demand and pricing in the quarter. Improved demand is a result of both relatively better market conditions and the desire of some truck buyers to obtain pre-2010 engines. Stronger demand combined with less available inventory in the market has allowed us to up-price generally, and in the U.S. market to increase the proportion of retail sales where we realize better prices.

Compared to the fourth quarter 2010, proceeds per vehicle were up 29% on tractors and were unchanged for trucks. Excluding some older units in Canada that we took to the auction market, truck proceeds would've been 4% higher than the prior year. From a sequential standpoint, tractor pricing was up 5%. Truck pricing was down 3% sequentially versus the third quarter 2011 or down 1% excluding the Canadian auction units.

At the end of the quarter, approximately 8,900 vehicles were classified as no longer earning revenue. This was up by 1,700 units or 24% from the prior year and reflects an increase in lease replacement activity. The increase also reflects seasonal out servicing of older rental units, which we expect to continue in the first quarter. As expected, the number of lease contracts on existing vehicles that were extended beyond their original lease term declined versus last year although, they're still running somewhat above normalized levels.

This decline reflects an increase in new, full-term lease contract sales instead of lease extensions by customers.

Early terminations of leased vehicles declined by about 625 units or 17%. Early terminations were less than half what they were 2 years ago and were at the lowest level in the past decade. This continues to be a very positive indicator of improved lease demand.

Let me now move to a discussion of our 2012 outlook. And Pages 17 and 18 highlight some of the key assumptions in the development of the 2012 earnings forecast I'll review shortly.

Beginning on Page 17. Our 2012 plan anticipates a moderately improving overall economic and freight environment with higher new sales in all of our business segments. Pension costs will significantly increase in 2012 due to lower actual and expected pension investment returns. We expect that foreign exchange rates will reflect a continued strengthening of the U.S. dollar. This negatively impacts reported revenue, and to a lesser extent, earnings.

In the Fleet Management area, based on trends that started year, we're anticipating stronger new contractual sales and improving customer retention levels. This should lead to organic growth in the contractual fleet throughout 2012.

In Commercial Rental, we anticipate a higher demand and continued strong utilization with further pricing improvement during the year on a larger fleet. We'll also see a partial carryover benefit from the Hill Hire acquisition, which closed in June of last year.

In the Used Vehicle area, we expect that the number of vehicles sold will increase due to higher lease and rental replacement activity this year. We anticipate Used Vehicle pricing to be stable. Depreciation will benefit due to our annual residual review that incorporates improved vehicle pricing we realized in 2011. Overall, as margins are expected to increase due to organic growth, the depreciation change, as well as productivity initiatives. And this increase in margin will be partially offset by higher maintenance costs on a slightly older lease fleet.

Turning to Page 18, in supply chain we expect growth in revenue and earnings due to both new business and higher volumes. In our dedicated service offering, we're working on operational initiatives to drive improved earnings. As an additional note, as some of you may be aware, our supply chain segment provides logistics services to Kodak, which filed for bankruptcy on January 19. Our pre-petition trade receivables total approximately $3 million, most of which was outstanding at year end. Kodak is in the early stages of the bankruptcy process. However, we do not anticipate nonpayment of the pre-petition receivables. As such, no reserves have been set aside. This is subject, however, to their bankruptcy finalization. And if the situation changed from our current expectations, we could potentially incur a charge related to the bankruptcy.

Page 19 provides a summary of some of the key financial statistics in our 2012 forecast. Based on the assumptions I just outlined, we expect operating revenue to grow by 6% this year. Comparable earnings from continuing operations are forecast to increase by 14% to 17%, showing strong operating leverage on our revenue growth. Comparable earnings per share are expected to increase by 15% to 17% to a range of $4 to $4.10 in 2012 as compared to $3.49 last year.

Our average diluted share count is forecast to remain constant at 50.9 million shares outstanding. We project a 2012 comparable tax rate of 35.9%, below the prior year's rate of 36.7% reflecting higher earnings and lower tax rate jurisdictions. Our return on capital is forecast to increase from 5.7% in 2011 to 5.9% this year driven by higher projected earnings.

The next page, Page 20, outlines our revenue expectations by business segment. In Fleet Management, contractual revenue and lease and contract maintenance is forecasted to be up by 5%. This largely reflects improved organic growth, the impact of prior acquisitions, higher rates on new sales resulting from increased vehicle investment costs and the CPI rate increases.

In Commercial Rental, we're forecasting revenue growth of 17%. This is driven by a modestly improved economic environment, establishment of new rental customer relationships and use of rental by private fleet owners who don't want to purchase trucks themselves. The 17% increase in projected rental revenue reflects an 11% increase in the average fleet size and a 6% increase in price.

Supply chain operating revenue is expected to grow by approximately 2%, driven by organic new business activity and volume improvements.

Page 21 provides our waterfall chart outlining the key changes in our comparable EPS forecast from 2011 to 2012. In 2012, pension expense will be higher by $0.18, above our prior expectations of $0.01 to $0.06. The increase is driven by lower actual and future projected pension investment returns in the plans.

Next, we plan to make several strategic investments to support the long-term growth and profitability of our business. These investments mainly fall in the areas of enhancing the maintenance technology and processes in our shops, as well as sales and marketing. These strategic investments are expected to cost between $0.11 and $0.13 this year.

A stronger U.S. dollar is projected to lower EPS by $0.06 in 2012, but this negative foreign exchange impact is largely offset by a tax rate benefit of $0.05. We expect improved results in our Supply Chain Solution segment, which will include all dedicated activity in 2012. New sales, improved volumes and lower overhead costs are projected to increase EPS by $0.09 in 2012. The rollover benefit from the Hill Hire acquisition is expected at $0.14 to EPS this year.

In FMS, we reviewed and modified our residual value estimates to reflect the impact of higher Used Vehicle prices we saw last year, and the change in depreciation rates would benefit EPS by $0.22.

Our lease fleet size increased sequentially in the latter part of 2011, reflecting improved lease sales and renewal activity, while maintenance costs will be higher on a full year basis due to a slightly older fleet. Continued improvement in organic sales is expected to provide EPS growth of $0.13 to $0.17.

And finally, a larger Commercial Rental fleet and higher pricing is forecast to improve EPS by $0.25 to $0.29 for the year. So in total, these items are expected to result in comparable EPS of $4 to $4.10 in 2012.

I'll turn it over to Art now to cover capital spending and cash flow.

Art A. Garcia

Thanks, Greg. Turning to Page 22, we're forecasting gross capital spending in a range of $2.1 billion to $2.2 billion, up by almost $350 million to $450 million from the prior year. Lease capital is projected to increase by $340 million to $440 million. $300 million of this is for projected growth of the fleet due to improved sales and also includes $100 million of higher purchase cost per vehicle related to the EPA technology.

Of course, we expect to earn an appropriate return on this, so the higher cost per truck will contribute to both revenue and earnings growth over their useful life.

The remainder of the increase largely stems from a higher-than-normal replacement cycle and improving retention rates on expiring leases. Since this capital spending is spread throughout the year, a significant portion of this increased investment will benefit revenue and earnings primarily in 2013.

We plan to spend almost $600 million on Commercial Rental vehicles, including approximately $140 million on new units to grow the fleet. These growth units, combined with the rollover impact early in the year from the Hill Hire acquisition, will contribute to an 11% growth in the average rental size. The fleet at year end is projected to be flat year-over-year.

In addition to the $140 million of capital for new units, the higher cost of new engine technology will require an additional $50 million for rental, and we're pricing this into customers.

As always, please note that lease capital is only ordered once we have signed contracts, and the split of capital between lease and rental could be revised during the year based upon movements of trucks between product lines.

Proceeds from sales of primarily revenue earning equipment are forecast to improve by $90 million to $390 million, primarily reflecting an increase in the number of used vehicles sold. As a result, net capital expenditures are forecast at roughly $1.7 billion to $1.8 billion, that's up approximately $300 million to $400 million from the prior year.

Free cash flow is forecast at negative $400 million to $460 million, due to higher capital expenditures. This reflects the impact of fleet growth, the current vehicle replacement cycle, as well as a higher investment cost per vehicle, which again should lead to revenue and earnings improvements in 2012 and future years.

Based on these projections, total obligations to equity at year-end 2012 are forecast at 261% to 265%. This forecast is slightly higher than 261% at the prior year end and remains at the lower end of our target range of 250% to 300%. At this leverage, we have capacity to support additional organic growth, as well as a typical acquisition spend.

Turning to the next page, our return on capital is forecast to increase from 5.7% in 2011 to 5.9% this year, driven by growth in projected earnings outpacing growth in capital invested.

During 2011, the spread between return on capital and cost of capital turned positive, after having been negative for 2 years due to the severity of the recession. This spread is projected to grow from positive 20 basis points in 2011 to 90 basis points in 2012, which is in line with prerecession levels. Over time, we anticipate this spread could improve beyond historical levels to the 150 basis point range.

In addition to an improved spread in 2011, our total invested capital of $5.2 billion is projected to be higher than any time during the past 10 years.

At this point, let me turn the call back over to Greg to review our EPS forecast.

Gregory T. Swienton

Thanks, Art. Turning to Page 24, as I previously outlined in the waterfall chart, our full year 2012 EPS is a range of $4 to $4.10, up $0.51 to $0.61 from a comparable $3.49 in the prior year. We're also providing a first quarter EPS forecast of $0.55 to $0.58 versus the comparable prior year EPS of $0.51. I'd like to point out that the difference in our view of the quarterly seasonality of EPS versus the Current Street consensus is primarily a swap between first and second quarters' projected earnings.

Coming into the first quarter of 2011, we didn't undergo the typical level of rental vehicle out-servicing because the market was strongly rebounding at that time. But in this year, in 2012, while the rental market remains strong and is still improving, we're doing a bit more of the typical seasonal out-servicing of older vehicles. In addition, the prior year's first quarter benefited from a decline in pension expense, positive earnings from acquisitions and 3% -- $0.03 property gain in FMS. Given these factors, there's more of a sequential decline from the fourth quarter last year into the first quarter this year as compared to the prior year.

Turning to Page 25. As we discussed earlier, pension expense in 2012 will be above our prior expectations and will be up by $0.18 this year. Given the impact from pension expense, we thought it would be helpful to provide you with you a view of historical and forecasted comparable earnings per share, excluding the non-service pension costs.

This information helps when looking at the underlying operational performance of our business without the impacts of the equity markets and discount rate environment on our pension plans, which have been frozen for several years. Excluding non-service pension costs, the midpoint of our 2012 EPS forecast is $4.44. This is the highest comparable EPS we'd ever achieved, including in our peak earnings year of 2008, which was $4.43. And we still have significant earnings upside especially remaining in our core lease business.

Further, as a reminder, starting in the first quarter, we'll move non-service pension cost below the business segment line for reporting purposes. So going forward, you'll be able to see more easily the operational performance of the segments. We plan to publish historical information under the new segment reporting structure on or around March 1, so you'll have this in advance of our next earnings release.

This does conclude our prepared remarks this morning, and we're going to move to questions and answers. [Operator Instructions]

So 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] Our first question today is from David Ross with Stifel, Nicolaus.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

On the Dedicated side, can you just talk about where the biggest margin issue is there? And then can you also give us the margin for the quarter excluding the favorable insurance development?

Gregory T. Swienton

I'll let John Williford speak to some of the challenges in DCC, and when they might carry forward a bit and the prognosis for improvement.

John H. Williford

Yes, David. So yes, we -- in the fourth quarter we had some account-specific issues that really are going to require commercial resolution with the customers. These are mostly customers that we got with the Scully acquisition. And we're working through these one at a time, and it's going to take 1 to 2 quarters to complete that. I think the impact of the favorable insurance in Q4 was about $400,000.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Okay, John. That's helpful. Also, just a few -- with just all the 3 segments, which I guess will become the 2 segments, can you talk about the competitive landscape both on the leasing side of things, Dedicated side and the Supply Chain side, and how that may differ?

Gregory T. Swienton

Well, they surely do differ because you've got different competitors. And I'll let John continue on what he sees activity-wise and competitively. And then Robert, you can speak about what you see in leasing and maintenance and rental. John?

John H. Williford

Yes, in the logistics -- the world of logistics is a big fragmented market. We're focusing on competing by industry group. And as you know, we have a strong automotive industry group. We have a set of competitors there, but we feel like we are certainly among the leaders. We made this acquisition a year ago to strengthen our presence in CPG, which is the biggest segment of outsourced logistics, and we feel we have a very strong position there. We have a slightly different set of competitors there than automotive with some overlap. And right now, about half of our pipeline is in CPG. So we feel good about our presence there. DCC, once again has a slightly different set of competitors. Some companies have done well in DCC by focusing on some niches that are adjacencies to DCC. We're looking at some similar ideas, and we're especially trying to connect, working on connecting our DCC strengths with our vertical industry group strategy. And we do find that we have a lot of good opportunities by connecting our strengths in these industry groups and offering -- with DCC and offering services where we're running fleets and warehouses or fleets and managing transportation. We think that could be the competitive advantage for us going forward.

Gregory T. Swienton

And I think just to further emphasize that point, both our reporting and our marketing emphasis in getting that combination of fleets with warehousing and logistics op centers and just-in-time activity, that's where we get the best returns because we're adding more services, more revenue, more return on combinations. And when you then can include the provision of Ryder vehicles as a part of that ground transportation, you have a home run for the organization. Robert?

Robert E. Sanchez

Yes. David, I think on the full-service lease side, as you probably know, it's a good time to be in the business because there's a pretty significant replacement cycle that we're in the midst of that, should continue for the next couple of years. So that means a lot of activity around existing Full Service Lease customers that need to replace their -- or renew their leases. And then also, private fleet owners who need to make decisions on replacing the units that they own, therefore, gives us an opportunity to sell them on the benefits of the products that we sell. So a lot of activity certainly has picked up during the year and continues to grow, so we're very excited about that. And on the rental side, I think it's -- the competition I would say is consistent with what it's been in the past. There is -- there has been over the last year much more activity in rental and again, from a competition standpoint, consistent with what we've seen in other years.

Operator

Our next question is from Kevin Sterling with BB&T Capital Markets.

Kevin W. Sterling - BB&T Capital Markets, Research Division

Greg, you talked about miles per truck per day being down the past couple of quarters in a row, and I think you attributed some of that to mix. Was there something else going on that would drive this metric down or is it really just mix?

Gregory T. Swienton

We analyzed that and think about it because we're always -- particularly want to be alert to is there anything negative in the way of a trend with those statistics. We have concluded there is not. There is not an issue, and I'll let Robert comment a little bit about what you're finding closer to the business there.

Robert E. Sanchez

Yes, I'll just reiterate what Greg said. It is down, the 2.5%, but it really is a bit of an anomaly relative to all the other indicators that we have in the marketplace around, what we hear from our customers, what we're seeing in terms of sales activity and what we're seeing in terms of rental activity. So obviously we want to continue to monitor that closely, but as of now we don't really see any real concern around that.

Kevin W. Sterling - BB&T Capital Markets, Research Division

Okay. And Greg, maybe I can touch a little bit on both leasing and rental here and in particular, the margin profile. I think the thought is that the margin profile in rental, it's higher margin business, but the utilization on that is close to 80%. So it requires more sales and back office, et cetera, to support that rental piece. But I think in theory, leasing might be a lower profile but however, it takes fewer sales people to sell that lease, and they're sold in bulk versus the one-off spot rentals. So could you address kind of the differences in margin profile between rental and leasing, and maybe it might not be as great as some might realize.

Gregory T. Swienton

Well, while we don't disclose the specificity, I think you'll probably gain some additional clues in the new reporting design, supported by SEC changes that are in the appendix. Apart from that, I mean, clearly a transactional product like rental, you'd expect to have a better short-term margin profile, that's just expected. When you factor in all of the support costs however, I don't think that marketing necessarily is that big a factor. I think it's really more about demand price utilization. But if you have anything else you want to add Robert, I'll turn it to you.

Robert E. Sanchez

Yes, I think another way to look at it might be that over the cycle, rental's margin will be better. And depending on where it is in the cycle, it could be better or worse, right? Because if you're get into the downside of the cycle, margins do suffer and rental, when you get into the upside, they do a little better. So net-net, you're going to be slightly better with the rental and lease to really accommodate for the additional risk and volatility.

Operator

Our next question is from Peter Nesvold with Jefferies.

Peter Nesvold

So I mean, I think given that pension was the big variance here, I have a few questions on that, another quick one and then one question on the guide. What was the pension status, funding status at the end of the calendar year? Did you know underfunded status in dollar terms and in percent terms?

Art A. Garcia

Yes. The underfunded by -- so the funded status is about 70% overall and underfunded about $500 million. I think $500 million, I don't have it here with me right now.

Peter Nesvold

And what are the contribution requirements, the funding requirements, for '12 and the next couple of years?

Art A. Garcia

Next year it's about -- in 2012 it's about $80 million, and then it would go up to around $110 million over the next few years after that.

Peter Nesvold

Okay. That's helpful. And then last one on the pension side. I pulled up the 10-K real quick, and you only had a 7.65% assumed return on planned assets, which I guess I'd take it if I could get it, but in the context of most other companies, it doesn't seem like it was unreasonably high. Where did you bring that, and was there a change in asset mix or anything else that drove that assumed return lower?

Art A. Garcia

There's a slight change in the mix but generally, I think the expectations around have declined. So we brought it down about 50 basis points overall.

Peter Nesvold

50 bps. Okay, great.

Gregory T. Swienton

And big impact from the discount rate.

Art A. Garcia

Right. The discount rate also came down about 80 bps, that really impacts leverage. You'll see that, that's a big driver. The pension equity charge has less of an impact on pension expense. The expense is really being impacted by the fact that the returns were less this year or in 2011, and then we reduced the expected return by 50 basis points.

Peter Nesvold

Okay, great. If I could flip over briefly then to the earnings walk. When I do sort of a postmortem for 2011, it looks like you ended up putting up earnings about 24%, 25% better than initially guided, around $0.64 in actual terms. By my rough math, maybe half of that came from rental and half of it came from between rental and used trucks. Versus your internal plan, what were the other major sources of upside versus the 2011 walk? And how concerned are you that there's -- that you've kind of tapped out the rental and used truck earnings power here, given how much stronger it was in '11 versus initially expected?

Gregory T. Swienton

Well I think first of all, Commercial Rental is far from tapped out. I think demand, the market environment will remain strong. We have really no exceptional expectations for the used trucks. We're saying that pricing should be stable, so we're not looking for a huge upside there. And the other thing that contributed last year was acquisitions. So we don't build acquisitions into the plan. If we should have any this year, then that's an upside.

Operator

Our next question is from Anthony Gallo with Wells Fargo.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

I'm really disappointed I didn't get to tackle the pension question. A question about the change in depreciation. If you did not change your residual value assumptions based on the strength in prices, where would that show up if you didn't make the change in depreciation?

Art A. Garcia

If we didn't make that change, you would see that in future years, starting into a certain extent in 2013 a little bit and then '13, and 3 or 4 years after that in higher vehicle gains because the vehicles would've come in at the lower net book value at the time we sold them.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Okay. And when you -- could you just refresh us on the accounting rules. How long and how strong -- or how long does the residual -- the actual results need to differ from residual before you can make that depreciation change?

Art A. Garcia

Well the way we do it is we're really using almost like a 5-year average rolling residual. So we factor in current year sales and do a drop off to one 5 years ago. So -- and that's kind of how the process works.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Okay. And then back to the Commercial Rental question, which I thought was answered pretty well. The 6% price, just remind us historically, what type of context it is. It seems like it's not low but it's fairly conservative, particularly since we keep hearing that everyone is sort of reaching new benchmarks in utilization. How should we think about that 6% price expectation in Commercial Rental?

Gregory T. Swienton

Well, I think it's -- it would be the third year of a significant price increase. The percents were larger in previous years, so 6% is not insignificant on this larger fleet after a couple of years of price increase. And you also have to recognize that some of that has to come in being built in from new equipment or act of purchases because we're going to have to gain a couple percent just to -- in rates in rental just to cover the increase of the initial cost of more expensive equipment from the 2010 EPA mandated engines.

Operator

Our next question is from Art Hatfield with Morgan Keegan.

Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division

I just want to follow up on the miles per unit per day. I do appreciate your explanation. I just wanted to think about it additionally. Is it possible that given what you've been able to do with extensions over the last couple of years, that age of vehicle may be causing that as vehicles step out of service more often for maintenance events?

Robert E. Sanchez

Art, this is Robert. That could be a contributing factor, but again there's just a lot of little things that could be contributing. We'd look at it by customer and it's really -- there's really not a set pattern that you could really point and say it's that one contributing factor. Clearly, as the fleet ages, you do have more days that it's out of service, but I wouldn't pinpoint that as really the main driver.

Gregory T. Swienton

And we also kind of wonder and think about as people actually add to their fleets, they may be putting a little less per previous power unit on the miles. So actually, we're trying to figure out if this is a bad sign or not when you're increasing the number of units. It may not be bad at all but as we said earlier, we pay attention to it and try to -- and analyze it the best we can.

Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division

Okay, that's helpful. And then back to the residual adjustment question, with the rolling 5-year, if we get these -- I mean, okay, even modest economic growth over the next couple of years, is it fair to say that we should see, given the fact that you're going to start rolling through '07, '08 and '09 that, that number should continue to move favorably for you over the next few years?

Art A. Garcia

Yes, if pricing stayed at the current levels, you would expect that residuals would improve in future years also.

Gregory T. Swienton

Yes, because you can imagine in those bad years when the new bad years were rolling on a few years ago, we were taking the pounding.

Art A. Garcia

I'm not sure obviously, Art, I can't really -- we can't estimate what it would be. Typically, this is at a higher end of what you would see. We -- usually you would see depreciation changes that could be $0.05 to $0.15 is on a little higher end of that because we did see substantial improvement in pricing.

Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division

Sure. But the thought process that if we get okay economic growth going forward, you're getting ready to roll through some horrific years on those sale prices, so it could be somewhat of an earnings tailwind for you.

Art A. Garcia

Yes, that's true.

Operator

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

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Greg, back to the first quarter guidance. In your comments -- if I understand that correctly, it sounds like there's going to be some servicing on the rental fleet that didn't happen in the first quarter of last year that's going to be trade-off between the first quarter and the second quarter. I was wondering if you can clarify that comment and then, if you could also quantify maybe on a year-over-year basis how much that additional expense is going to be in the first quarter?

Gregory T. Swienton

Robert?

Robert E. Sanchez

Yes, Todd, it's not so much, just the additional expense. Todd, we actually took the units. We're taking the units out, therefore, you're not seeing the same amount of quarter sequential revenue and demand growth year -- quarter-over-quarter. To give you an idea, this year, we took out 1,800 units, I believe, fourth quarter to the first in the rental fleet. And last year, we actually grew the rental fleet from the fourth quarter to the first. So I think, that's really what Greg was trying to allude to as an explanation for some of those sequential changes.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. And so if I understand that correctly and in the context of how you guided the rental fleet, we should see it come down a little bit sequentially in the first quarter but still be up year-over-year, ramp up into that second and third quarter and then end the year flat year-over-year?

Robert E. Sanchez

Correct. It will be -- on average, it will be up year-over-year, somewhere around 10%, 10%, 11%. But we'll end the year flat in terms of unit count.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. And then for my follow-up, looking at the revenue, the revenue guidance for the supply chain segment. I guess I was a little bit surprised that you're guiding 2% operating revenue growth for 2012. Is there something going on specifically, either loss of business in one of the pieces, loss of revenue at one of the pieces of that business, or some clarification on why -- I guess to me that seems like a little bit lower than what I would have expected.

Gregory T. Swienton

Yes, and the fact is that we're actually selling revenue at a better rate than that. It's a matter of actually when we're going to see it appear. I'll let John Williford comment on that.

John H. Williford

Yes, it's a good question. I'm glad you asked it. 2% revenue growth is less than we would want to expect. There are couple of things holding us back. We have some big accounts that are -- that have either sold the division or are redoing their network in some way, and that's taking a few big chunks of revenue out. Those are not -- those chunks don't have the same level of operating profit that our average business has. There's also some expectation of a transition of some low-margin business out. And then we have sold -- we had a really good 2011 in new sales. We have a very strong pipeline. Some of the big projects we sold, especially at the end of 2011, have long lead times. And we're not expecting the revenue to come on from those until -- at least the end of 2012 or into 2013. So normally, we would expect -- and I think we've said before, 7% to 10% growth in this business per year. And it is held back a little bit next year by those factors. I think you can see it from the waterfall Greg showed that we are expecting profit growth to be significantly higher than that 2%.

Operator

Our next question is from Alex Brand with Suntrust Robinson Humphrey.

Alexander V. Brand - SunTrust Robinson Humphrey, Inc., Research Division

I just want to follow up on an earlier question that John answered about Dedicated, which I think you kind of answered why maybe it wasn't growing as much we might think. It seems like everybody wants more Dedicated, but the profitability too -- I mean, I hear you on the Scully piece, but I would think that the other piece prior to that would've been maybe almost twice as profitable. Is there something holding back the profitability there that could maybe improve a lot in 2012?

John H. Williford

Yes. Okay. I'll try and answer that as a 2-part answer. If -- without the Scully accounts, which we think we can fix through -- basically through pricing, we would have had the same operating profit margin in Q4 2011 as we had in Q4 2010. Now we think we can get that profit margin up over time. What's happened over time is there have been cost pressures on the business, and it's been very difficult to pass those along to customers. And it's essentially what we're seeing, just a little sharper version of with the Scully accounts. Now we have good relationships with our customers. We provide good service, and we are going to be pushing over time a little harder to make sure we're compensated for the work we do. And we would expect to see the margin over time, and it takes a while, but to get that margin back up above what we had in Q4 2010.

Alexander V. Brand - SunTrust Robinson Humphrey, Inc., Research Division

Right. So I mean, I typically think of that as a cost-plus business with something like a 10% margin, is that not the right way to think about it over time?

John H. Williford

Well the 10% margin, if you're talking about 10% after allocating all your overhead that -- we're a ways from doing that. We've got to get to 6% before we get to 7%. But those are kind of the ranges of numbers we would be looking for over the next couple of years.

Operator

Our next question is from Ed Wolfe with Wolfe Trahan.

Edward M. Wolfe - Wolfe Trahan & Co.

I guess this is for Robert. Can you talk a little bit about the timing going forward of CapEx? So this will be the second year 2012 of kind of ramping CapEx and using some cash and investing back into the business. Where do you think -- if you look out 2013, '14, when do you start to generate cash again?

Robert E. Sanchez

Well we expect -- as you saw, we expect this year to still be part of the replacement cycle and the growth. Next year, if you look at OEM -- truck OEM production, 2013 is an even stronger year than 2012. So you could probably extrapolate and say we're going to be getting our fair share of that. So capital requirement, certainly on the lease fleet, are going to continue to be strong. I would expect rental, either in 2013 or 2014 to really begin to slow down in terms of the amount of replacement we need to do. But lease, I would expect to continue strong next year, 2013. And then 2014 I think is when it maybe starts to level off some.

Edward M. Wolfe - Wolfe Trahan & Co.

That's helpful. And then, kind of a bigger picture, Greg, and I know other people have asked this. But when you think about the Full Service Lease business starting to come back in 2012 and you think about the rental at some point slowing its degree of growth but still being strong, how do you think about the 5-year contracts and the pricing? Pricing feels like it's good now, but you have some -- if you go back to 2007, 2008, it's not so strong. How do you think about the overall margins of FMS with these changes as you go forward?

Gregory T. Swienton

When you're talking about pricing not being as strong in the softer economic periods, that would relate to rental. The FSL, the Full Service Lease pricing, that we maintained even during the downturn because of the standards that would apply when we had the EVA requirements for -- on a per vehicle basis. So I think pricing is not expected to move down in combination or in either. You would expect pricing to go up just because we have to maintain our spreads and margins and returns and lease, plus the equipment is more expensive and the same in rental. Over time, our expectation for the overall return to business, we expect to continue to inch up. The money that we spend now and continue to spend on investments and technology, productivity, efficiency, sales and marketing, innovation, we think that helps our returns in the longer term. In addition, someday, markets are going to come back, the economy's going to be healthier, and we're not going to have these headwinds with pension either. And a lot of that is attributed in FMS. So we continue to believe, we think quite reasonably and conservatively that we're going to return to not only high and record levels of total corporate EPS but continued bottom line improvement in FMS for a quantity of reasons.

Edward M. Wolfe - Wolfe Trahan & Co.

Okay. That makes sense. Just last thing, can you give some form of guidance on D&A and interest expense for the year in 2012? I thought I heard you say D&A might even be down. Did I hear -- I don't know how that can be though.

Art A. Garcia

Yes, no, no. I'm not -- no, it's going to be up significantly, right? I mean, you see from the -- from our slides that we gave guidance around operating cash flow. You can see that's up a couple hundred million year-over-year. That's driven by a combination of improved earnings and then more so by higher depreciation expense. So you're going to see depreciation move up a couple hundred million probably -- $150 million, $200 million.

Edward M. Wolfe - Wolfe Trahan & Co.

Off of the base of 872-ish?

Art A. Garcia

Yes.

Edward M. Wolfe - Wolfe Trahan & Co.

Okay, and how about on the interest expense side off of the base of 133?

Art A. Garcia

Interest will be up because the amount of our debt outstanding is higher in 2012 than it was in '11. The interest rate, we're forecasting kind of comparable to what you saw in the fourth quarter, so downright 4% range, maybe a little bit higher but just around there. So you'll see it go up just because of the volume increase.

Edward M. Wolfe - Wolfe Trahan & Co.

And how much is fixed and variable at this point of the debt?

Art A. Garcia

We're about 40% variable at the end of the year, and it will probably be around there for most of the year, maybe a little bit lower.

Operator

Our next question is from Ben Hartford with Baird.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Greg, I just want to ask, I guess, a conceptual question related to the guidance. If I can go back to '05 and I compare that to where you ended the year in 2011, the EPS base was comparable, some puts and takes with pension and acquisitions. But if you strip those out, it looks like your core guidance when you're sitting at the end of 2005, looking at 2006, the core guidance from an operating profit line was low teens, but now we're looking at kind of upper teens. And I'm just curious if that's emblematic of some of the secular opportunity in front of you. How much of that is aided by maybe maintenance expense falling here at the near term and rental being strong? Can you talk a little bit about that kind of that delta of 5 percentage points or so on a core operating performance basis?

Gregory T. Swienton

And when you talk about low teens, you were talking about growth in EPS?

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Yes, growth in EPS. Looking at the guidance that you gave at the end of '05 from that base of 341, the midpoint was about 12% growth. And now a number of ways to normalize for, but it looks like it's -- and certainly north of 15% on a core basis.

Gregory T. Swienton

Yes, and that was obviously -- well, we thought it was a much healthier economic environment. We didn't know what was coming around the corner. I would say now, I think we've got even a larger more stable base of customers. I think we even have more service offerings and what we had clearly going for us then. But even when you strip it out, all of that pension activity, I think to get now to the mid-, mid to upper teens, we think is a reflection of what we see in the way of market opportunity and our ability to capture it. So when you think about the growth opportunities whether it's in that FMS side and private fleets or the expense and the complexity of FMS equipment or the value proposition and quantity of offerings we now have in the supply chain in industry segments we didn't have before, we think -- I think the simplest answer to your question is mid to high single-digit bottom line growth is a reflection of our ability to capture real growth market opportunities and trends that we think we're better now equipped to go after than we were 5, 6, 7 years ago.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Okay, good. That makes sense. And then lastly on the rental side, a big contribution assumed this year in the guidance, and obviously that worked against you in the '06, '07 time period. What's different about that network today that allows you to be more responsive in terms of reducing that fleet or otherwise protecting yourself from some of the negative leverage that can materialize if trends were to weaken?

Gregory T. Swienton

Well I think for sizing, right-sizing, re-sizing, I think that's a matter of continued expertise over time that our centralized Asset Management Group has been able to do. So I think that works well for us. The other thing that's different in rental since that last downturn is we probably have -- when we have more rental customers, we have more national account customers. One of the things that we had to do in that rental downturn was to do a lot more intense focused, scrambling, cold account calling to try to make up what the market was taking away from us generally. And I think we've established a lot more relationships, have a more effective contact sales organization, and we may just have more regular renters than we used to have. And I think that's a plus for the future.

Operator

Our next question is from Jeff Kauffman with Sterne Agee.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Sal Vitale on for Jeff Kauffman. So just a couple of quick questions on the commercial side. I understand you don't break out the Commercial Rental profitability. But earlier you made a comment, you said, you think you're far from tapped out in the profitability gains in the rental business. So if I just think about it in terms of from the trough, what the profitability was there to the typical peak, how far along do you think you are in terms of the margin expansion? Are you 70% of the way there, 50%?

Gregory T. Swienton

I'll let Robert try to guess from memory because I know we don't have that page right in front of us.

Robert E. Sanchez

Yes, I -- certainty the year-over-year growth last year was -- 2011 versus 2010 was a very strong year. But I think to Greg's point, there's still a lot of opportunity, and we still expect in 2012 to have rental be a significant contributor to the year-over-year growth in earnings. So maybe the easiest way to look at it is we expected to still grow this year in 2012, not at the same percentage clearly as it did in 2011, but still a strong contributor.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay, that's helpful. And then I guess the other question is on -- looking here, are you saying the utilization is -- was 79% for the fourth quarter? Just refresh my memory, what is the -- historically, what is the peak utilization you typically get in the business?

Robert E. Sanchez

Yes, it's -- we're at that at this point. It's 79%. We're right around the peak. We usually say for the full year, peak is somewhere -- can be somewhere between 76% and 78%. So when we're at 78%, 79%, we're at peak.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. So I guess then, any further margin expansion is really going to come from increased pricing and fixed cost absorption on more units?

Art A. Garcia

Demand and pricing, correct. Demand from where -- demand that -- which comes along with more units and pricing.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. And then just a last thing on the higher maintenance cost, is that something you can quantify, what it was in the fourth quarter?

Robert E. Sanchez

Yes, we really haven't got into that point. But maybe what you can think about is, maintenance cost continues to be headwind throughout the whole year, including the fourth quarter. We expect that -- because of the fleet age, we expect that to continue through probably the first 3 quarters at least of this year and then at the end of this year, and certainly going into '13, as the fleet starts to get younger, we'd start to see the benefit of maintenance costs coming down.

Gregory T. Swienton

And if you were to recall the 2011 waterfall slide, when we were together this time a year ago, there was a big red bar that we highlighted for the impact of the older fleet and therefore, the maintenance cost and that was like $0.30 EPS. So this year, you don't see that bar. It's now buried within the FMS contractual. So although there's a potential red segment, the net of FMS contractual is up significantly. So we're eating away at that age issue and over time, it will turn positive too.

Operator

Our next question is from Brad Delco with Stephens.

A. Brad Delco - Stephens Inc., Research Division

I guess the first question, I understand leasing rates have certainly been strong and there seems to be the message that there's strong interest. Are there any customers that are seeing these higher rates with the price of equipment and seeing any sort or of sticker shock? And if there are, I mean, is that driving any business away? Or I would expect maybe potentially driving more business to Dedicated. Have you seen any of that activity in your business?

Robert E. Sanchez

Well, you saw it over the last year. You saw that a lot of customers stayed with rental for a period of time. We also had a pretty significant increase in term extensions, so certainly customers over the last couple of years have done as much as they can to delay, if you will, the increase. But what we've seen, I would say probably over the last 6 months is customers now making that commitment to either lease, or obviously if they have to buy, they've got to go out and spend the incremental dollars on new equipment. So it is -- it has had an impact in there. I think it's delayed some of the decisions, but in terms of when they have to make the decision, the choices are either you're going to lease a new piece of equipment or you're going to have to go out and purchase one also at the higher price.

Gregory T. Swienton

I think the outsourcing decision, relative to the sticker shock that you raised what becomes foremost in the customer's minds are the certainty of the maintenance in a more expensive and complex world and actually have a lease that works effectively rather than they also in addition to maintenance having to go out and get the equipment. So I think for those customers who still prefer to have their own drivers, they are going to continue to look, as an outsourcing choice, the Full Service Lease with the maintenance. When they reach that next step and that comes at different times over time and they decide, "Why am I doing and of this?" Whether it's for CSA reasons or complexity or cost, and then one outsource the driver, that's when they move on up the DCC.

Robert E. Sanchez

Jeff, one other thing that's helping with the decision is that there is an improvement in fuel efficiency with the newer vehicles that's helping to offset some of that increase in cost.

A. Brad Delco - Stephens Inc., Research Division

Okay, great. That's great color. And then I guess my second question may be more for Art. You talked about that equity charge having a pretty significant impact on your total obligations to equity, and it doesn't capture growth. I guess if -- absent that charge, I mean, would there be areas of growth maybe on the acquisition front more this year that we could expect? And how comfortable are you with that level? And I guess, the read I have was we could see growth potentially slow because of where that metric stands today versus where it was a year ago.

Art A. Garcia

I don't know what I would say. I mean, obviously our plan doesn't contemplate acquisitions in it, but as we look at our current level of leverage, we believe we have capacity to handle organic growth in the business, which we expect here over the term, as well as a more typical acquisitions spend. We spend I think a little bit more in 2011 just because of how things worked out with Hill Hire and the like. The typical acquisition spend, we see as still being available to us. Also keep in mind, that as we -- even in this year of pretty significant spending, leverage is not really moving up that much. So the business tends to de-lever pretty fast in that sense.

Operator

Our final question today is from Dan Moore with Scopus Consulting Group.

Dan Moore

It's Scopus Asset Management. Quick question. Could you remind us of what your full year 2011 guidance was originally, relative to where you came in this call last year?

Gregory T. Swienton

Last year? It was $280 million to $290 million, and we came in at $349 million.

Dan Moore

And then, I guess the concern anyone might have at this point is leverage. And I think there's a lot of -- there's been a lot of discussion around consumer rental. And anybody that looks at the lease side of the business can obviously see a lot of opportunity over the next couple of years. Can you remind us though, how you're thinking about the potential for margin improvement over the next, let's say, 2 years in lease? And what difference is if any there may be in the cycle relative to your previous peak? Just trying to kind of put our arms around what a peak EPS outlook might be for the company as we move through the cycle.

Gregory T. Swienton

Yes, there's a lot of tentacles to that question. I think on a broad look, in the last couple of years, people said, "When do you think you'll get back to your peak earnings?" And we said over the next couple of years, without being precise, and that was part of the value of the chart on Page 25, that if you strip out the positive and negative impacts of service, pension cost over the years, this is the year when we're going to hit our peak again. We expect to continue to be able to increase not only comparable EPS but the bottom line margin return. You specifically talked about -- I think mentioned Full Service Lease or FMS, and we've got several hundred basis points to continue to improve upon, which we believe we can get to, especially when you get the stability of the larger lease fleet and the lower maintenance costs from a more normal, younger average lease fleet. See, we're not there yet either. So that gives you a few concepts of why we think that's doable in addition to being able to improve the bottom-line operating leverage every time we do an acquisition we're putting units over an existing network, every time that we add incremental growth, new sales, with good EVA, they're being spread over an incremental network. So we think reasonably, those items plus productivity, efficiency, market opportunities, they're going to continue to move up. So if you want to add anything else on FMS, Robert, that I haven't touched upon.

Robert E. Sanchez

No, that's it. I mean, the fleet -- as the lease fleet gets larger and newer, that's where you're going to see the margin expansion.

Operator

This does conclude the question-and-answer session. I would now like to turn the call over to Mr. Greg Swienton for any closing remarks.

Gregory T. Swienton

Well as I look at my watch, it's now about 12:15. So we're a little bit over our time, but we had our longer presentation. I think we've been able to entertain everyone's questions. Thank you for joining us, I appreciate it, and 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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