Ryder System, Inc. (R)

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Ryder System (R)

Q2 2013 Earnings Call

July 23, 2013 11:00 am ET

Executives

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

Robert E. Sanchez - Chairman, Chief Executive Officer and President

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

John H. Williford - President of Global Supply Chain Solutions

Dennis C. Cooke - President of Global Fleet Management Solutions

Analysts

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

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

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

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

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

John R. Mims - FBR Capital Markets & Co., Research Division

Scott H. Group - Wolfe Research, LLC

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

Matthew S. Brooklier - Longbow Research LLC

Justin Long - Stephens Inc., Research Division

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

Ryan Mueller - The Buckingham Research Group Incorporated

David P. Campbell - Thompson, Davis & Company

Presentation

Operator

Good morning, and welcome to the Ryder System, Inc. Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. And if you have any objections, please disconnect at this time.

I would like to introduce Mr. Bob Brunn, Vice President, Corporate Strategy and Investor Relations for Ryder. Mr. Brunn, you may begin.

Robert S. Brunn

Thanks very much. Good morning, and welcome to Ryder's second quarter 2013 earnings conference call.

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

Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer; and Art Garcia, Executive Vice President and Chief Financial Officer. Additionally, Dennis Cooke, President of Global Fleet Management Solutions; and John 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 Robert.

Robert E. Sanchez

Good morning, everyone, and thanks for joining us. This morning, we'll recap our second quarter 2013 results, review the asset management area and discuss the current outlook for our business. We'll then open up the call for questions.

With that, let's turn to an overview of our second quarter results. Net earnings per diluted share from continuing operations were $1.19 for the second quarter 2013, up from $0.91 in the prior-year period. Second quarter results included $0.06 of non-operating pension cost. The year-ago period included $0.18 of net expense related to non-operating pension cost and restructuring charges. Excluding these items in both periods, comparable earnings per share were $1.25 in the second quarter, up from $1.09 in the prior year, an improvement of $0.16 or 15%.

Total revenue grew 3%. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue, was up by 4%. These revenue increases reflect new business and supply chain, as well as lease revenue growth.

Page 5 includes some additional financials for the second quarter. The average number of diluted shares outstanding for the quarter increased by 1.2 million shares to 51.9 million. This reflects the temporary pause of our anti-dilutive share repurchase program that we discussed previously and is higher than planned due to increased employee stock activity. As of June 30, there were 52.3 million shares outstanding, of which 51.9 million are included in the diluted share calculation.

Our second quarter 2013 tax rate was 35.7% and includes the impact of non-operating pension cost. Excluding this item, the comparable tax rate would be 36%. This rate is below the prior year comparable tax rate of 36.8%, reflecting a higher proportion of earnings in lower tax jurisdictions this year, as well as the impact of a prior year tax law change.

Page 6 highlights key financial statistics for the year-to-date period. Operating revenue is up 3%. Comparable earnings per share from continuing operations were $2.06, up by 16% from $1.78 in the prior year.

The spread between adjusted return on capital and cost of capital increased to 110 basis points for the trailing 12-month period, up from 50 basis points in the prior year. We now expect this spread to remain at 110 basis points, which is wider than our original plan, as we continue to make good progress towards our longer-term target of 150 basis points.

I'll turn now to Page 7 and discuss some key trends we saw in the business segments during the quarter. Fleet Management Solutions total revenue grew 2%. Total FMS revenue included a decline of 0.5% in fuel services revenue due to lower fuel cost. Excluding fuel, FMS operating revenue grew 3%, driven mainly by growth in Full Service Lease.

Full Service Lease revenue grew 4% due to higher rates on replacement vehicles, reflecting the higher cost of new engine technology. Our lease fleet declined by 1% from the prior year, reflecting nonrenewal of some low-margin trailers in the U.K., the impact of economic uncertainty and more efficient redeployment of off-lease vehicles.

Miles driven per vehicle per day in the U.S. lease power fleet increased 2%. Miles per vehicle have improved over the past 2 years and are now only 2% below their pre-recession levels. The average age of our lease fleet began to decline in June of 2012, as a result of elevated replacement activity. It continued to improve this quarter and was down by 1 month sequentially or 4 months since the second quarter of last year.

Contract maintenance revenue declined 3% due to a shift in vehicle mix, reflecting more trailers and fewer power units. Contract-related maintenance increased 12% since the prior year, partially due to our new, on-demand maintenance products, which is in the pilot stage with several large customers.

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