Ryder System, Inc. May 11, :30 PM ET

Page 1 Ryder System, Inc. May 11, 2011 1:30 PM ET Good afternoon. I'm Anthony Gallo. This afternoon we are very pleased to have Art Garcia, Executive Vice President and Chief Financial Officer of Ryder Systems, Inc., present. This is, I think, Ryder's first time at a Wells Fargo conference, so we're very pleased. This is a relatively new name for me. My colleague in Fixed Income, Jim Dunn, had coached me into spending some time, and Bob coaxed us down to a visit in Miami in December, and we came back thinking, wow, we came across a pretty neat story here that we thought we knew and didn't really know. So, I'm very pleased to have coverage out now and very pleased to have management here with us this afternoon. Art? Thank you, Anthony. I'm pleased to be with all of you today. Today's presentation does include some forward-looking statements as described in more detail in the presentation slides. As a quick overview, for those of you are who less familiar with Ryder, we provide outsourced transportation and supply chain solutions for commercial customers. We generated over $5 billion of revenue in 2010, and have 26,000 employees in North America, the UK and Asia. The Company reports externally in three business segments - - Fleet Management Solutions, Dedicated Contract Carriage, and Supply Chain Solutions. Each of these segments benefit from long-term secular trends that will lead to further outsourcing over time. These trends include increasing complexity and higher operating costs of vehicle technology, increased capital costs for new vehicles, a more constrained credit environment, and continual changes in customer supply chains. I would like to touch briefly on the products and services offered by each of the three reporting segments. Fleet Management Solutions provides trucks, maintenance and support services to commercial customers. We offer both long-term leases, typically five to six years, and short-term rental agreements, which could be daily, weekly or monthly. Our customer base is highly diverse, representing nearly every major industry. Our customers are mostly non-trucking companies that need a private fleet of trucks to move product to their customers. We purchase trucks at a discount due to our volume, and provide lifetime guaranteed maintenance to improve our customers up time and lower their costs. After their initial

Page 2 life with Ryder, we sell the used trucks ourselves for a premium, mainly through 53 used truck centers. We provide related services including fuel, insurance, and safety and administration reviews. These services reinforce the customer relationship, expand our margins, and improve return on capital. Ryder's focus is to expand contractual business with our 13,000 current leasing and maintenance customers, and to win new customers by increasing penetration of the nonoutsourced private fleet market, which is over five times as large as the outsource market. We believe growth will also be supported by aging private fleet and the eventual need for their replacement. More expensive and complex maintenance, higher vehicle investment costs, and tighter credit markets should cause private fleet owners to Ryder to reduce their costs and free up their balance sheet to support their core business requirements. In Dedicated Contract Carriage, we serve 150 customers with outsourced vehicles, drivers and management personnel, as well as provide some other services. Many additional customers use Dedicated as part of a broader solution provided by our Supply Chain segment. Combining the standalone business with the Dedicated activity within Supply Chain, Dedicated is a $1 billion overall business for Ryder. DCC allows us to leverage Fleet Management's maintenance capabilities and provide strong synergies. Dedicated also provides increased returns from value-added services performed by our drivers. We target DCC customer opportunities that have higher service requirements and therefore higher margins. Prime opportunities involve specialized handling, specialized equipment, or integrated services. We often operate closed loop, multi-stop systems that are time-sensitive and where drivers perform extra services, like inventory stocking. In DCC, our same driver typically operates the same route every day, wears the customer logo on their uniform, and is our customer's representative to their customers. In Supply Chain Solutions, we provide a wide range of logistic services to support customers' supply chain and distribution requirements. Services may include supply chain design and engineering, inbound and outbound distribution, warehouse management, dedicated contract carriage, and transportation management. Our services are recognized as best-in-class by our customers, having been named the best 3PL provider by Inbound Logistics magazine for the last four years in a row. We serve almost 500 customers in North America and Asia, markets which have significant growth opportunities for outsource logistics. We continue to diversify the industry vertical serve by Supply Chain, including through our recent acquisition of Total Logistic Control. The primary industries we serve are automotive, high tech, industrials, and our newest vertical, retail and consumer packaged goods. The three segments of our business cover very large markets with significant growth opportunities. As we increase our focus on sales and marketing, we have done some important work on market definition and segmentation, and I would like to share some of those with you. The outsourced lease and rental market for power vehicles is over 800,000 units. This presents a sizable opportunity for Ryder to capture share from companies that have already made an outsourcing decision. Even more importantly, the private fleet is 4.2

Page 3 million power vehicles. This represents companies that handle vehicle ownership and maintenance themselves and is an even more important growth opportunity for us. For Supply Chain Services, the outsourced logistics market in our focus areas of North America and Asia is $260 billion. We believe there are some compelling market dynamics that will drive increased rates of outsourcing over the next few years. These factors will benefit all of our segments, but especially Fleet Management due to our vehicle purchasing and maintenance capabilities. The average age of US commercial trucks is the oldest since 1979. Private fleet owners need to start refreshing these older fleet for both performance and cost reasons. We anticipate vehicle sales and leasing to grow over the next few years because of this pent-up demand for fleet replacement as well as due to a modest economic and freight recovery. This aging and replacement of private fleets creates many decision points for fleet owners, which is a great opportunity for our sales team to convert them to an outsourcing solution with Ryder. Additionally, we expect that companies will continue to have more limited access to capital than in the past, and other companies will be looking to reprioritize their capital allocation. Many companies will want to use their available capital in their core businesses rather than for noncore assets, like trucks and maintenance shops. Ryder can help these companies with this objective not only by reducing their P&L costs, but by freeing up their capital for their core investment areas. The last two EPA mandated engine changes have added significant complexity and cost to truck purchasing and maintenance. On the purchasing side, many private fleets who are replacing pre-2007 tractors will see purchase price increases of 40% to 50%. They will also see higher ongoing operating costs due to the additional maintenance requirements on these vehicles. Ryder's industry-leading people, processes and technologies position us to capitalize on the long-term outsourcing opportunities driven by these factors, not only in Fleet Management, but also in our Dedicated and Supply Chain segments where Ryder vehicles are often used. Now, let me turn briefly to cover our financial results for the most recent quarter, which for us was the first quarter. We saw strong operating revenue growth of 14%, accelerating from 4% growth in the fourth quarter last year. We also saw a very strong earnings leverage on this revenue with comparable EPS from continuing operations up 113%. Earnings growth was driven by 78% higher earnings in Fleet Management, and 72% higher earnings in Supply Chain. First quarter comparable EPS from continuing operations was $0.51 above both the prior year of $0.24 and our initial forecast range of $0.40 to $0.44. Return on capital improved from 4.1% to 5.1%, but still remains below our targeted levels. We saw the leading indicators for our business improve throughout most of 2010, and these improvements continued in the first quarter this year. Rental has always been the first place our customers go when they need additional capacity. With improved demand and higher vehicle purchase costs for private fleets, utilization of our rental fleet was up

Page 4 by 390 basis points in the first quarter to 73%. This is a strong utilization rate for the first quarter, which is seasonally our lightest quarter of the year. With better supply/demand conditions in the rental market, we grew the fleet 15% and increased pricing by 12%. Used vehicle pricing improved by over 40% versus the prior year. This was driven by lower available inventory, increased demand, and the impact of more expensive 2010 engines for new vehicles, which is causing some buyers to look for well maintained used equipment. In our lease business, miles driven per vehicle were up 3%, and early contract terminations were down by 33%. These are important indicators of improving lease demand. In Supply Chain we saw improvements in overall customer volumes during the first quarter, especially with our automotive and high-tech customers. All of these items bode well for future revenue growth. Turning to our earnings outlook, our most recent full year comparable EPS forecast is $2.90 to $3.00 per share. This was increased two weeks ago by $0.10, and includes an anticipated $0.10 to $0.15 negative impact from the recent natural disasters in Japan, which primarily affects one of our largest automotive customers. Our EPS forecast represents an improvement of 31% to 35% from last year's comparable EPS of $2.22. The next page outlines cash generation, capital spending and leverage over the past decade. The Company generated strong and fairly predictable total cash. We used this cash partly to invest in revenue earning equipment, for fleet replacement, and growth over time. Our most recent CapEx forecast for 2011 includes $575 million in commercial rental capital. This reflects $200 million for 10% fleet growth, $50 million for higher vehicle investment costs, and the remainder for fleet replacement. Our latest lease capital forecast calls for $1 billion to [$1.1 billion] in capital. This reflects somewhat higher than normal fleet replacement and $70 million for higher vehicle investment costs. The mix of rental and lease capital may change as the year progresses due to our asset management decisions and the use of rental trucks to fulfill lease contracts. In light of the planned fleet replacement and growth, we are forecasting negative free cash flow this year of $265 million. This upfront investment in vehicle purchases should benefit revenue and earnings over their five- to six-year operating lives. We are forecasting balance sheet leverage of around 207% at year end. This is well below our target leverage of 250% to 300% total obligations to equity. Our strong balance sheet provides significant capacity to support organic growth, acquisitions, and/or share repurchases over time. We have also continued to increase our dividend, which now stands at $1.08 per share annually. So, in closing, we are benefiting right now from improvements in our transactional rental and used truck businesses. Our lease fleet is stabilizing; however, in the near term we will continue to see higher maintenance costs on an older fleet. Looking ahead, we like our prospects for profitable contractual revenue growth. We operate in large markets where increasing complexity and higher ownership costs should drive secular outsourcing. We are well positioned for success as we move forward. Our rental and used truck fleet are aligned with market demand and our target levels. Our

Page 5 facility network is intact, and this will provide operating leverage on future revenue growth. And we have a strong balance sheet, and we can use it to take advantage of significant growth opportunities in the future. Given these factors and with the right external environment, we are confident that we can return to and exceed the record performance levels we saw in 2007-2008. I'd like to thank our host today for the opportunity to be with you today, and I'd be glad to take any questions. I'm going to start with a few questions up here. We are webcast, so if you want to ask a question in the audience, please just raise a hand, we want to get a microphone to you. Let me start in the core lease business. We do have a lot to cover, but I want to start in the core lease business. We have found that you allow commercial users to utilize a commercial vehicle on a much lower per-mile basis than they can on their own. Now, there are a couple of different components to that that allow you to do that. One may be financing, and we'll come back to that. But walk us through everything you do from the acquisition of the vehicle to the maintenance of the vehicle to the disposition of the vehicle, why you can do it better, and then how that lowers your customer's per-mile cost of vehicle. Right. Well, first, upfront, obviously we are one of the bigger purchasers of trucks in the country, so we believe based on that volume we can get discounts that maybe a private fleet owner would not get on their own. So, upfront there is a purchasing advantage. On the back end, we have 53 or 50-some-odd retail used truck centers around the country, so that allows us, at the back end, when we sell these units to get a higher value than a private fleet owner could typically get. Because in most case they are looking at trading with a dealer, selling wholesale, things like that. So, we maximize the benefit on the back end as well as we get some purchasing power upfront. And then what's probably more important to our customers would be the maintenance. We believe over the lifecycle we can provide maintenance at a cheaper cost than a customer could do it themselves, when you think about the leverage of our network and the like. So, that value, when you put it all together, comes out to a reduced cost versus ownership. Okay. So, now, I'm going to support my own thesis here a bit, if I can. The cycle that you are looking at now, we've got higher vehicle costs, we've got more complex and more costly maintenance. We do have strong used markets and what we think is going to be persistent used market demand. And you also have an above average percentage of trucks coming off lease. Right. So, how does all that play together in terms of what the earnings and the margins can look like this cycle versus last cycle? Well, obviously, we see this as the opportunity for us, especially in the near term, as you look at -- and there was a slide there we covered -- the age of the fleets out there are older than they've been in the last 30 years. So, we see that as critical to improving our profitability, right, is getting through this lease replacement cycle. Because of the aging

Page 6 of the fleets, we right now maintain a slightly older fleet, higher maintenance costs relative to what we would be once we get through this cycle. So, we see that leverage, as well as tied into what you're saying. Right now customers, private fleet owners -- let's talk about them first -- if they're looking to replace a vehicle today, that would typically be a vehicle that is 2006 model year or actually older. So, they would have skipped two technology changes. So, they are looking at price increases in the market 40% to 50% higher to buy a unit. We think that helps us in our outsourcing arguments with the customer. They can see the value a lot -- it's a lot clearer now, we believe, with the price being so much higher, the residuals are more in question, especially if your only avenue is trading or wholesaling, things like that. So, we see that as a trigger to help us grow the fleet, but those two things together we see us being able to hit if not exceed our pre-recession levels of 2007-2008. So, part of that is going to come into, or it's going to show up in a better lease rate, if that's the way to think about it? Can you give us some color on a per-mile rate, or however you want to think about it? Well, lease rates are going to move up for customers just because the way the price is driven by the cost of the vehicle upfront. So, just like their cost of ownership will go up substantially if they are paying 40% to 50% more for the vehicles. So, rates are going to move up. We are not really -- it's not really something where rates are going to move down from current levels, they are going to move up, but the question is how much do they move up? We believe we can limit that for them because of the value we provide around upfront purchasing, the back end, as well as the maintenance on these vehicles now is also going to be a little bit more complex and there is a little more of an investment required in their own shops. Okay. We are limited on time, so I am going to jump around a little bit and then we'll come back to lease and go to questions. Just briefly, in the Dedicated division, what we've heard from kind of a select group of the larger dedicated players is that these past couple of months have been particularly good. It would seem to foot with what we think is happening in the marketplace. Shippers concerned about access to equipment, not a lot of capacity entering the for-hire market. Can you provide any color on that again? We've heard quite good things about booking a new dedicated business. Our Dedicated business, like I talked about, really focuses on a niche around specialized service requirements, specialized handling. We have seen, for us we have seen some growth, so we are happy with that. We always hope to grow a little bit more, and we have some, I think, some good things on the horizon there. For us, from a margin perspective, we have been dealing with a driver wage issue really since probably the second half, second quarter of last year, second, third quarter. In the first quarter we just ended, we still have some of those comps year-over-year driving, impacting our margins. However, we are kind of -- it's kind of in line with our plan right now and we see that kind of abating as an issue here beginning the second and third quarter. Okay. Jumping to logistics for a minute. After the first quarter report, you raised guidance but you shared with us, I think it was a $0.10 to $0.15 EPS hit.

Page 7 Yes. It's going to come from one large logistics customers in particular. I asked the question on the conference call, but I just want to clarify. It would seem to me that the core logistics margins are running much better than we would have thought at this point in the cycle, given those margins are still expected to be good for the year, but you've got a pretty big hit coming out of it. Is that the right way to think about that? Right. I would tell you that that hit wasn't -- we haven't yet realized that. That is all happening in the second, third and fourth quarters. But excluding that, we saw -- we had levels that were back to pre-recession levels, if you would. Okay. So, my follow-up to that is, has John done anything specific, or did he do anything during the downturn that is going to make this next logistics cycle look different than the past? He's been there since '08. Right. There have been a number of things on the contracting side. There are other things that play there that should give us a little better -- I think we have worked around the contracts, so during the cycle we kind of got out of some under-performing contracts that we weren't really comfortable with. Our strategy is trying to differentiate our execution across the verticals, and also lean our process around and be more efficient across all of our offerings. So, we are starting to realize some of that. We also completed an acquisition in the fourth quarter of last year, Total Logistic Control, which really adds to our capabilities. That's what kind of the beauty of this one was, is that it expanded our capabilities and consumer packaged goods, we really didn't have that. That was part of our longer term view. The supply chain would be to add capabilities, and we think that helps us as we go through the next cycle. Consumer package goods is a fairly stable business, adds a new set of customers for us, allows us to sell, cross-sell some of our other service offerings to those customers that they haven't really had an opportunity to see. Okay. Any questions from the audience? I'll keep going if not. A question up front here. Unidentified Participant: Art, turning to your balance sheet quickly, I don't want to put words in your mouth, but I interpreted your comments to mean that you deem your balance sheet to be modestly under-levered at the present time. And I guess with that backdrop, can you talk around what your priorities for cash are when you look at all the different options out there from acquisitions, CapEx to share repurchases, etc? Right, right. Yes, our target leverage, like I said, is 250% to 300%, and that is going to be our basically debt-to-equity, including our off balance sheet debt for vehicles. Right now we are forecasting to end the year around 207%, so that is well below where we want to be. We are, however, a couple of points. I guess the way we have historically communicated is that we look first to organic growth, because that will over a cycle increase our leverage. So, organic growth probably the first call. Then focus on acquisitions as second, and then we have used over time share repurchases as a way to manage the leverage.

Page 8 So, we think all of those -- right now we are entering an organic replacement cycle. In light of the fleet age that we see, we see that happening this year where you can see the amount of capital we are spending. Next year is probably going to be a pretty significant year also, in light of the term outs for lease. So, we expect that to continue, which helps our leverage. We just completed -- we spent in the last six months almost $600 million, around there, on acquisitions. So, we continue to look at acquisitions, especially in our leasing business, and then Supply Chain, if they add capability, so that's out there. And then share repurchase is out there, it's always going to be something, a tool that we use depending on how we see the organic environment as we look out and as we see acquisitions. Unidentified Participant: When you look at selling trucks and trailers in the back end, maximizing value there, I guess, are you in some way creating a natural competitor for yourself by -- I mean, who are the principal buyers of those? I would think that you are putting supply in the market. You are buying new trucks, but are these trucks in some way or other competing against your core business? Typically, they don't. For us, these would be high mileage units' end of what we consider their first life. So, that doesn't really compete with a customer who would do a new lease vehicle. Typically, these are second lives, where it may be run more in local applications, and that's what we see. So, it's really not the same customer base we focus on in our leasing business. Unidentified Participant: What are you seeing on lease duration on new contracts? Are people signing up for longer leases at this point? Our typical lease is five to six years. That hasn't changed. So, on a new piece of equipment, that is still what you re going to see. I think I commented a little bit that in this current environment, one thing we may see a little bit more of will be customers looking to lease used equipment, not like really old, but let's say it's two-year-old equipment, may have four years left in its life; you may see a little bit more of that. So, that's why our estimates, when we look at lease capital versus rental capital, that could vary over the year depending on the appetite for used equipment. But in a straight piece of new equipment, that hasn't changed. It's still the five to six years. There hasn't been any movement in that. I'm going to test your memory real quick. Going back into the '04 and '05 cycle, there are some similarities in terms of engine technology changeovers, etc. Right, right. But if you look at the metrics, rental utilization, early terminations, extensions. If you look at the metrics that you look at going into a cycle, how do they look in '04-'05, the start of that cycle versus how do they look right now? Well, '04-'05, we probably are seeing stronger rental utilization now than we saw then at that cycle. And I think part of it is the impact of these technology changes really shouldn't be under-estimated, because there are significant cost increases associated with that. And I think where the economy is, there is a decent amount of uncertainty out there as we look out, as we hear from our customers. I think that's a little bit of a difference

Page 9 between the cycles. They're not exactly the same. We're coming out of such a deeper trough in '08-'09, than what we did before. I think that's kind of changed the landscape a little bit. Okay. Any read on the early terminations or extensions in those metrics, or is it too early in the cycle to tell? Yeah, that could be a little too early. Okay. We've got about 30 seconds here. I've got one more, if not. Back to Supply Chain Solutions, there seemed to have been a lull in logistics outsourcing during the downturn. Right. Our sense is that pent-up demand is starting to move forward. Is that your sense or can you give us some color on how that pipeline of business has started to shape up? I think as we look out we see -- you know, we think we have a solid pipeline. I mean, across all verticals, automotive included, despite some of the issues we talked about with the natural disasters. We still have added some good accounts and we expect to add more. So, I think overall we have a very solid pipeline. Fantastic. I think we're out of time. Art, thank you very much. All right. Thank you.