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Ryder System, Inc. (NYSE:R)

Q3 2008 Earnings Call Transcript

October 22, 2008 11:00 am ET

Executives

Bob Brunn – VP of IR and Public Affairs

Greg Swienton – Chairman and CEO

Robert Sanchez – EVP and CFO

Tony Tegnelia – President of Global Fleet Management Solutions

John Williford – President of Global Supply Chain Solutions

Analysts

John Larkin – Stifel Nicolaus

Jon Langenfeld – Robert W. Baird

John Barnes – BB&T Capital Markets

Art Hatfield – Morgan, Keegan & Company, Inc.

Alex Brand – Stephens, Inc.

Ed Wolfe – Wolfe Research

Todd Fowler – Keybanc Capital Markets

Mike Pak – Banc of America

David Campbell – Thompson, Davis, & Co

Operator

Good morning and welcome to Ryder System Incorporated third quarter 2008 earnings release conference call. All lines are in a listen-only mode until after the presentation. (Operator instructions). Today’s call is being recorded. I would like to introduce Mr. Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder. Mr. Brunn, you may begin.

Bob Brunn

Thanks very much. Good morning and welcome to Ryder’s third quarter 2008 earnings conference call. I would like to begin with a reminder that in this presentation, you will hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political, and regulatory factors. More detailed information about these factors is contained in this morning’s earnings release and in Ryder’s filings with the Securities and Exchange Commission.

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

With that, let me turn it over to Greg.

Greg Swienton

Thanks Bob, and good morning everyone. This morning we will recap our third quarter 2008 results, review our asset management area and provide our current outlook for the business. After our initial remarks, we will open up the call for questions.

So let me begin with an overview of our third quarter results, which is on page 4 for those following online for the slide presentation. Net earnings per diluted share were $1.25 for the third quarter 2008 as compared to $1.11 in the prior year period. EPS in this year’s quarter included a benefit of $0.03 due mainly to a change in Massachusetts tax laws. EPS in the prior year period included a $0.03 net charge for restructuring costs, partially offset by a gain on a property sale. So excluding these items in each year, comparable EPS was $1.22 in the third quarter 2008, up from $1.14 in the prior year. If you include the small positive tax effect in the third quarter this year, EPS grew by 10%. Excluding this effect, EPS grew by 7%. Including the tax effect, EPS was at the low end of the forecast range we provided on our last earnings call of $1.25 to $1.30. If you exclude this effect, comparable earnings for the quarter were slightly below our forecasted range. The shortfall was due to weaker than expected demand in our transactional commercial rental product line.

Total revenue for the company was down by 1% from the prior year. Total revenue reflects the impact of the previously announced change from growth to net revenue reporting for subcontracted transportation with one supply chain customer. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue was up 3%, due to contractual revenue growth in fleet management and supply chain.

Fleet management grew primarily from acquisitions and organic contract maintenance revenue growth. While supply chain revenue grew due to new sales activity, supply chain and dedicated revenue also benefitted from higher fuel costs.

On page 5, fleet management total revenue was up 11%, while operating revenue was up 2% versus the prior year. Contractual revenue, which includes both full service lease and contract maintenance, was up 4%. Lease revenue growth was up by 4%, driven by our recent acquisitions, while higher contract maintenance revenue of 6% growth reflects organic sales activity. Total FMS revenue was positively impacted by a 33% increase in fuel revenue, reflecting higher fuel costs passed through to customers.

Global commercial rental revenue was down 4%, reflecting a slowdown in the global economy. Rental revenue was down in both the US and the UK markets, while rental revenue was up in Canada. Gains from the sale of used vehicles were up by $2.3 million. We did sell fewer units during the quarter from a smaller used vehicle inventory. The decline in units sold was more than offset by improved pricing, as we increased our reliance on our own retail sales network, where we receive better pricing.

Net before tax earnings in fleet management were up by 12%. Fleet management earnings as a percent of operating revenue were up by 120 basis points to 13.5%. FMS earnings benefitted primarily from improved contractual business performance and accretive acquisition results. To a lesser extent, FMS earnings also benefitted from improved used vehicle results and unusually volatile fuel prices. These benefits were partially offset by lower commercial rental results.

Turning to the supply chains solutions segment on page 6, total revenue was down by 22%, due to the change to net revenue reporting on a subcontracted transportation business with one customer that was previously reported on a gross basis. This reporting change did not impact operating revenue or earnings. Operating revenue was up by 6%, reflecting both new and expanded customer contracts, as well as higher fuel costs. Third quarter net before tax earnings in supply chain were down 27% versus the prior year.

Net before tax earnings as a percent of operating revenue were down 160 basis points to 3.7%. Supply chain’s earnings were negatively impacted by lower operating results in our Latin American operations and the startup of US operation.

In dedicated contract carriage, total revenue was down by 2% and operating revenue was down by 1%. The revenue decline was related to non-renewed contracts, partially offset by higher fuel costs. Net before tax earnings in DCC were up by 7%. Earnings in the quarter benefitted from improved operating performance, partially offset by higher safety and insurance costs. DCC’s net before tax earnings as a percent of operating revenue were up by 80 basis points to 9.6%.

Page 7 highlights key financial statistics for the third quarter. Operating revenue was up by 3%, reflecting growth in multi-year contractual business. Earnings per share were up by 13%, reflecting higher net earnings and a lower number of shares outstanding due to share repurchases. Excluding the $0.03 tax benefit in 2008 and the $0.03 net charge primarily for restructuring costs in 2007, comparable earnings per share were up by 7%.

The average number of diluted shares outstanding for the quarter was down by 2.8 million shares to 56.2 million. In December 2007, we announced both a $300 million discretionary share repurchase program and a 2 million share anti-dilutive repurchase program. During the third quarter, we repurchased 850,000 shares at an average price of $66.44 per share under the $300 million program. And this brings that program to date purchases to 2,615,000 shares at an average price of $64.89 per share. During the quarter, we purchased an additional 103,000 shares at an average price of $67.16 under the 2 million share anti-dilutive program. This brings the program to date purchases to 1,363,000 shares at an average price of $63.41 per share. As of September 30, there were 55.6 million shares outstanding.

As you know, the capital markets have experienced conditions that we haven’t seen in the last 75 years. Ryder remains relatively well positioned due to our strong credit ratings, our under-levered balance sheet, and experience in accessing diverse funding sources. We are however being appropriately prudent in evaluating all sources and uses of capital. As such, toward the end of the third quarter, we temporarily paused our share repurchase programs. We are continuing to assess market conditions for appropriate continuation of the programs in the future.

The third quarter 2008 tax rate was 37.3%, in line with the prior year. The current period tax rate reflects the benefit of the change in Massachusetts tax laws. The prior year tax rate reflects a benefit from audit closures, expiring statutes of limitations within several jurisdictions, and a tax law change in the UK. For the fourth quarter, we anticipate our tax rate to be somewhat above our initial full-year plan rate, which was 39.1%.

Page 8 highlights key financial statistics for the year to date period. Operating revenue was up by 4%. Reported earnings per share were up by 10%. Comparable earnings per share were $3.40, up by 12% from $3.04 in the prior year. The average number of diluted shares outstanding were 57.2 million, down by 3.2 million shares. The year-to-date tax rate was 40.3%, compared to the prior tax year rate of 38.1%. The 2008 tax rate was impacted by non-deductable losses in Brazil we reported in the second quarter. Return on capital, which is calculated on a rolling 12-month basis, was 7.4% and the same as last year.

I would like to turn now to page 9 to discuss our third quarter results for the business segments. In fleet management solutions, operating revenue was up by 2%, led by 4% contractual revenue growth. The smaller commercial rental product line had a 4% revenue decrease. Total revenue increased by 11%, due both to this operating revenue growth and higher fuel cost passed through to customers. Fleet management solutions earnings were up by $11.6 million or 12%. In lease, we continued solid revenue growth, driven primarily by our four recently closed acquisitions.

Miles driven per vehicle per work day on US leased power units were down 4% versus the third quarter 2007. Contract maintenance revenue grew 6%, due to continued new sales to the private fleet market, which resulted in an increase in the number of units under contract maintenance agreements.

US rental revenue was down, due to a 5% smaller fleet, and a 3% reduction in pricing on power units. Despite softer market demand, US commercial rental utilization on power units was 73.7%, up 70 basis points from 73% in the third quarter 2007. Utilization improved as we made the appropriate adjustment to our rental fleet size to meet market demand conditions during the quarter. This is fourth consecutive quarter of improving US rental utilization comparisons. In the UK, rental demand was softer, and this resulted in lower utilization of the UK rental fleet. Rental revenue increased in Canada in the quarter.

In supply chain solutions, total revenue was down 22% in the quarter, due to the change from gross to net revenue reporting I discussed previously. SCS operating revenue excludes subcontracted transportation and therefore excludes the impact of this change. SCS operating revenue was up 6%, reflecting new and expanded customer contracts as well as higher fuel costs. SCS net before tax earnings were down $4.7 million for the quarter. Earnings were negatively impacted by results in our Latin American operations, and the startup of US based operations.

In dedicated contract carriage, total revenue was down 2% and operating revenue was down 1%, due to non-renewed contracts, partially offset by higher fuel costs. DCC’s net before tax earnings were up by 7%, due to improved operating performance partially offset by higher safety and insurance costs. Our total central support services costs were up by $1.7 million, due primarily to professional fees associated with strategic initiatives and legal services. A portion of central support costs allocated to the business segments and included in segment net earnings was up by $1.4 million. The unallocated share, which is shown separately on the P&L, increased by $300,000. Net earnings were $70.2 million, up 7% and comparable net earnings were $68.6 million, up by 2% from the $67.2 million in the prior year.

Page 10 highlights our year-to-date 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 year-to-date net earnings were $194.5 million as compared to $183.6 million in the prior year. This represents an increase of $10.9 million, or 6%.

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

Robert Sanchez

Thanks Greg. Turning to Page 11, year-to-date gross capital expenditures totaled $949 million, down $33 million from the prior year. Full service lease vehicle spending was down $37 million. The reduction in lease spending reflects increased term extensions on existing vehicles in lieu of purchasing new vehicles for customers. Additionally, lease spending was elevated in the prior year due to the pre-buy of 2006 model year engines which continue to be purchased for customer leases in early 2007.

Commercial rental vehicle spending was down by $28 million from the prior year reflecting our more conservative plan for rental capital spending this year. We realized proceeds primarily from the sales of revenue earning equipment of $212 million, down by $85 million from the prior year. This decrease reflects a planned reduction in units sold as a result of having a smaller used vehicle inventory.

In 2007, we executed a $150 million sale lease back but did not have a sale lease back in the current year-to-date period. Including proceeds from sales for the 2007 sale lease back, net capital expenditures were $737 million, up by $202 million from the prior year. We also spent $232 million on three fleet management acquisitions closed this year; Lilly in the northeast, Gator in Florida, and Gordon in Philadelphia.

Turning to the next page, you will see that we generated cash from operating activity of $882 million year-to-date, up by $45 million from the prior year. This increase was due to improved earnings before depreciation expense. Increased depreciation was largely due to spending on contractual leased vehicles primarily from acquisitions. Including the impact of our used vehicle sales activity, we generated over $1.1 billion in total cash, down by $191 million from the prior year. The decline was primarily due to the $150 million sale lease back from the prior year.

Cash payments for capital expenditures were $891 million, down by $202 million versus the prior year. Including our capital spending, the company generated $250 million in positive free cash flow in the current year to date, up from $239 million in the prior year.

On Page 13, total obligations of approximately $3.1 billion are up by $135 million as compared to the year-end 2007. The increased debt level is largely due to spending on acquisitions and net stock repurchases. Balance sheet debt-to-equity was 165% as compared to 147% at the end of the prior year. Total obligations as a percent of equity at the end of the quarter were 174% versus 157% at the end of 2007.

Our recently closed acquisitions as well as share repurchases are starting to move our balance sheet leverage higher this year in accordance with our previously stated objective. We continue to have significant balance sheet capacity to fund future growth, acquisition and other objectives.

Our equity balance at the end of the quarter was $1.77 billion, down by $115 million versus the year-end 2007. Our ending equity balance reflects net share repurchases, currency translation losses and dividends, which more than offset our net earnings.

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

Greg Swienton

Thanks Bob. On Page 15, we summarize key results in our US asset management area. At quarter end, our used vehicle inventory for sale was 4600 vehicles, unchanged from the end of the second quarter. Used inventories were down 39% or almost 3,000 units from the end of the third quarter 2007. The lower used fleet balance reflects the actions we took last year to reduce inventories and bring them in line with our targeted levels.

We sold 4300 used vehicles during the quarter, down 36% from the prior year, and in line with our expectations. Because our inventories are in line with our targets, we’ve returned this year to our normal process of selling the large majority of our vehicles at retail prices through our own used vehicle sales centers where we realize the best pricing. Proceeds per vehicle sold were up by 17% on tractors, and up by 8% on trucks as compared to the third quarter 2007. Tractor and truck proceeds per unit were also up by 3% to 4% from the second quarter this year. Because our inventories are so much lower than last year, we are able to be much more selective and can focus on maximizing the price per unit sold.

At the end of the quarter, approximately 5,600 units were classified as no longer earning revenue. This number is down by 3,200 units from the prior year, primarily due to a decrease in the number of units available for sale. Our total US commercial rental fleet in the third quarter was down on average by 5% from the prior year. In addition to last year’s fleet reductions, due to the softer-than-expected rental market in the third quarter, we reduced the size of the US rental fleet to below our previously-planned level. We made the necessary changes during the third quarter to align our rental fleet with the softer demand and we continue to closely monitor and respond to market conditions on an ongoing basis. The rental fleet reductions we have made accomplished their objective for the third quarter by improving rental utilization levels by 70 basis points versus the prior year. It is also important to highlight that even with the additional rental fleet reductions in the third quarter, our used truck inventories were stable and remain below our target level, while pricing on used vehicle sales has improved.

Turning to Page 17. We are revising our full year 2008 EPS forecast, primarily due to softer commercial rental demand. Our prior forecast was a range of $4.60 to $4.70, while our new range is $4.43 to $4.53. This now represents an increase of 5% to 8% over the prior year comparable EPS of $4.21. We are also establishing a fourth quarter EPS forecast of $1.03 to $1.13 versus $1.18 in the prior year. As some of you may recall, our original business plan for the year assumed a continued soft but stable economic and transportation environment. Specifically, our commercial rental revenue was forecast to be in the range of flat to up 2% for the year. While this forecast was accurate for the first half of this year, due to the further weakened economic environment we now expect commercial rental to be softer in the near term and have factored this into our fourth quarter outlook. Additionally, we have assumed a couple of cents of additional EPS expense in the fourth quarter related to higher short term borrowing costs given the recent unusual conditions in the credit markets.

While our EPS outlook is now somewhat lower, due to the changed economic environment, our business model does remain strong because of the many process changes we have made in the business in recent years. In particular, our centralized asset management team and our improved processes in this area have been critical in properly executing our asset strategy through this downturn. As a result, we remain in very good shape in terms of managing the company’s vehicle fleet assets. Fleet management’s operating margins were actually up significantly in both the third quarter and the year-to-date period reflecting these actions. Commercial rental utilization rates were also up in both periods. Our used vehicle inventories have been and remain below our targeted level. And the pricing we realized in the third quarter on both used trucks and tractors were solidly up. The proper management of our fleet put the company in a significantly stronger position to weather the current economic downturn as compared to the prior downturn we experienced in the early period in 2000, 2001.

Looking ahead to next year, while we haven’t finalized our 2009 business plan yet, we expect to continue to grow our contractual business through both acquisitions and organic growth. We have intensified our focus on productivity initiatives and cost control opportunities in light of the softer market conditions.

We are also making progress on addressing some of the operational headwinds we have had this year in the supply chain segment. EPS will also benefit next year from the share repurchases we have already completed to date and from any additional repurchases if and when we restart the programs. While we expect the external economic environment to remain challenging for some time, we are going to focus on our own initiative to grow our contractual businesses to improve our productivity and reduce cost to drive earnings improvement next year.

That does conclude our prepared remarks for this morning. But before I open up the call for live questions, I would like to address one question that we have received in advance of the call. And that question is related to whether we anticipate vehicle write-downs or increases in depreciation expense due to used vehicle market and pricing conditions? The short answer to that question is no, we don’t anticipate vehicle write-downs or increases in depreciation earnings due to used vehicle market and pricing conditions. Our depreciation policy is based on a long term trend of used vehicle pricing over an economic cycle, not just on recent pricing history. We also review our depreciation rates periodically and make any changes necessary to depreciation rates for existing vehicles on a going forward basis.

Due to the significance of our volumes, this review is based primarily on Ryder’s sales pricing experience not on general market rates. The review is also not based just on recent used vehicle prices, but is typically based on a 5-year history of sales proceeds. Each year when we’ve communicate our business plan for the coming year, we’ve identified any changes in our depreciation rates resulting from this analysis. In years where we have made an adjustment the changes have been modest in size never representing more than a $0.13 impact to EPS in any of the last 5 years. Based on our sales experience to date and give our sales price trends we don’t anticipate a significant change in depreciation policy rates next year. In fact, as a result of our asset management programs, we are operating some vehicle types for longer time periods with customer. This actually may result in a modest benefit to earnings next year because our depreciation policy will reflect that it is appropriate to depreciate vehicles over longer periods which represent their actual usage periods with customers.

We will be happy to discuss this and other topics further. So, at this time I will turn the call over to the operator to open up the line for questions.

Question-and-Answer Session

Operator

Your first question today is from John Larkin. You may ask your question and please state your company name.

John Larkin – Stifel Nicolaus

Yes. I am with Stifel Nicolaus. Good morning everyone.

Greg Swienton

Good morning John.

John Larkin – Stifel Nicolaus

Given the suspension of the share repurchases program, yet the reiteration of the objective longer term of moving the leverage ratio up to 275% total obligations to equity, is it safe to say that at this particular time given the credit markets as they are it would be difficult to actually lever up to that level?

Greg Swienton

I think it will be a litter tougher to lever up at the rate that we would have anticipated prior to this sort of meltdown in the financial markets. That doesn’t change our intended direction to get to that right level of 250% to 300%. And we are going to keep a careful watch on this. Obviously we’ve been experiencing, as I said in my remark, something that this country and the world hasn’t seen for 75 years. And we just think it’s prudent that we look at every source and use of cash. So, we are temporarily suspending that. That doesn’t change our long term direction between share repurchases and acquisitions. We still expect to move to that longer term objective. It may just not happen as quickly as it would have if we didn’t have this blip that occurred over last several months.

John Larkin – Stifel Nicolaus

So, to put it in (inaudible) the words, if a great acquisition came along in the next couple of months you would have the availability under current lending arrangements to move on that acquisition and roll that company into your operation?

Greg Swienton

Yes, we currently absolutely do. And Bob Sanchez, is there anything you want to add about on access these days?

Robert Sanchez

The only thing I would add is clearly our access to capital has despite all the issues that have occurred in the credit markets has been strong during this period. And one of the reasons why we temporarily paused the share repurchases to make sure that as these acquisition opportunities come up that we do have all the capital that we need even if some things went the wrong way in the capital market, that we still have the capital we need to execute on them because in this environment one thing that we are looking at is it could possibly move more opportunities for acquisitions which would be helpful for us.

John Larkin – Stifel Nicolaus

Do you think generally that acquisitions are more accretive to earnings than the share repurchase program even at this share price level?

Robert Sanchez

In the short run no, in the long run though as these acquisitions really are tuck-ins, and we get the synergies that we look for in them. We believe that we are better positioned with the acquisitions.

John Larkin – Stifel Nicolaus

Is there any refinancing of any pieces of commercial paper or other instruments coming up in the near term that we need to be worried about?

Robert Sanchez

No, there is not. We are actually – let me address that a little bit. In August, we issued the $300 million 7-year medium term note at about 7.25%. And that did position us well coming into to September to be able to manage through some of the activity that’s going on. Our commercial paper level is at a low level right now between our AR backed CP and our normal CPU [ph] at about $250 million. As you know we have an $870 million global revolver plus the $250 million AR backed CP programs. So, we’ve got a lot of capacity on that end for continued capital access.

John Larkin – Stifel Nicolaus

Could you tell us who your lead bank is and then who are the other key members of the bank group are?

Robert Sanchez

They are global banks. The three top ones in the revolver are Bank of America, Royal Bank of Scotland, and Bank of Tokyo.

John Larkin – Stifel Nicolaus

Okay. It’s very helpful. And then one other sort of broader question. The company has done such a tremendous job over the last few years of moving away from what I would call businesses that are tied to economic cyclicality, yet even with commercial rental being only, I want to say, 10% of the total overall business it has had a bit more of an impact and I think some of us might have thought here in the last quarter or two, is there any thought to perhaps dramatically downsizing that or perhaps exiting that business or is it two critical in terms of being maybe the first service that potential much larger customers would want to take-up [ph]?

Greg Swienton

Yes. I would say that the way the commercial rental is a piece of the fleet management than leasing and maintenance business that we would not be looking to do something draconian or dramatic or move away from it. It is a logical service piece that is a key part of leasing and much of the volume that comes from rental does come from existing lease customers. Clearly what happens when you take a sudden rapid decline, which is sort of what we’ve been experiencing now, the third quarter and we think will happen again in the fourth is a rapid decline from where we thought things might have been. So, you might say a sort of a double dip this year that nobody forecasted, not even us. So, in a short term you not only have the rental revenue decline, you also have the cost of then outsourcing the vehicles and that has a little bit of extra expense to get to the right levels. But the overall business model and being tied together of the value for our customers, I think in the long term really does play out well. I mean, that’s why I answered the way I did. Then I don’t it would be appropriate to do something draconian because that would harm the long term model although it is a little bit of pain in the short term.

John Larkin – Stifel Nicolaus

Okay. Maybe just to shed a little more color light on that point. Any idea of what percentage of the new full service lease customers first started off with Ryder as commercial rental customers?

Greg Swienton

I don’t know that I know the exact percent, but we can tell you that many customers had their very first experience with us as renters. And that’s when they become exposed to the company, to the people, to the operations, to the maintenance, and then the potential for leasing. So, that is also a feeding point. And in addition, as I also said earlier, just to repeat, the majority of the business that comes from rental is not just occasional rentals but also from our longer term lease customers. So, your point that again, is this an indication that you’ve got tougher issues in the economy generally, I would say, yes that’s the case because that is supplemental capacity that they don’t need. And you will also note the other thing we reported this quarter is that for the first time in quite a while the lease miles that were run on existing fleets were also down for the first time in a long time. So, I think that is saying something about the level of freight to be moved in this environment.

John Larkin – Stifel Nicolaus

That’s very helpful. Thank you very much.

Operator

Thank you. Jon Langenfeld, you may ask you question and please state your company name.

Jon Langenfeld – Robert W. Baird

Good morning

Greg Swienton

Good morning Jon.

Jon Langenfeld – Robert W. Baird

Can you reflect on the pipeline on the full service lease side?

Greg Swienton

I will let Tony Tegnelia comment on that.

Tony Tegnelia

Good morning Jon. Our pipeline actually looks very good year over year. It’s up from the third quarter of last year. Significant portion of that pipeline continues to be for large deals which is strategically our segmentation direction. It’s up from the beginning of the year and also midyear as well. So, we’ve discussed in the past, we are staying very steady state and firm with our sales force in the field. And we are going to continue that strategy. We continue to build the pipeline, we like it very much, we are making improvements in our closing ratios. And our extensions are up very handsomely as well. And our reduction in loss business is very attractive too. So, we are seeing our retentions up, extensions up very high, and a very strong pipeline. And we are continuing firmly with our strategy with our strong sales force to continue gaining market share in this environment. We like where the pipeline is in level and also in quality a bit [ph]. And as we discussed earlier in previous calls, we really cleanse the pipeline process very well and the probability of hit rates on this pipeline is higher than the hit rates have been in the past with its level being higher as well.

Jon Langenfeld – Robert W. Baird

And if you look at that pipeline today relative to maybe 6 months ago, is there anything in it that convinces you that things have gotten worse, (inaudible) there’s other points of your data or data points in your business that show that. But I am wondering if the pipeline specifically if there are issues or (inaudible) duration to close is getting longer or how you might measure in that?

Tony Tegnelia

Yes. There the only tempering aspect is exactly the point that you raised. We are seeing some delays in decisions. They still need the equipment. They are still seeing their business going pretty steady state. We have a good creditworthy and good strong customer base. But it is taking in a bit longer to decide and you can see that in the extension during this rather turbulent period the extensions are higher as they wait to make longer term commitments. But they are sticking with us. They are very pleased with the service and we like the extensions because we get very extraordinary returns on the extensions. So, we are keeping them [ph] in the hold, also helps us preserve our capital. But they are a little longer to make the decisions and we are okay with that because we really do like the extensions.

Jon Langenfeld – Robert W. Baird

Okay good. And then Greg, on the Central Support Services, I thought that was up $2 million relative to your run rate. Can you talk about some of the strategic initiatives and (inaudible) legal services that caused that?

Greg Swienton

Yes, there were dollars that we had to expense in the third quarter that when we go through various acquisition activities if in fact those don’t occur and that has happened then you end up expensing all of that money right at the time that that decision is made and concluded that you don’t complete the acquisition. So, under today’s accounting rules, all of that then gets expensed at that time and that’s what help move that up both in the general acquisition, strategic, and legal costs.

Jon Langenfeld – Robert W. Baird

So that’s not a (inaudible) don’t have more of those that’s not a run rate, the $48 million plus there?

Greg Swienton

That’s correct.

Jon Langenfeld – Robert W. Baird

Okay. And then finally if you think about your comments about growing earnings next year and having the contractual businesses grow and trying to improve the earnings, can you just talk qualitatively, I mean how you think you get there from – it looks like leaving the year here in the fourth quarter, if I just look at the midpoint of your range, your earnings will be down kind of in the mid to upper single digits, what are these kind of incremental points, can you run through those again, you did it on the prepared remarks, maybe run through those that give you the confidence in here today that you might be able to improve earnings?

Greg Swienton

Yes. I’ll try to think a little bit of lifting the year up or our hit list for you. We have again at the end of this year managed our vehicle assets down and I think that puts us in a better position again at the start of next year even in a lower general economic environment that would better position to face some of that headwind. We are going to face that from a softer rental market, but we believe that we can continue to grow our contractual business both through acquisitions and through organic growth. And our continued challenge and is still showing up is that even as an existing base of business with customers tends to be slowing down we continue to work on offsetting that with both organic sales by going after new customers and proposing the value proposition that I think you are familiar with as well as from acquisitions. We are also going to I think be able to overcome some of the things that we face this past year in supply chain, both in the US and internationally, particularly in Latin America. So, we will have that behind us. We may, as I indicated in that first proposed question, we may have some benefit from depreciation because we are holding vehicles for longer periods because customers are holding them and utilizing them for longer periods. We are going to have some positive impact from earnings per share from share repurchases that we’ve already completed to date. And that assuming that the conditions are light we would resume again. So, I think those are some of the potential reasons behind feeling that we can still make progress. I would say that the one other area that is going to be a headwind and we may have commented on it briefly but it will come up when we do our year end analysis and we do 2009 and we talk about 2009 for next year is that pension cost to our P&L are going to be determined by market values of securities held by a plan on the 12/31/08 just as anybody who has got the defined benefit plan. So, based on current asset values we are going to expect that we are going to have a pension expense due that’s going to significantly increase in 2009, yet at the same time we are going to be doing a number of other things with productivity and cost management and other growth areas to offset that. So, net of all of that we believe that even in a tougher environment we are going to be able to still grow revenue, operating revenue and earnings. Maybe not as robustly as we would have hoped 6 months to 18 months ago, but we still expect to grow earnings and revenue.

Jon Langenfeld – Robert W. Baird

Thanks for the color.

Operator

Thank you. Your next question is from John Barnes. You may ask your question and please state your company name.

John Barnes – BB&T Capital Markets

Hi guys. Can you just talk a little bit about, i.e., two questions, one on the managing the used vehicles. You said they are above or below I guess target levels. Can you talk about given your outlook, how much more aggressively will you manage the number of vehicles in the used vehicles network on a go forward basis, I mean how many more would you be willing to take out at this point?

Greg Swienton

I will let Tony speak to that. I don’t know that we would predict a specific number. I think we are going to try to balance that to the anticipated demand that you see for the next three to six months. Tony?

Tony Tegnelia

John, we have targets for the fleet level and target for assets that are generating revenue. And right now we are about 10% below that target and we are very comfortable there. We’ve developed that program last year. We are keeping it into effect and we plan to keep it that way. We are probably not going to go dramatically lower and I will tell you why. We like the price level that we are getting right now on the used truck and the used tractor sales. And we like that price and those gains are very attractive for us. So, our mix has changed that Greg had mentioned to a much more favorable retail channel and we want to keep it that way. So, we still have about a 3-month inventory supply on hand. We watch that continuously so it doesn’t swell. But right now we like the pricing and all these balance rising fleet levels with the price. But right now we believe we will stay right where we are enjoying these prices with much more retailing, protecting our residuals, which impacts our pricing on lease and go steady state like this as we go into ’09, which – another favorable reason why we’re liking [ph] these inventory levels is that as we re-right-size the rental fleet based upon demand we have the capacity through our used vehicle network to these inventory levels to deal with those added units to be disposed off, and that’s extremely helpful to us in this environment as well. So, we like the level. We are going to stay there, but we also like the prices and so we balance that. That will help the rental product line going forward in the future also.

John Barnes – BB&T Capital Markets

Okay, given that you are earning 10% below your targeted levels, do you anticipate the gains on the sale that we have seen over the last couple of quarters. Is this kind of the run rate we should expect as we get into 2009?

Tony Tegnelia

Well, we think the pricing on the tractors and the pricing on the trucks will continue solid and stable as we go into the next several quarters.

John Barnes – BB&T Capital Markets

All right. Can you just help us out here from the standpoint of – you know, we have heard how bad the used equipment market has been from everyone; that some alternative channels have kind of closed down. Can you just give us an idea of why your channel has stayed as robust as it has and why the pricing has stayed as solid as it has?

Tony Tegnelia

Well, we believe there is a number of reasons. First, we do have a network of over 50 locations to do very solid retailing. We have a strong, loyal customer base for our used vehicles, we have a very attractive branded Ryder road ready and warrantee program that goes along with those units. We also do some offshoring as well. But I think fundamentally, we spend years building the momentum of this retail network for our used vehicles with a lot of customer loyalty and a lot of good branding and very attractive programs for warranty. And we think that that strategy is holding us in very, very good stead during this economic environment. And we do command a better price on that basis. So, we are going to continue to follow that strategy and work with those loyal customers with our branded products.

John Barnes – BB&T Capital Markets

Okay. You know in terms of the renewal of lease business, I understand the commentary about it taking a little longer to get a deal done and that type of thing. Can you give us an idea has there been any material shift in the size of the deals and if so, what kind of magnitude are we talking in terms of number of trucks in a particular deal or something along those lines?

Tony Tegnelia

Well, our strategy over the last years or so has been to shift the focus of the sales force from the segmentation point of view to larger customers. And that has been very successful. So where we see shifting in the pipeline is those opportunities where the size of the fleet is larger. Typically, our average customer would be 3 to 5 units, now we are seeing more in the 15 to 20, 25 range. And we like that really quite a bit. So, we think that is favorable for us. It helps the cost of our production from the sales point of view and that works really very well in this environment. So we do see the shift in size of customer. It has been our strategy, we are going to continue that strategy from a segmentation point of view of larger fleet customers converting from private fleet, and you will see that continue.

John Barnes – BB&T Capital Markets

But how about on existing customers that are renewing a deal. Can you talk a little bit about the shift in the size of those deals?

Tony Tegnelia

We have seen the downsizing within our division really plateau. Last year, we saw a lot of requests for downsizing, we have really seen the number of units for downsizing really plateau. So we think right now our customers have the right fleet levels as they see going into the future, and those large fleets, for the most part, are staying with the fleet levels that they have. Consistent with Greg’s comment earlier, some of them are utilizing the vehicles a little less, with less miles, and I think that is because they are changing some of their routes and visiting stores perhaps a little less frequently. But generally speaking, they like their fleet levels and they are renewing pretty much at the same fleet level.

John Barnes – BB&T Capital Markets

Okay, very good. All right, thanks for your time, guys.

Operator

Thank you. Art Hatfield, you may ask your question and please state your company name.

Art Hatfield – Morgan, Keegan & Company, Inc.

Morgan Keegan. Morning, everybody.

Greg Swienton

Hello, Art.

Art Hatfield – Morgan, Keegan & Company, Inc.

Hey, Greg, when I look at the gains on vehicle sales line items, this may be a stupid question, but has that number ever been at an actual expense as opposed to a gain?

Greg Swienton

Not in my nine and a half years, and I would ask Tony, who has been here 31 and I don’t think so.

Tony Tegnelia

No, we set conservative residuals, okay, to make sure that we protect the integrity of the balance sheet, and also pricing of lease. So, we have not had combined losses with the sales of used vehicles with any specific accounting period; no, we have not.

Robert Sanchez

Hey, Art, the only other thing I would add is that the writedown of the vehicles when they get to the UTC, the used truck centers, is actually under depreciation expense line item. That is one of the things.

Art Hatfield – Morgan, Keegan & Company, Inc.

Okay, that is very helpful.

Greg Swienton

In fact, just one other point. If you go back to our low point in the last downturn, which was like in 2000, 2001; in 2000, that low point still had a gain of like $12 million to $15 million per year.

Art Hatfield – Morgan, Keegan & Company, Inc.

Okay, that is very helpful. I was going to do that, but I hadn’t had a chance to go back into that this morning. One quick question for – an additional question I guess for Tony, maybe my other ones will be directed to him too, but Tony had mentioned the credit worthiness of customers have been very good. Have you seen any changes in that at all or have you become concerned at all for any particular customers, large or small?

Tony Tegnelia

We have very strict credit standards within our company and we have actually seen on a year to date basis this year compared to last year, the number of units coming back to us either because businesses are closing or going chapter 11 actually dropped dramatically. So we are comfortable with the credit worthiness of our customer base, we do have very strict credit standards going into the transaction initially, and so we feel good about where we are right now with that group.

Art Hatfield – Morgan, Keegan & Company, Inc.

Okay, thank you. Turning back to the extensions a little bit, I'm sure you have, depending on the vehicle, a maximum term that you are willing to extend a contract. If that is the case, have you gotten to a point where you are reaching the end of any extensions that occurred earlier this year, and if so, what kind of experience are you getting on retention with those customers?

Tony Tegnelia

We typically extend for about 12 months to 18 months and that is the ideal lifetime that we have from that perspective, so that there is still life in the vehicles when they go to the used vehicle network to support those residuals and gains, and we do have good experience, those customers typically stay with us. So we have good experience with those customers, and typically, it is about 12 months to 18 months.

Art Hatfield – Morgan, Keegan & Company, Inc.

Okay. And then finally, this is kind of a broader question, but I think guys in the public markets tend to focus on you guys a little bit too much, inappropriately I would say, you probably want us to focus on real time [ph], but with regards to the problems hitting in the market and how that may impact you and I don’t think we see or understand maybe the problems some of your smaller competitors are facing. Can you talk a little bit about this environment that we are in, if you have seen any commercial rental or leasing competitors that have had trouble and maybe even any failures that you have seen and maybe if you have seen any kind of move to you from customers because of concerns about the people that they are with now?

Greg Swienton

From my point of view, since you asked a broad question, I'm not sure that I have heard and seen that on any broad nature. Whatever may be going on inside privately-held firms, I just don’t know. If there is anything that we see from customer movement – customer transition sometimes do happen, it may be hard to guess why that may be occurring. I don’t know that we are at any point where we would say that there is some lack of confidence from the broad base of suppliers who are in this industry is my sense thus far.

Art Hatfield – Morgan, Keegan & Company, Inc.

Okay. Have you seen anything with regards to some of these localized or regional leasing companies coming to you? Has that activity picked up at all with regards to people seeking a merger opportunity?

Greg Swienton

Nothing appreciably different than what has occurred in the recent past.

Art Hatfield – Morgan, Keegan & Company, Inc.

Okay. Thank you; that’s all I have.

Operator

Thank you. Alex Brand, you may ask your question and please state your company name.

Alex Brand – Stephens, Inc.

Hi, Stephens. Good morning, guys.

Greg Swienton

Good morning.

Alex Brand – Stephens, Inc.

I may have missed it, but have guys given the figures on how much revenue and earnings accretion you have gotten from your acquisitions?

Greg Swienton

We do know that and we could share that. We have some stats, roughly we said a good proportion, maybe about two-thirds of the revenue growth in contractual and lease and probably similar value for earnings has probably come from the acquisition.

Alex Brand – Stephens, Inc.

Okay, I can get those numbers from Bob on follow-up.

Robert Sanchez

$0.02 to $0.03 pretty much for the most part of the quarter.

Alex Brand – Stephens, Inc.

And do you have a revenue figure, Bob?

Robert Sanchez

Revenue was about 25 to 30, something like that.

Alex Brand – Stephens, Inc.

Okay. And, Greg, you have mentioned that you feel pretty good about growing the contractual business, including M&A next year, which makes sense that you are in a position to do that. What is out there to acquire? I mean, I didn’t think there was much that was sort of meaningful to take a look at anymore.

Greg Swienton

Well, in and of itself, there may not be anything that would be big enough or material enough, but as you have seen in the last less than 12 months, we have had 4 in-fleet management and we announced one that makes sense for us in supply chain. None of those are huge, but put together, you can talk about something that adds $100 million, $125 million or more of revenue over a period of time and the way that we manage them and run them, they are accretive to earnings, so they make sense. So, no, there is no big one on the horizon that makes a difference, but collectively and together, they can’t add up.

Alex Brand – Stephens, Inc.

Okay. I think your first question, there was some discussion about your levering up, but it seems to me like – you can correct me if I'm wrong on this – with all the extensions, you are likely to have lower CapEx for growth for at least another year. You are going to continue to have pretty strong free cash flow. I guess I can’t see why you would – what is your incentive to lever up at this point when you have a lot of free cash flow in the environment certainly not conducive to leverage?

Greg Swienton

There is two pieces. First, I think, you just probably mentioned one reason why we want to be cautious in this environment. Until you see more thawing of capital markets and access to capital, we want to be pretty cautious. But overall, remember that for our overall portfolio, of which fleet management and leasing is the largest portion, the appropriate ratios for that sort of business in leasing, it deserves a higher ratio of debt to equity. So that is the long term reason. That is the long term target rationale, because that is what makes the model work. So, that is why over time, you do want to get there; but that is also why, as you suggest, we are not rushing to get there right now in this environment.

Alex Brand – Stephens, Inc.

And I'm not sure what you guys are using, but your share buyback, you bought a lot of stock in the 60s it sounds like stocks hit 40 and you have got a pause on that buyback. Are you guys using some parameters for valuation internally that will drive that or is it just sort of a comfort factor before you come back?

Greg Swienton

It has everything to do with a period of uncertainty in this market that I think just makes everyone pause and be careful. You know, when you are in an environment that we haven’t seen for three generations. When people are afraid to even have their money in banks, you are in an environment that none of us have seen in our lifetimes. So that just suggests that you want to be pretty careful about your sources and uses of cash until things thaw out, banks are willing to loan each other money and they are willing to put money in the marketplace and the credit markets for businesses and consumers.

Alex Brand – Stephens, Inc.

Yes, it is safe under the mattress, but a little uncomfortable.

Greg Swienton

Well, we got a lot of it in rolling stock, you know.

Alex Brand – Stephens, Inc.

Right, right. My last question, supply chain has been a struggle of late. And you know, I know you are going to take steps to right that, but obviously, it also has the biggest auto exposure. Do you need to reduce auto exposure meaningfully in order to really get that business right?

Greg Swienton

I think that – considering that we have written a lot of auto manufacturing down over the last few years, if you look at even the revenue growth, which we break down in the US, that hasn’t been a severe even as their entire industry. So, that means that we are connected to many of the better-served products in the automotive industry, but I think that the longer-term broader question for our portfolio as well as for anybody else’s is diversification is always better, and there are some areas in some business segments that we believe we do well in diversifying and I think that that just helps generally regarding the perception of us as even as much as the result. So I think there are areas that John Williford and his team are looking at and it may be premature to say where exactly we may be focusing, but diversification is a target. Is there anything else you want to add, John?

John Williford

I think we strong team in automotive and so, even though volumes are declining, we are probably gaining a little share. A way to diversify from that is to grow our other products faster than automotive. We are putting a lot of energy into that right now. As Greg said, we don’t have a specific plan where we are ready to rollout yet, but we don’t want to cut our automotive business, we want to keep growing there and we want to grow our other products in other industries faster.

Alex Brand – Stephens, Inc.

Okay, fair enough. Thanks for the time, guys.

Greg Swienton

Sure.

Operator

Thank you. Ed Wolfe, you may ask your question and please state your company name.

Ed Wolfe – Wolfe Research

Thanks. Wolfe Research. Hi guys.

Greg Swienton

Hi Ed.

Ed Wolfe – Wolfe Research

Rental fleet, Greg, how do you get in front of this again like you did last year? How quickly can you take down the fleet and what is the right number?

Greg Swienton

Tony is in front of it, so I will let him answer.

Tony Tegnelia

Okay Ed, here is what we do with rental. What we saw in the third quarter beginning about August, early August was a little bit of a second dip on the rental demand. And so what we did very expeditiously is re-right size the rental fleet very quickly within the quarter and that actually negatively impacted our performance in the quarter by several cents a share. But we do not procrastinate in our needs to re-right size the rental fleet. We have learnt from past that that hurts the company and you cannot do that. So, we re-right size the fleet very expeditiously. We have 134 rental markets that we really continuously monitor by asset class and when we see that there is an out of calibration between demand and also the fleet levels then we will act very, very quickly to put them back into synchronization. So, with those 134 markets and with that synchronization, the fact that our used vehicle inventory levels are lower now is able to accommodate any of those reductions and so we are able to adjust the fleet very quickly. And to further follow-up on a point that Greg had mentioned earlier, more than 50% of our rental fleet is really dedicated to support our lease business. So, when we downsize the rental fleet, there is really less of the fleet left to support the pure product line that we have within rental. So, it actually self-corrects the cyclicality within the rental fleet during this kind of environment. So we are prepared to do what needs to come, we are comfortable going into the fourth quarter with our rental fleet but if we see the demand continuing to soften, then we will do what we need to do because we do not procrastinate with that asset adjustment.

Ed Wolfe – Wolfe Research

Yes. Tony quickly because we are into other people’s calls and such, is that down 5% from quarter to quarter, how much down did you take it, what were those actions that you took and how did they cost you a couple of cents?

Tony Tegnelia

What we did is, the third quarter versus last year it is down about 5% and we anticipate at the end of the year we will be down about 4%, and what we did is we take out those vehicles that are not renting. We know by asset class that the light vehicles are the ones that are not renting the most, so we will move those out into the used vehicle network and we will sell those units off. We were able to do that and still maintain the pricing that we have got in the UVS operation. So we do it by asset class. We were down by about 5% and we will be down probably 4% at the end of the year.

Ed Wolfe – Wolfe Research

An additional 4% or some of it is going to come from –

Tony Tegnelia

No, the additional 4% is pretty much year over year, where we were at the end of last year versus where we will be at the end of this year. It will still be lower at the end of this year than it was at the end of the third quarter.

Ed Wolfe – Wolfe Research

Okay. But your idea is you are going to be flat from here right now is your thought process.

Tony Tegnelia

We will probably take it down a bit in the fourth quarter as well, which was our original plan to do.

Ed Wolfe – Wolfe Research

Okay. How big is the UK fleet versus the US fleet?

Tony Tegnelia

Well, actually over 80% of our rental is really in the US. The UK fleet is really the smallest one. It is less than 10% of our total rental.

Ed Wolfe – Wolfe Research

Okay. On the leasing side, in the old days customers would hand back trucks or not take ones that they had ordered as they came in when the economy softened, what do you have – are you seeing any of that and how do you respond to that today?

Tony Tegnelia

Actually our early terminations are really down and we are really thrilled with that and our downsizing requests have really plateaued as well but I think the most important indicator of that it really is our early terminations are down and we are very happy with that.

Ed Wolfe – Wolfe Research

Okay. The buyback piece Greg, you know at a time when it is most accretive the stocks at $40, recent days we have seen signs that the credit markets are beginning to thaw, what are you looking for, what do you need to see to say “hey, we are stable and we can go back and buy some stock because it really would be quite accretive right here?”

Greg Swienton

Yes, that point is not lost on us either. I think that when we see the ability for both consumers and commercial borrowers to get reasonable rates without having the equivalent of an exorbitant credit score is the only ones who qualify. When I think that the broad average is improving when commercial paper rates in the short term continued to come down, I think when all of the combinations of signs make you feel safe and secure, then I think you can seriously consider it.

Ed Wolfe – Wolfe Research

Do you think that is a quarter, two quarters, do you have any sense of that, I mean best case scenario?

Greg Swienton

I hope it sooner but I am not Paulson or Bernanke. So, I hope it is sooner.

Ed Wolfe – Wolfe Research

Okay. What were the supply chain acquisitions in terms of what is safe [ph] for them and what is the revenue?

Greg Swienton

Ed that has not been announced yet. All we did was announced the intent to proceed with that so those details haven’t been shared yet.

Ed Wolfe – Wolfe Research

So that won’t be in the Q?

Greg Swienton

No.

Ed Wolfe – Wolfe Research

Okay. What is the total auto exposure in terms of percentage of revenue right now?

Greg Swienton

I believe it is 5% of the total company and about 15% to 17% in supply chain of the total revenue.

Ed Wolfe – Wolfe Research

If you take out supply chain, what is the inventory [ph]?

Greg Swienton

I am sorry; I thought you were asking about the biggest client there. The total would be, in automotive if you are counting OEMs plus the next level tier supplier it is about 60% of the supply chain.

Ed Wolfe – Wolfe Research

What is it of the total company?

Greg Swienton

60% of 30%, 18% to 20%.

Ed Wolfe – Wolfe Research

Are you saying there are no auto-related businesses in leasing or rental dedicated?

Greg Swienton

Yes, but they are not directly working with OEMs necessarily; they may be tied to the industry somewhere in a secondary basis especially in the upper Mid West.

Ed Wolfe – Wolfe Research

Okay, so it’s really the supply chain side.

Greg Swienton

Primarily, yes.

Ed Wolfe – Wolfe Research

Okay. On the supply chain side, your pretax basically doubled over last quarter, that is basically the fixing of what was going on in Brazil, is that how we should think about that or was there something else going on there that improved?

Greg Swienton

That’s where lot of the improvement came from. In US, the question last call would it be a long period or a quarter, we said it would be a quarters we will be making progress each one, I think that is the case.

Ed Wolfe – Wolfe Research

There is more to come?

Greg Swienton

Yes.

Ed Wolfe – Wolfe Research

Okay. Average age of a tractor sold this quarter that you reported?

Greg Swienton

About 60 months, 62 months, something in that nature.

Ed Wolfe – Wolfe Research

Has that changed at all over the past couple of quarters?

Greg Swienton

No, it really hasn’t. Our asset management principles are pretty standard. If there is life left into it, it gets redeployed and typically that is our life cycle when it goes to our used-vehicle inventory.

Ed Wolfe – Wolfe Research

Yes. In the dedicated side you mentioned results were negatively impacted even though they were good results by safety insurance spreads [ph], how much was that?

Greg Swienton

The improvement I think was 80 basis points in total. So, it is all a mix. So the large improvement came from operational performance and a little bit of negative impact from safety and insurance cost.

Ed Wolfe – Wolfe Research

What was that little negative impact, was it more than $1 million, do you have any sense to that?

Greg Swienton

I don’t know. That maybe roughly right, I just do not know.

Ed Wolfe – Wolfe Research

Last question, miscellaneous, what is in that miscellaneous net that you reported as a positive million, I am sorry $1 million expense, it is been a negative expense most of the last third quarter, if I look back historically it swung to be a real expense this quarter, what is going on in that?

Greg Swienton

Robert, do you know?

Robert Sanchez

There was some activity in the Rabbi Trust that we have for deferred comp but that went against as the market went down.

Ed Wolfe – Wolfe Research

So, do you think of it as ongoing as an expense?

Robert Sanchez

We have got it down as kind of a similar expense in the fourth quarter.

Ed Wolfe – Wolfe Research

Thank you very much for the time.

Robert Sanchez

Let me add one thing that is offset on the employee related cost; it does get offset in there. So, the net-net if you try to model out for the fourth quarter is zero.

Operator

Thank you. Todd Fowler, you may ask your question and please state your company name.

Todd Fowler – Keybanc Capital Markets

Keybanc Capital Markets, good morning everybody.

Greg Swienton

Hello Todd.

Todd Fowler – Keybanc Capital Markets

Greg, with the FMS margins here in the quarter and the improvement on a year-over-year basis, you really had a couple of items that were favorable, few things that were maybe going the other way, if you had to kind of put those in a bucket, what would be the largest drivers as far as seeing the margin improvement in FMS, and then also how do lease extensions work through the margins as well?

Greg Swienton

All right, I will ask Tony to comment on that on FMS.

Tony Tegnelia

First, I think the most significant areas for margin improvement comes from the productivity improvements that we have within our maintenance operation side and we have very definitive programs within that area and they have been very successful and they actually continue to accelerate. So, the first and foremost for margin expansion is productivity relative to our maintenance operation. Secondarily, I would say the accretive acquisitions that we have made last year and also earlier this year have a lot to do with margin expansion as well. They are tuck-ins and typically a large portion of those fleets get added to existing facilities that we have. Then obviously the most obvious one as well is just added productivity and production from the sales force in driving more growth and those growth units also go through for the most part a relatively fixed network vehicle maintenance operation. Relative to extension, basically there is margin enhancement on those because we typically rate those largely at the same rate that they were doing the initial term but the fixed cost tend to decline on those because the book values are lower and the interest expense for them therefore are lower. So there is some margin expansion on the extended units as well.

Todd Fowler – Keybanc Capital Markets

Okay, that’s helpful. Can you just – I guess I am sure you pointed out during the release what was the impact of fewer margins in the quarter, maybe without earnings, I can’t imagine it was that much based on what happened but I guess maybe a little bit of color there will be helpful.

Greg Swienton

Well, for the most part on fuel, it is our longer term objective for us to just be a basic pass-through with our lease customers. This quarter had very volatile pricing relative to fuel and as a result, it typically is an inventory activity and valuation with the fuel that we have in the ground, but for the most part in the longer pool, our intent is that we be largely pass-through. Now, there are rental customers that add to the profitability of fuel and that was in there in the month, but there was some enhancement to profitability in the quarter as a result of the volatility of fuel and that was possibly about $0.02 to $0.03 around.

Todd Fowler – Keybanc Capital Markets

Okay. Then with the statistics on miles being down on a year-over-year basis, did you notice that trend consistent throughout the quarter, did that really accelerate bringing us to the back-half of the quarter and kind of the macro environment really started to slow, and it is just comes from circular contacts that maybe during past downturns, how long have you seen miles be negative on a year-over-year basis when it was having to play out for maybe two or three quarters and you have seen improvements and I guess any color on that would be helpful.

Tony Tegnelia

We actually see that the reduction in the lease amount typically mirrors the same time that we saw the second softening if you will of the rental fleet which is late July and also in the early August timeframe. We probably feel that there won’t be a dramatic swell for the Christmas season this year, so we think for the most part that that level will probably continue on for the next quarter or so. But keep in mind there is an offset to the reduction in mileage and that is that our running costs and maintenance costs are typically lower when the mileage is lower, so there is a net offset from those reduced miles. But we saw pretty much mirrored the same reduction in utilization on rental and we think that will probably continue into the first quarter.

Todd Fowler – Keybanc Capital Markets

Okay, that’s helpful Tony. Greg, just one last one here on the fourth quarter guidance, when I think about the magnitude of where the third quarter ended up at $1.22 or so in the midpoint of where the fourth quarter is at, from the commentary that you guys have laid today it seems that you are pretty comfortable with where the rental fleet is at as far as the size of the fleet and it sounds that there is going to be a little bit of a headwind from higher borrowing cost during the fourth quarter, I guess the majority of the magnitude in the fourth quarter declined from where we were in the third quarter, it definitely relates to the fact that you are not anticipating kind of bad debt, peak season bump from the rental activity in the fourth quarter and that is the biggest driver, is there anything else there that is really impacting the fourth quarter guidance?

Greg Swienton

No, I think you have captured it. This will be the third year where generally and this is way beyond us, but I think this is the third year where there won’t be a peak season and this will be the softest and the toughest of the three. So, I think you have captured what the primary issue is that we are seeing and I think many others in the environment.

Todd Fowler – Keybanc Capital Markets

Okay, thanks a lot.

Operator

Thank you Michael Pak, you may ask your question and please state your company name.

Mike Pak – Banc of America

Thank you. Yes, I am Mike Pak, Banc of America. Good afternoon everyone.

Greg Swienton

Hello.

Mike Pak – Banc of America

Just I will run through this real quick given the time. Can you, Greg, give us a sense of the commercial rental contribution margin during a normal cycle?

Greg Swienton

We do not break it down to that level. We keep it at the upper segment level and that is for – again for being the only public company in this space that tends to give out too much information. So, we don’t break that down at that next level.

Mike Pak – Banc of America

Is it fair to say that given it is a short-term rental that the margin would be higher than versus the lease derivative?

Greg Swienton

That’s a reasonable principle, sure.

Mike Pak – Banc of America

Okay. And then on the free cash flow, it seems like it is tracking towards your guidance pretty well, are you still comfortable with the $300 million at year end, is there anything in the fourth quarter we should consider seasonally or anything like that on working capital or other cash flow items?

Greg Swienton

No. We are comfortable with the cash flow projections through the end of the year.

Mike Pak – Banc of America

And just a couple of balance sheet ones, what is your discount or implied rate on the commercial paper during the quarter or presently right now?

Robert Sanchez

Mike, this is Robert.

Mike Pak – Banc of America

Hi Robert.

Robert Sanchez

Commercial paper, as you know, shot up about mid September. We were historical about 3% and it went up to 6%, however we did have other sources of funding such as our AR backed program which allowed us to mitigate most of that increase. But as you know, CP is still high certainly from what it was towards the early part of the year. At the end of the quarter, so at the end of September, our one month CP rate, not the AR backed but the unsecured was at about 6%. And we have seen that come down to kind of the low-to-mid 5s right now. So, we are hoping that continues to get into a more reasonable rate and we will continue to leverage that. So, we are assuming that it stays at kind of the level it is at now for the rest of the quarter.

Mike Pak – Banc of America

So, you were able to renew the trade receivable program it sounds like?

Robert Sanchez

Yes, we did.

Mike Pak – Banc of America

Okay, that was what, $300 million or something?

Robert Sanchez

You are right; we did $250 million of it.

Mike Pak – Banc of America

Okay $250 million. And let’s see, that’s all the questions I have guys. Good luck for the rest of the year.

Greg Swienton

Thank you.

Operator

Thank you. David Campbell, you may ask your question and please state your company name.

David Campbell – Thompson, Davis, & Co

Your full service lease revenues were flat sequentially from the second quarter to the third quarter, first of all why, given the fact that acquisition revenues contributed to some growth there, why was that revenue flat?

Greg Swienton

I don’t think it was flat. I thought it was up –

David Campbell – Thompson, Davis, & Co

No, on a net basis, operating revenues. I heard $516 million in the second quarter and $516 million in the third?

Robert Sanchez

The total it would be the rental offset for total operating.

David Campbell – Thompson, Davis, & Co

So, you have an increase in full-service lease revenues on an operating basis?

Robert Sanchez

Yes.

David Campbell – Thompson, Davis, & Co

Then I must have been saying the wrong numbers.

Robert Sanchez

No, I am sorry, it is flattish, but there is an offset on the rental.

Greg Swienton

But he is only asking about full service lease.

David Campbell – Thompson, Davis, & Co

I just asked on full service lease.

Robert Sanchez

Okay it is flat, right, it is flat.

David Campbell – Thompson, Davis, & Co

It is flat, right, so given the benefit of some acquisitions –

Greg Swienton

No, wait a minute, quote the numbers that we are looking at in our tables.

Robert Sanchez

Okay. The second quarter full service lease revenue was $516.1 million and in the third quarter was $516.4, so sequentially for the third quarter it was flat. It was up versus the third quarter of the prior year by 4%.

Greg Swienton

Now we’ve got it. Okay.

David Campbell – Thompson, Davis, & Co

So it was flat sequentially, why was that given the fact that there was some benefit of acquisition in the third quarter versus the second quarter?

Robert Sanchez

The mileage was down as we discussed earlier about 4% and we did have some translation, negative translation impact as well coming in from Canada and also from the UK.

David Campbell – Thompson, Davis, & Co

Okay. Yes, versus the second you would have, yes.

Robert Sanchez

It was really the – and I am sorry I didn’t understand the question but the sequential aspect really is the mileage being down and also the translation.

David Campbell – Thompson, Davis, & Co

Right, okay. But you seem relatively optimistic about driving that revenue up in 2009, I just wondered what – so you would have to assume therefore there will be some improvement in revenue in mileage driven, is that what your assumption is for next year?

Robert Sanchez

It is predominantly based upon our retention rate and our reduction in large business and also the strength of our pipeline and also that the acquisition activity is positive as well.

David Campbell – Thompson, Davis, & Co

Right, okay. But the visibility of the full service lease revenues has to be questionable. You can’t really be sure of anything, can you?

Greg Swienton

I think as a general statement, in 2008, considering what has happened in the last two months, I would say you can’t be sure of anything.

David Campbell – Thompson, Davis, & Co

Right. And you are assuming higher interest costs in the fourth quarter despite LIBOR rates going down that is probably because commercial paper rates are still higher than they were in September, is that right?

Robert Sanchez

That’s right and you are going to get the full effect of the higher rates in the fourth quarter than in the third quarter where everyone came up.

David Campbell – Thompson, Davis, & Co

My last question is, on the supply chain leasing, supply chain services the start up in the US; could you be a bit more precise about what that is all about?

Greg Swienton

A little bit but not too much. Very often, during a start-up phase where you have maybe multiple processes in a major location, you may face some start-up and activity cost and challenges that you don’t normally have when you have a full break-in period, and that is kind of what I have described that as.

David Campbell – Thompson, Davis, & Co

So, it is a new contract that you have just begun to implement.

Greg Swienton

Yes.

David Campbell – Thompson, Davis, & Co

Okay, good. Thank you very much. I appreciate your help.

Operator

Thank you. At this time I am showing no further questions, I would like to turn the call over to Mr. Greg Swienton for any closing remarks.

Greg Swienton

Well, we had plenty of questions and we have got through all of them. But as it is late in the day for anyone who is still on, thank you for hanging with us and appreciate your time and have a safe day. Bye now.

Operator

Thank you. This concludes today’s conference, thank you for participating. You may disconnect at this time.

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Source: Ryder System, Inc. Q3 2008 Earnings Call Transcript

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