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Executives

Robert (Bob) Brunn - Vice President of Investor Relations and Public Affairs

Gregory T. Swienton - Chairman and Chief Executive Officer

Robert E. Sanchez - Executive Vice President and Chief Financial Officer

Anthony G. Tegnelia - President of Global Fleet Management Solutions

John H. Williford - President of Global Supply Chain Solutions

Analysts

Jon Langenfeld - Baird

David Roth - Stifel Nicolaus

Ed Wolfe - Wolfe Securities

Alex Brand - Stephens

Todd Fowler - KeyBanc Capital Markets

Kevin Sterling - BB&T Capital Markets

David Campbell - Thompson, Davis & Company

Ryder System Inc. (R) Q3 2009 Earnings Call October 22, 2009 11:00 AM ET

Operator

Good morning and welcome to Ryder System Incorporated Third Quarter 2009 Earnings Release 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.

Robert (Bob) Brunn

Thanks very much. Good morning and welcome to Ryder's third quarter 2009 earnings conference call.

I'd like to begin with a reminder that in this presentation you will here some forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectation 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.

Gregory T. Swienton

Thank you, Bob, and good morning everyone. This morning we will recap our third quarter 2009 results, review the asset management area and discuss our current outlook. After our initial remarks, we will open the call for questions, so let me get right into an overview of our third quarter results.

And for those you have following on along on the web, on page four, net earnings per diluted share from continuing operations were $0.51 for the third quarter 2009 as compared to $1.29 in the prior year period.

The current year's quarter included a net $0.01 benefit to EPS this year. This resulted from a $0.04 benefit related to tax reversals, partially offset by a $0.03 restructuring and other charge primarily related to a debt tender offer. In 2008, the third quarter included a $0.03 net benefit related to tax law changes. Therefore excluding these items in each year, comparable EPS from continuing operations were $0.50 as compared to $1.26 last year.

During the quarter, we successfully closed all of our South American and part of our European supply chain businesses in accordance with our previous announcement. As such, the results from these businesses have moved into discontinued operations in the financial statements. If you include the $0.08 EPS loss from discontinued operations in the quarter, EPS would be $0.43. Excluding $0.04 of restructuring charges on the discontinued operations, comparable EPS including discontinued operations was $0.46.

All the financial information we'll review today is based on continuing operations and excludes the results of Supply Chain's discontinued operations in South America and part of Europe.

On page 5, total revenue for the company was down by 20% from the prior year. Total revenue reflects lower fuel services revenue, lower operating revenue and unfavorable foreign exchange rate movements.

Operating revenue which excludes FMS fuel and all subcontracted transportation revenue declined by 13%. Operating revenue was negatively impacted by lower revenues in commercial rental, SCS and DCC fuel, SCS automotive and contractual revenues as well as unfavorable foreign exchange rates.

In Fleet Management, total revenue decreased 22% versus the prior year. Total FMS revenue was down largely due to a 49% decrease in fuel services revenue, primarily reflecting lower fuel costs as well as volume decline. FMS operating revenue, which excludes fuel, declined by 8%, mainly due to lower rental revenue.

Contractual revenue, which includes both full service lease and contract maintenance was down 3% or down 2% excluding foreign exchange.

Commercial rental revenue decreased 25%, consistent with results in the first half of the year. This reflects continuing weakness in overall freight demand with some seasonal improvement.

Net before tax earnings in Fleet Management were lower by 64%. Fleet Management earnings as a percent of operating revenue decreased by 820 basis points to 5.3%. FMS earnings were negatively impacted by commercial rental results, full service lease performance, higher pension expense and lower used vehicle pricing. These negative impacts were partially offset by cost reduction initiatives.

Turning to the Supply Chain Solutions segment on page 6, both total and operating revenue were down by 22%. The revenue decline was due to lower automotive and other freight volumes, lower fuel volumes and prices and unfavorable foreign exchange rates. SCS realized strong profitability in the third quarter with earnings of $15.1 million, down only 4% from last year, but significantly up from the first two quarters of 2009.

Supply Chain's net before tax earnings as a percent of operating revenue increased by 110 basis points over last year to 6%. SCS earnings were negatively impacted by $1.1 million of losses in our European operations which have not yet been discontinued. We expect these operations to be closed by year-end and move them into discontinued operations reporting at that time.

In Dedicated Contract Carriage, total revenue was down by 14% and operating revenue was down 15%. The revenue decline was related to lower fuel costs passed through to customers and lower overall freight volume.

Net before tax earnings in DCC decreased by 26%. Earnings in the quarter were negatively impacted by higher safety and insurance costs and lower freight volumes. DCC's net before tax earnings as a percent of operating revenue declined by 120 basis point to 8.4%.

Page 7 highlights key financial statistics for the third quarter. I already highlighted our quarterly revenue results, so let me begin with EPS. Comparable EPS from continuing operations was $0.50 in the current quarter, down from $1.26 in the prior year. Comparable EPS from continuing ops for the third quarter 2009 included pension costs of $0.19 which were $0.21 higher than in the prior year.

The average number of diluted shares outstanding for the quarter declined by 400,000 to 55.5 million shares. During 2009, we haven't repurchased any shares to date in accordance with our prior announcement that our share repurchase programs were temporarily paused due to unusual market conditions. We do expect to resume our share repurchase programs in the near term due to number factors, including the solidification of the financial markets and our strong balance sheet which is delevering fairly rapidly due to the strong free cash flow we are generating.

We have two currently authorized share repurchase programs. The first is a $300 million discretionary share repurchase program which has $130 million of authorization remaining. The second is a 2 million share anti-dilutive program which has 637,000 shares of authorization remaining. As of September 30th, there were 56.1 million shares outstanding.

The third quarter 2009 tax rate was 35.6% as compared to 36.8% in the prior year. Excluding restructuring charges and other items, the comparable tax rate was 40.4% in 2009 versus 38.2% last year.

Page 8 highlights key financial statistics for the year-to-date period. Operating revenue was down by 14%. Comparable earnings per share from continuing operations were $1.28, down from $3.62 in the prior year.

The average number of diluted shares outstanding were 55.4 million, down by 1.6 million shares. Adjusted return on capital, which is calculated on a rolling 12 month basis, was 5.1% versus 7.4% in the prior year, reflecting lower earnings.

I will now turn to page nine to discuss our third quarter results for the business segments.

In Fleet Management Solutions, total revenue declined by 22%, primarily due to lower fuel costs as well as volume declines. Operating revenue which excludes fuel decreased by 8% including a negative 1% impact from foreign exchange.

Contractual revenue which includes full service lease and contract maintenance was down 3% or down 2% excluding foreign exchange. Contract revenue was negatively impacted by slowing new lease sales and increased non-renewals of expiring leases due to customer fleet downsizing. Lower usage of leased vehicles also hurt lease revenue as miles driven per vehicle per day on U.S. lease power units decreased 6% versus the third quarter 2008. Lease mileage comparisons however improved from the 9% decline we saw in the second quarter 2009 and also improved sequentially during the third quarter.

Rental revenue was lower by 25% on a 17% smaller average fleet. Global pricing on power units decreased by 6%, an improvement from the 8% decline we saw last quarter. Global commercial rental utilization on power units was 70.8%, down 210 basis points from 72.9% last year. The decline in year-over-year utilization rates however was an improvement from the 590 basis point decline we saw in the second quarter. This reflects the continued rightsizing of our rental fleet and some seasonal demand increase.

Fleet Management Solutions earnings declined 64% due to lower commercial rental results, full service lease performance, higher pension expense and lower used vehicle pricing. These negative impacts were partially offset by cost reduction initiatives.

In Supply Chain Solutions, operating revenue decreased 22% in the quarter. Automotive volumes with plants we serve were down significantly versus the prior year, but were much higher than in the second quarter. Operating revenue was also negatively impacted by lower volumes in non-auto sectors, lower fuel revenues and unfavorable foreign exchange rates. SCS realized strong earnings of $15.1 million in the quarter.

Earnings were down however by 4% from the prior year. SCS earnings in the third quarter this year include 1.1 million in losses from operations in Europe, which are expected to be discontinued in this fourth quarter.

In Dedicated Contract Carriage, operating revenue declined 15% due to lower passed through fuel costs and lower overall freight volumes. DCC's net before tax earnings were down by 26%, net before tax margin decreased by 120 basis points to 8.4%. DCC earnings were negatively impacted by increased safety and insurance costs and lower volumes.

Total Central Support Services costs were down by 4.8 million, reflecting lower spending across all functional areas due to cost reduction actions, lower incentive based compensation and prior year professional fees. The portion of Central Support costs allocated to the business segments and included in segment net earnings was down by 3.6 million. The unallocated share, which is shown separately on the P&L was down by 1.2 million.

Earnings from continuing operations were 28.5 million including after tax restructuring and other charges of 2 million and tax benefits of 2.2 million. Comparable earnings from continuing operations were 28.2 million as compared to $71.2 million in the prior year.

Page 10 highlights our full year results by business segment. In the interest of time, I won't review all of these results in full detail, but will just highlight the bottom line results. Comparable full year earnings from continuing operations were 71.6 million as compared to $207.9 million in the prior year, down by 66% or 136.3 million.

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

Robert E. Sanchez

Thanks Greg, turning to page 11, year-to-date gross capital expenditures totaled $468 million, down by almost 500 million from the prior year. Spending on leased vehicles declined by $268 million or 39% year-to-date.

Lease capital was down due to lower new and replacement lease sales as customers continue to downsize their fleet. Lease spending is also down due to a successful implementation of our strategy this year to increase the number of lease term extensions and increase the use of surplus and other midlife vehicles to fulfill new lease sales. These actions reduce the requirement for new vehicle purchases to fulfill customer fleet needs in a lease product line.

Year-to-date gross capital spending was also down due to lower spending on rental vehicles of $167 million, in line with our plan to spend virtually no capital in rental this year. As we look ahead to 2010, we expect to spend some capital on rental vehicles next year to refresh the fleet and reduce the fleet ageing.

In the third quarter this year, we realized proceeds primarily from the sale of revenue earning equipment of $151 million, declining by 61 million from the prior year. This decrease primarily reflects lower used vehicle sales pricing.

Including proceeds from sales, year-to-date net capital expenditures were 318 million, down by 416 million from the prior year.

We also spend 86 million on acquisitions, primarily on Fleet Management's acquisition of Edart Leasing in the Northeast U.S. in the first quarter.

Turning to the next page, we generated cash from operating activities of 759 million year-to-date, which was 136 million below the prior year. The decrease was mainly due to lower net earnings and differed taxes partially offset by higher deprecation.

Deprecation increased largely due to higher adjustments in the carrying values of used vehicles, the impact from acquisitions and higher per unit investments on new vehicles. These increases were partially offset by the impact of foreign exchange rates and a lower number of owned vehicles.

In addition to our normal process of annually revising depreciation rates on all vehicles to reflect used market valuation changes over time, we have increased the depreciation rate on vehicles expected to be sold through December of 2010. This change increased depreciation expense by $4 million in the quarter. Including the impact of used vehicle sales, we generated $961 million in total cash, down by approximately 200 million from the prior year.

Cash payments for capital expenditures were 509 million, a decrease of 379 million versus the prior year. Including our cash capital spending, the company generated $452 million of positive free cash flow in the current year. This was an increase of 186 million from the prior year, due primarily to lower vehicle purchases in both lease and rental. We expect favorable free cash flow comparisons to continue in the fourth quarter, primarily due to the lower cash capital expenditures.

On page 13, total obligations of approximately 2.66 billion are down by 362 million as compared to the year-end 2008. The decreased debt level is largely due to the use of positive free cash flow to pay down debt.

Balance sheet debt to equity was 174% as compared to 213% at the end of the prior year. Total obligations as a percent of equity at the end of the quarter were 184% versus the 225% at the end of 2008. Our equity balance at the end of the quarter was 1.45 billion, up by 107 million versus the year-end 2008. This increase reflects net earnings and foreign currency translation gains, which more than offset dividends year-to-date.

As compared with the third quarter of 2008, however, equity was down $321 million. The decline was largely due to an increase of 330 million in our pension equity charge in the fourth quarter of 2008, largely as a result of the market values in our pension investment portfolio that declined last year. The equity decline versus the third quarter of 2008 was also due to dividend of $53 million and currency translation losses of $42 million. These combined items more than offset net earnings of $64 million.

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

Gregory T. Swienton

Thanks Robert, page 15 summarizes key results in our asset management area. As a reminder, beginning this year, we are reporting asset management statistics on this page for our global FMS operations including Canada and the UK. Previously, this information was only presented for U.S. operations and we've included U.S. stats and parenthesis for historical comparative purposes.

At quarter end our global used vehicle inventory for sale was 7800 vehicles, up by 2300 units from the prior year, but down by 1200 units from the end of the second quarter 2009. We're very pleased by the reduction we achieved in our used vehicle inventories this quarter, which are now at a high end of our target range. We expect used vehicle inventories to remain near current levels through year-end.

We sold 5200 units during the quarter, up 3% from the prior year. Used vehicle sales were relatively stable throughout the quarter. Compared to the third quarter 2008, proceeds per vehicle sold decreased by 24% on tractors and 29% on trucks. Compared to last quarter, proceeds was down by 6% on tractors and 4% on trucks.

For tractors, we saw the continuing impact on pricing of soft market conditions, but sold a significantly higher number of tractors this quarter, up around 25% from the second quarter.

For trucks, U.S. proceeds per unit increased. However, the U.S. increase was offset by price declines in Canada and Europe. We expect tractor pricing to remain weak while truck pricing is expected to remain stable in the near-term with potential strengthening in both of the vehicle classes by mid 2010.

At the end of the quarter, approximately 11,000 units were classified as no longer earning revenue. This was up by 3,300 units from the prior year. But more importantly was down by 1,400 units from the second quarter of 2009. The decrease versus the prior quarter reflects a decrease in the number of units held for sale and an improvement in rental utilization.

We've continued to successfully implement our strategy to increase the number of lease contracts on existing vehicles that are extended beyond their original lease term. year-to-date, the number of these lease extensions was up by approximately 1300 units versus the prior period. These extensions are a positive tactic in the current soft market environment as they retain the revenue stream of the customer, reduce the number of used trucks we need to sell and reduce new capital expenditure requirements.

Our global commercial rental fleet in the third quarter declined on average by 17% from the prior year. We've successfully executed our plan to reduce the size of our rental fleet to align with weaker demand. We expect our year-end fleet count versus the prior year to be down by a similar percentage range as in the third quarter.

In closing, let me turn to page 17 to summarize our current outlook. Overall economic conditions continued to be weak in the third quarter. As in the second quarter, we continued to see stability in freight volumes with some seasonal improvement in demand in the third quarter. However, we haven't seen sustained growth across our broad customer base yet.

Despite the improvements in automotive volumes and with the used vehicle sales we've seen, we expect that soft overall economic conditions will remain in the near term. We anticipate that these market conditions will primarily impact earnings in our FMS segment. Revenue comparisons in lease will become continually more challenging in the coming quarters due to reduced new and renewal sales levels stemming from customer fleet downsizing.

While we expect rental demand to continue to remain soft, we project improving utilization comparisons on what is now a smaller fleet. We anticipate the general used vehicle sales trends will continue at current levels. We expect to be able to continue to sell a good number of used vehicles with prices remaining soft.

A key point in this area is that we've taken the right steps to ensure our used vehicle inventory is at appropriate levels.

In Supply Chain, we anticipate that automotive production volumes in the fourth quarter will remain at similar levels to those we saw in the third quarter. SCS earnings will benefit somewhat due to completing the closure of our remaining SCS European operations by the end of the year. We expect free cash flow to improve due to lower capital expenditures, partly offset by reduced earnings versus the prior year and lower used vehicle sales proceeds.

We're also considering the possibility of making a modest, voluntary cash contribution this year to our pension plan. Our ability to generate strong free cash flow remains an important differentiator for the company and has provided stability in this current environment.

Finally, given the stabilization of the credit markets, the strong free cash flow we're generating and the strength of our balance sheet, we plan to resume our two share repurchase programs.

That does conclude our prepared remarks this morning, and at this time, I'll turn it over the operator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today is from Jon Langenfeld. You may ask your question and please state your company name.

Jon Langenfeld - Baird

Robert W. Baird. Thank you, good morning.

Gregory Swienton

Good morning.

Jon Langenfeld - Baird

Greg, talk a little bit about the extension side of the business. You've had some good luck there, good success there. But how, what's the typical length of that? And then is there any ability to have another extension on the tail end of that, or are the trucks simply too old at that point?

Gregory Swienton

Well, I think, yeah I think the extension effort has been good. And appreciate your comments calling that success rather than luck. And that's certainly the intent. The normal would be about a year I would guess would be a good norm. It could be less. As far as an extension beyond that, it really will depend on our judgment of the remaining life on the engine. So depending on how many additional miles are on it and the status of the maintenance when it's reviewed as it comes into the shop, it could be extended longer, but that's totally dependent on how we view the status of the equipment. So I mean it's not infinite, but it could be extended a bit longer.

Jon Langenfeld - Baird

Okay, great. And then can you talk a little bit about retention rates just generically like you usually do in terms of what you are seeing there relative to pervious quarters?

Gregory Swienton

Yeah, I would... I'll let Tony comment a little bit as well, but from my point of view, I think we clearly have done a good job of retaining customers. The issue is retaining the number of units because of the volume that they need to move, but beyond that I'll let Tony comment.

Anthony Tegnelia

Jon, Our retention rate as you might expect based upon Greg's comment with regard to the non-renewal business is down a bit from last year. But it has been flattish for the most part since the second quarter. So we do see the retention rate down a bit, but the extension strategy is really helping that quite a bit as well. But we're at satisfactory levels on retention right now is what we would expect to see given this environment, but we have seen with regard to retention an abatement in the request for fleet reductions coming in from the customers.

As you may recall from some earlier conference calls, we were getting a lot of frequency on requests from customers to reduce the size of their fleet. But right now what we are seeing are really good signs. As Greg mentioned, the decline in mileage is abating and so are the requests for reductions in their lease fleet. So those are both two positive indicators for us on lease. Right now we see retention stable, but a bit lower than last year.

Jon Langenfeld - Baird

And Greg, you talked about how did the revenue comparisons get more challenging in FMS simply because of the contracts rolling off and annualizing those. But per change, could you have a better competitive position that offsets that in the near-term? Looking at some of the smaller players out there that can't get funding at an attractive rate or even looking at your larger competitor who appears to be more on the sidelines these days. What would be your thought there?

Gregory Swienton

Clearly, your opening statement indicates the truth that there is a lag on the upside for the lease portion of the business. Because unlike miles driven or commercial rental or used vehicle sales pricing, that tends to react fairly quickly once things really improve. The decision to commit to a longer term lease is where you have the lag and as more time expires and goes by and more equipment expires, it's going to be tougher for the comparison.

Now as to competitive position and availability of cash and credit and ability for funding, that will remain to be seen when we see a market recovery. Certainly, many private firms have relationships with banks and when they are solid, that's not an issue; if they are not, then that could be more challenging. But it is way too early to speculate whether that will be an issue or not, but in our case no matter relative to anyone, we have solid access to capital. We've got a great balance sheet, we have plenty of cash and we are in a solid position whether competitors are strong or weak.

Jon Langenfeld - Baird

Very good, and then last question just a few number questions. Could you tell me how many much losses you booked to depreciation? And then did the depreciation change you mentioned in your prepared remarks was that new to this quarter and expected kind of on that same $4 million run rate going forward?

Gregory Swienton

Yeah, we did make some adjustments to depreciation calculations because of our assessment of the environment. And if Robert, you have that handy, I'll let you answer that.

Robert Sanchez

Yeah, we have Jon, the impact of increased depreciation because of the vehicles that are used, truck center was 4.7 million. And in addition to that we had accelerated depreciation impact of another 4 million. And that one should recur.

Jon Langenfeld - Baird

I'm sorry the difference between the two?

Robert Sanchez

4.7 million was the writedown for the vehicles at the used truck center and 4 million was the incremental accelerated depreciation for vehicles that are going to be getting to the used truck center by December 2010.

Jon Langenfeld - Baird

Great. Thank you.

Robert Sanchez

Okay.

Operator

Thank you. David Roth. You may ask your question and please state your company name.

David Roth - Stifel Nicolaus

Yes, Stifel Nicolaus. Good morning gentlemen.

Gregory Swienton

Good morning.

David Roth - Stifel Nicolaus

First on the FMS side, can you just talk a little bit about kind of how the margins should over time get back to where we saw them in '04 to '07? My understanding is utilization of the rental fleet is obviously key, pension hit hurt some commercial rental side is a big factor. And is there other things I'm missing there that could help return to double-digit FMS margins?

Gregory Swienton

Yeah, I think you got the two big ones right at the top. Rental recovery will be very important because a lot of that will be flowing to the bottom line on the upturn. Pension was the hit that we took this past year, what I think you'll also see in the future will be used vehicle sales and also improving returns because miles driven on existing leases will improve. And Tony, if there is any beyond those Big Four, you can add those.

Anthony Tegnelia

No I think, clearly the biggest item is the return of the pull through on the rental fleet as it becomes more highly utilized. Pension was significant for us and the impairment charges on gains and things of that nature, when that reverses, we think all that will fall right to the bottom line, dramatically improve margin. And there is no incremental asset investment required to turn around any of those three items from an incremental NBT point of view. And those three items are clearly significant.

David Roth - Stifel Nicolaus

On the maintenance side, is the margins on the contracts with related maintenance above average, below average? How do we think about the growth in maintenance and its impact on the margin in FMS?

Anthony Tegnelia

Well on the contract maintenance side, they are holding steady pretty much, before we bring any of those units into our network, we do revaluations on those units in advance. They typically are of an older vintage, they are not new units. So we investigate and look at the units very carefully before we bring them into the fleet. So our margins in that regard are highly predictable in that product line and they are stable right now with our expectation.

David Roth - Stifel Nicolaus

And then the fact about the lower lease sales having a negative impact on customers asking for fleet reductions. How much is the fleet is up for renewal next year? Is it any more than normal, is it roughly 20%?

Anthony Tegnelia

Actually, our retirement next year based on term outs of the leases will actually be down a bit in 2010 compared to 2009. And for the most part, it's our normal 16 to 20% of the fleet on average. But we will be down on number of term outs next year as structured by the leases.

David Roth - Stifel Nicolaus

And then when the customers are coming to you asking for fleet reductions, I know it varies widely, but on average is it a 5% reduction or are they asking for 20%? Kind of what's the magnitude there?

Gregory Swienton

It does vary. It's not at all in the 20% range, it is about 2 to 5% probably in some instances, but it is fortunately as not as high as 20% at all. And those vehicles are relatively quickly redeployed and as Robert mentioned, that helps us preserve our capital and have a constant revenues stream. So we've solidified some good relationships with customers with that program. And we're confident that when their fleets increase, they will get that business.

David Roth - Stifel Nicolaus

And then just a question on Dedicated before I pass it on, you mentioned the lower freight volumes and the higher safety insurance costs caused the reduction in margin and operating income there. Did volumes decline sequentially in that unit as well because normally I thought that Dedicated did a little bit better in the third quarter than the second quarter or was the access the main issue?

Gregory Swienton

I'll let John Williford comment on that for you. I think volumes were about flat sequentially. So that comment about volume being a main contributor to margin decline really relates to the year-over-year decline in margins and volumes.

David Roth - Stifel Nicolaus

Okay, so is the accident and higher hire safety cost really hurt the margins more than the volumes?

Gregory Swienton

For the sequential decline, it's really primarily driven by the higher insurance cost.

David Roth - Stifel Nicolaus

Okay, excellent, thank you very much

Gregory Swienton

You're welcome.

Operator

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

Ed Wolfe - Wolfe Securities

Thanks, hey guys.

Gregory Swienton

Hello.

Ed Wolfe - Wolfe Securities

Can you give us more flavor on SCS? Has is it been that for all these years, there have been more losses than I realized in Latin America, so the profitability of the business has just been greater? How much of it was the ramp up of what was going on with clunkers and the autos and, now that you're gone be writing down Europe, how do we think about what the right NBT margin is for instance and what the right underlying revenue base of SCS is right now? I mean we're seeing things move so quick, your NBT margin goes from 1.1% in second quarter to 6% plus in second. And a lot of moving parts here, can you help me with SCS going forward?

Gregory Swienton

Yeah, you're right, there are many moving parts. In fact, we've gone from a loss in the first quarter to 6% return in the third. So a lot is going on. I'll let the John Williford comment.

John Williford

Yeah hi, first, you've got a lot of questions in there, but first I think the normal margin for this business would be something like 4 to 5%. And I think in a decent economy and kind of a normal GDP growth economy, we can get that to 5 to 6%. What you're seeing in this quarter, we had a very good operating margin in this quarter, and that's a result of several factors. One is... the most important was that our auto team really did a good job of managing operations efficiencies. A lot of that is costs takeout and a lot of it was matching our people and equipment with where the volume was going to be. So that was one benefit.

The second was we had a good mix this quarter, an unusually good mix in automotive so that even though our volume was down year-over-year, we had an improvement in operating margin year-over-year.

So an example of that would be... and normally in lots of quarters there is some plant that we have fixed costs at somewhere that's down. And in the third quarter, even though our total volume in automotive was way down year-over-year, we didn't have any real... we had consistent volume, we didn't have any big closure costs or downtime costs. So that mix helped us in this quarter.

And then finally, we have some initiatives in kind of the warehousing side of our business that I think have improved our results at some of our big warehousing projects. And if you looked at last year's margin, we did reference one operations problem. And so we've solved that and we've improved our warehousing operations for several other warehouses. So those three things kind of add up to a really good percentage margin quarter. That's probably a little higher than our long-term sustainable margin target.

Ed Wolfe - Wolfe Securities

That's all, very helpful John. But when I think about the discontinued piece, how do I think about how that was negatively impacting margins if I go out the last couple of years? Obviously it's probably worse now in the last 12 months in the market, the environment we've been in. But how much of a drag has that been as you look back on it and then the same for Europe. Is there going to be another... when we look at a year ago and you restate the discontinued for the comp next year, is that going to look better because we have gotten rid of Europe next quarter?

Gregory Swienton

It will look better at in Europe but not nearly the magnitude in South America. And generally, as we specifically said last year in South America, we had a particular issue in challenge in Brazil. So that shows up really more significantly in '08 versus '09 and why the improvement seems more dramatic. But if you go back prior years, it would not have been so significant.

Ed Wolfe - Wolfe Securities

Okay. And is the base of revenue it is 300 million in third quarter and then we're rating down Europe, how do we think about what a good base of revenue before any, you loose anyone again anybody going forward is without Europe now ?

Gregory Swienton

We're looking at some numbers now. So the Europe impact Ed is about 6 million in the quarter.

Ed Wolfe - Wolfe Securities

That's it for revenue?

Gregory Swienton

Yeah, for what remains for operating revenue in the quarter yeah, not much there.

Ed Wolfe - Wolfe Securities

Okay, that's very helpful. Robert, can you talk a little bit about D&A guidance going forward? I heard you say some of what happened in the quarter was ongoing, some wasn't. What's a good place holder for fourth quarter as D&A was 220 in the quarter?

Robert Sanchez

Well, I'd say in the fourth quarter you should expect that number to come down slightly as the fleet count and lease continues to decline because you will now see in the full run rate of the accelerate depreciation, you also see in the impact of the right down of the vehicles of the used truck centre which I, as you heard Greg mention earlier, that inventory is down relative to where it was at the beginning of the year. So I think at this point, you'll see depreciation expense come down slightly from that 220 level.

Ed Wolfe - Wolfe Securities

Okay. At this point is there any CapEx? I know you spent a lot of time on that in the future. But is there any directional guidance for CapEx for next year versus 2009?

Robert Sanchez

I think the only guidance that we mentioned was that we will be... we do anticipate spending some money on refreshing the rental fleet. We still haven't finalized what that amounts going to be but that will... it will certainly be more than it was this year at which we didn't spend any money.

Ed Wolfe - Wolfe Securities

Okay. And can you take us through utilization for the kind of month-by-month in rental and how that looked?

Robert Sanchez

Yes, I can do that. Our utilization month-by-month in the quarter was pretty much right at the 70.8% that Greg could really... spoken about. So we're very pleased with the progress that we've made in reducing the size of the rental fleet. And we find that utilization really stabilizing and we believe that you'll start to see those comparisons year-over-year even improve from what you've seen so far this year. A lot of effort has been put into that. We are starting to see the benefits of the improvement in utilization year-over-year relative to those changes.

And we expect to continue see the benefit of that fleet reduction going on into next year. And the fact that we've kept the used vehicle inventory levels low than are (ph) actually down, those units typically when they are out serviced out of the rental unit go to the UBF, they're also being sold off the UBF. So we're enjoying that improved utilization on the rental product line and the balance sheet is nice and clean since those vehicles have been sold.

Ed Wolfe - Wolfe Securities

Just bigger picture, in the past I've always thought of commercial rental as a good leading indicator of the economy and we hear from a lot of places the economy is slowly coming out of the hole and getting better. But we're just not seeing that it sounds like in demand for commercial rental this time around, how do you think about that?

Robert Sanchez

Well, I'll tell you where we first see it we believe is where we really would like to see it. And that is a reduction in the declines if you will of the utilization of our lease fleet. So as Greg had mentioned earlier, the reduction in the mileage decline is really significant to us because what that means is that our private fleet operators are beginning to increase the utilization of their fleet. And that is the first indication we feel that things may be improving when those utilizations or those private fleets rise, then they'll have a higher propensity to rent after they've been a bit more comfortable with the solidification of their volume, then they will come back to lease and increase the size of their lease fleet. So first we'll see it in improved utilization of our private fleet operators fleet, then we think we'll see it in rental as well.

Ed Wolfe - Wolfe Securities

And when... is there a way to look kind of month-by-month and into October of how the utilization of your private guys fleets have looked from a mileage standpoint?

Robert Sanchez

Yes. And it did improve each month sequentially through this quarter. So as we saw there, their mileage decline abating, we were very pleased to see that and it continued form each of the three months of this quarter. And as Greg mentioned, this quarter is the best that we've achieved so far this year.

Ed Wolfe - Wolfe Securities

How far are you still down from a year ago?

Gregory Swienton

In mileage?

Ed Wolfe - Wolfe Securities

Yeah.

Gregory Swienton

It's about 6% for the quarter compared to last year. But as Tony said, in the three months, July was down 7%, August was down 6%, September was down 4%. So the decline was getting less bad.

Ed Wolfe - Wolfe Securities

And was the comp fairly similar in those ones?

Gregory Swienton

Lease power unit? Yes.

Ed Wolfe - Wolfe Securities

Okay. One last one, and I will let someone else have it, how do you think about now that you are going to start repurchasing shares, is there a thought process in how you are going to do this by quarter or certain amount? Or is it going to be based on weakness in the stock, how long should we think about for you to complete what's your going to back to now?

Robert Sanchez

Ed, the authorization that we have out there, the two for the 300 discretionary which we have 130 remaining and the 2 million impact dilutive, which we have 640,000 shares remaining, expires in the middle of December, December 13. So depending on market conditions and really what we see in our business, we would likely move to execute on the share repurchase during this period during the fourth quarter. But again, that's still up in the air depending on what we see.

As we've said in the past, we don't really look to time the stock. We really look it as a lever that we use to make sure that we've got the capital structure at the right leverage and as an efficient way to return money back to the shareholders.

Ed Wolfe - Wolfe Securities

So rather than seek an increased reauthorization in terms of time, the goal is to try and complete it before it's up?

Robert Sanchez

Yeah, right now, what we're looking do is execute in the fourth quarter, again subject to any changes in the market.

Ed Wolfe - Wolfe Securities

Okay, thanks everyone for the time. I appreciate it.

Gregory Swienton

You're welcome.

Operator

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

Alex Brand - Stephens

Hey, Stephens, good morning guys.

Gregory Swienton

Good morning.

Alex Brand - Stephens

Just a couple of quick questions from me, when you were talking Greg about FMS comps getting tougher, you were talking about revenue right, because the extensions are good for cash flow and earnings, but hurt the revenue, is that the right way to think of it?

Gregory Swienton

Well it will affect lease operating revenue and earnings because the comps reflect a lower number of units. So you get the impact from having fewer units.

Alex Brand - Stephens

Right, I got you, that makes sense. And just one other, when we think about your customers, fewer tractors and utilization is down. Internally, I assume you are tracking pretty closely the selling into new business. Can you... you've talked a lot about the trends of existing stuff getting a little better. What's the trend look likes for the selling into the accounts and new business that we can't see?

Gregory Swienton

Alex, I think there are two aspects to that. First of all historically, a lot of our new business has come from existing accounts with the solid relationship that we have with those customers. And that has abated this year as well. That's down actually quite a bit because as we said, they are actually reducing the size of their fleet. As far as what we call new customers, we have a very solid pipeline for that. We are holding our discipline on prices for that and we're not dissatisfied with how we're doing competitively in the marketplace with bringing new customers into the fold. We think when the 2010 engines come into the economy with their unknown aspect from a maintenance point of view and also with their very expensive prices, that will also be compelling reasons for new customers to come in and convert to outsourcing to leasing and maintenance. And we feel very good about that as well.

But the pipeline is strong. We have maintained our discipline as well through this period with new customers. And we think we are in a very good position; we have also maintained our sales force out there as well during this period of time so we don't loose touch with all those new customers. Generally speaking, we feel we have done okay with those in the marketplace.

Where we have been down a bit is new growth with existing accounts but as we discussed earlier, we maintained solid relationships with them and working with them and I need to reduce their fleet and they'll be there for as when they come back

Alex Brand - Stephens

Okay. That's all I have, appreciate the time.

Gregory Swienton

You're welcome.

Operator

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

Todd Fowler - KeyBanc Capital Markets

Hi, good morning, KeyBanc Capital Markets.

Gregory Swienton

Hello.

Todd Fowler - KeyBanc Capital Markets

Greg or maybe Tony, just a question on some high level trends within the leasing business, looking at both service lease revenue down about 3% year-over-year during the quarter. Can you talk about what you're seeing with regards to pricing either on I guess probably more relatively on new leases that are going into service? So how much of the decline is related to vehicles coming out versus what's going on in price?

Gregory Swienton

I would say that and Tony, can comment further that the changes in the revenue and the earnings are not coming because we've got lower prices and lower returns on the new business we're signing. That's not the case, the lower returns are coming from fewer miles being driven and fewer units in service. For the new business that we signed, we are very careful and Tony and his team are very focused on getting the right returns on any new lease that we sign. It does have an EVA target, we measure that on every single unit as a part of every sale. And the price is driven by the reality of the factors that go into the cash flow and the P&L for that unit.

So what we buy the equipment at, what it takes to maintain it? What the interest rates are at the time and the maintenance going forward and the expected residual at the end? So we have not diminished our standards for the pricing of those new units.

Todd Fowler - KeyBanc Capital Markets

And would you say, that's you're consistent with... I mean is the market base pricing could be rational at this point or do you have a feeling that you are being disciplined with regards to price or maybe seeing some share go other places because of that?

Gregory Swienton

No, I don't believe we've been harmed by share and I think that if you're in this business and if you've been in it for a while regardless of your size, there are certain realities that you have to deal with as you price your business. And for the most part, that's largely rational because everybody has a certain cost of capital and they have certain maintenance cost and you have overhead and returns. This is not like selling a consumer product like a candy bar that if you sold two rather one, you are better off. Everyone, every unit has got to have a P&L and a cash flow that works. So, I think anybody who has been in this business for while and people were still in it have been in it for a while, understand that reality and therefore you sort of have an embedded reason to have, fairly consistent rational pricing.

Todd Fowler - KeyBanc Capital Markets

Okay. That's helpful Greg. And then one just last one, We are thinking about vehicle sales and gains on vehicle sales. Is the assumption really that these, the rental fleets at the right point and then really the churn on the vehicles is going to come and the continued sales on vehicles is going to come from leases that are coming up off of lease and naturally are going to be where the sales are going to be going forward and that's why we'll continue to see gain kind of at the same run rate in the next couple of quarters.

Gregory Swienton

Tony?

Anthony Tegnelia

Todd, we have the rental fleet where we want it right now. We are right at our targeted inventory level for the rental fleet, we don't anticipate dramatic reductions on that. So the units being accepted into our UBF operations have been over the next six or so months will predominantly come from the lease fleet as we've currently forecasted. However, as Robert had mentioned, we have been very successful with extension and the reason why there is many more units available for extension is because the amount have been down and there is more engine life left.

So what we do is, we preserve capital really try to extend the vehicles, so that we don't get more inventory into the UTC operations which takes a little bit further pressure off price because we have very disciplined target levels for the inventory. So we don't let them swell and its work very well for us.

The extension have kept the inventories low, and we have the rental fleet reductions behind us and we pull very good where we are overall with the balance sheet.

Todd Fowler - KeyBanc Capital Markets

Okay, that's all I have for now. Thank you.

Gregory Swienton

You're welcome.

Operator

Thank you. Kevin Sterling, you may ask your question and please state your company name.

Kevin Sterling - BB&T Capital Markets

Thank you, BB&T Capital Markets. Good morning, gentlemen.

Gregory Swienton

Good morning.

Kevin Sterling - BB&T Capital Markets

Greg, I have a quick question. How does the acquisition pipeline look? Any specific areas that you would target?

Gregory Swienton

I suppose if we could have our ideal desire, we'd like to continue to see more acquisitions spread throughout the country. We seem to have had more success than the East and the North East. So you can get more and more places, but generally anyone who may be interested, anyone who thinks it's the right time to leave their business for whatever reason, whether it's financial or age or succession planning, we're interested in anyone. And as long as there is an interest and we can some to mutual agreement, we have a wide geographic interest.

Kevin Sterling - BB&T Capital Markets

Okay, thank you. And I jumped on late, you may have already addressed this, I apologize if you did, but how should we think about the pension expense going forward do you still see as a headwind?

Gregory Swienton

Well if the market ends on December 31st at the end of day as it is today, no, it wouldn't be. But you can only predict so far. So it all depends by those calculations that are done at year end as to what the returns are.

Kevin Sterling - BB&T Capital Markets

Got you. Thank you. That's all I had, thank you for your time today.

Gregory Swienton

You're welcome.

Operator

Thank you. Our final question today is from David Campbell. You may ask your question and please state your company name.

David Campbell - Thompson, Davis & Company

Yes, Thompson, Davis & Company.

Gregory Swienton

Hello David.

David Campbell - Thompson, Davis & Company

Hi. How are you?

Gregory Swienton

Good, thank you.

David Campbell - Thompson, Davis & Company

Greg, there hasn't been much acquisition activity though following up on that last question.

Gregory Swienton

Yes.

David Campbell - Thompson, Davis & Company

The first quarter and yet, we've had obviously continued pressure on smaller companies. Do you have any reason for that or explanation for that?

Gregory Swienton

Yes, I would say this David that companies that we are interested in would be healthy companies. They would have good market presence, they had good pricing, they have had good maintenance and if they are and if they running their businesses well just like ours chances are they are chilling off cash. So they are in no position of distress or desperation, and they may also be waiting for a healthier moment on which to perhaps put there companies up for sale, just like if you are in your house and you don't have to sell it, you'll wait for a better period.

And I think some of these companies are in the same position. Since if they are well run and those are companies we want, they have got the same thing going for them that we have for us know, and that is strong free cash flow without a lot of other heavier requirements for capital. As we come out of this and things improve, it's possible that maybe those that may have been interested in the past may show a greater interest in the future.

David Campbell - Thompson, Davis & Company

And obviously you didn't estimate revenues or profits in the fourth quarter. It doesn't sound like there is that much uncertainty relative to the third quarter. But you haven't yet made... were unwilling to do so. Is there any particular reason, just continuing the policies that you started earlier this year?

Gregory Swienton

Yes, when we started the policy earlier this year, it was largely because the broadness of the range that would be required for us to fall within it was so wide that it became a little unmeaningful. And we will certainly consider the reinstatement of our past practices of providing guidance when we think we've reached a position that we can narrow the range enough that we can be confident with delivering that in the marketplace.

David Campbell - Thompson, Davis & Company

Okay. And the increase in commercial revenues from the second to the third quarter, commercial rental revenues, is that largely seasonal?

Gregory Swienton

Yes.

David Campbell - Thompson, Davis & Company

Okay. And I guess, thank you, I think that's pretty much got out. I appreciate the help.

Gregory Swienton

You're very welcome.

Operator

Thank you. I would now like to turn the call back over to Mr. Greg Swienton for any closing remarks.

Gregory Swienton

Well, I think we've just about hit high noon and I thank everyone for their participation and questions and have a good 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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