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Ryder System, Inc. (NYSE:R)

Q2 2008 Earnings Call

July 23, 2008 11:00 am ET

Executives

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 U.S. Fleet Management Solutions

John H. Williford - President of Global Supply Chain Solutions

Analysts

Arthur Hatfield - Morgan, Keegan & Company, Inc.

John Larkin - Stifel Nicolaus & Company, Inc.

Jon Lagenfeld – Robert W. Baird

Ed Wolfe – Wolfe Reserach

Todd Fowler – KeyBanc Capital Markets

John Barnes – BB&T Capital Markets

David Campbell - Thompson, Davis, & Co.

Operator

Welcome to Ryder System, Inc. second quarter 2008 earnings release conference call. (Operator Instructions) Today’s call is being recorded. I would like to introduce Bob Brunn, Vice President of Investor Relations and Public Affairs for Ryder.

Bob Brunn

Welcome to Ryder’s second quarter 2008 earnings conference call. I’d 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.

Gregory T. Swienton

This morning we will recap our second quarter 2008 results. We’ll update our capital spending and cash flow forecast. We’ll review the asset management area and will provide our current outlook for the business, and after our initial remarks, we’ll open up the call for questions.

Before I get into the results, I would like to briefly introduce John Williford, our new President of Global Supply Chain Solutions, who joined us in June. Many of you will recall that last November, we announced the decision to combine Ryder’s US and International Supply Chain Solutions businesses into one fully integrated organization. We’re very happy that John has joined Ryder to lead our Global Supply Chain and Dedicated Contract Carriage businesses going forward. John has amassed a great depth of experience during his 25 year career in the logistics industry and we’re very pleased that he’s here to assist the company in moving forward with our global customer service strategy.

In addition, Tony Tegnelia’s responsibilities have been expanded to include leadership of our European fleet management solutions operations. Tony has been promoted to the position of President of Global Fleet Management Solutions. Tony now has global responsibility for fleet management, mirroring our approach in supply chain. We certainly look forward to his continuing strong leadership of our FMS team and his newly expanded role.

With that said, let me get into the overview of our second quarter results. For those of you who are following on the Power Point, on Page 4, reported net earnings per diluted share were $1.10 for the second quarter 2008 as compared to $1.07 in the prior year period. Reported EPS in the second quarter included a charge of $0.12 for our Brazilian supply chain operations for items related to prior years. The charges related to accrual and tax deferral adjustments primarily for the years 2004 through 2007 and were not material to any individual prior year. The charge to before tax earnings was $6.5 million and to after tax earnings was $6.8 million. The impact to EPS is magnified as there is no tax benefit to partially offset the charge on an after-tax basis.

Excluding the charge, comparable second quarter 2008 EPS was $1.22, up 14% from $1.07 in the prior year. Comparable earnings for the quarter exceeded the forecast we provided on our last earnings call of $1.10 to $1.20. Better than anticipated performance came in our fleet management solutions segment, primarily through continued contractual revenue growth. The strong performance in FMS was partially offset by lower operating results in our supply chain segment. Total revenue for the company was unchanged from the prior year. Flat total revenue reflects the impact of the previously announced change from gross 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 5% due to FMS contractual revenue growth, including acquisitions, higher fuel prices in our SCS and dedicated segments, and favorable foreign exchange rate movements. Fleet management total revenue was up 16% while operating revenue was up 5% versus the prior year. Contractual revenue, which includes both full service, lease, and contract maintenance, was up 5%. Lease revenue growth was up by 5% driven by our recent acquisitions while higher contract maintenance revenue also at 5% reflects organic sales activity.

Total FMS revenue was impacted by a 44% increase in fuel revenue, reflecting higher fuel costs passed through to customers. Foreign exchange rate movements accounted for 1 percentage point of total FMS revenue growth. Global commercial rental revenue was up 1%, representing the second consecutive quarter of rental revenue growth. US rental revenue was modestly down in the quarter, although the rate of decline slowed again this quarter. The domestic rental revenue decline was more than offset by growth in the Canadian and the UK markets.

Gains from the sale of used vehicles were down by $3.4 million due primarily to a lower volume of used vehicles available to be sold and actually sold. The decline in gains, however, was more than offset by the lower carrying costs on that smaller used vehicle inventory.

Net before tax earnings in fleet management were up by 19%. Fleet management earnings as a percent of operating revenue were up by 180 basis points to 14.9%. FMS earnings benefited primarily from improved contractual business performance. FMS results also benefited from higher fuel margins due to unusually rapid increases in fuel prices and from recently closed acquisitions.

Turning to the supply chain solutions segment on Page 5, total revenue was down 25% due to a change to net revenue reporting on 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 the impact of foreign exchange rats, higher fuel costs, and both new and expanded customer contracts. Second quarter net before tax earnings and supply chain were down 56% versus the prior year. Net before tax earnings as a percent of operating revenue were down 280 basis points to 1.9%. Supply chain earnings were well below our expectations and were impacted by lower operating results in our Brazilian operations and from several North American automotive strikes. I’ll discuss these items in more detail shortly.

In dedicated contract carriage, total revenue and operating revenue were both up 2% due to higher fuel costs partially offset by non-renewed contracts. Net before tax earnings in DCC were down by 1%. Earnings in the quarter were negatively impacted by higher safety and insurance costs, partially offset by improved operating performance. DCC’s net before tax earnings as a percent of operating revenue were down by 30 basis points to 8.8%, due mainly to the impact of higher fuel pass through costs on the margin percent calculation.

Page 6 highlights key financial statistics for the second quarter. Operating revenue is up by 5%, mainly due to growth in multi year contractual business. Reported earnings per share were up by 3%, including the Brazil charge of $6.8 million for prior years. The charge in Brazil was identified in the course of a detailed business and financial review which occurred following an adverse tax and legal development. We utilized a cross-functional team of US and local employees as well as internal and external accounting and legal professionals to assist in the review process.

Although we’re continuing to review our business operations and practices in Brazil, we believe that the ultimate resolution of this review will not result in a material adjustment to our consolidated financial statements. We also believe that we’ve taken a number of appropriate steps, including changes made to the leadership team in Brazil, to prevent similar issues from occurring in the future, and that we have the proper procedures in place going forward to ensure our financial statements accurately reflect current period results.

Excluding the Brazil charge, comparable earnings per share were up by 14%. This increase reflects comparable net earnings growth of 7% and a lower average number of shares outstanding due to share repurchases. The average number of diluted shares outstanding for the quarter was down by 3.8 million shares to 57.3 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 second quarter, we repurchased 925,000 shares at an average price of $68.79 per share under the $300 million program, bringing the program-to-date purchases to 1,765,000 shares at an average price of $64.11 per share. During the quarter we purchased an additional 510,000 shares at an average price of $69.40 under the 2 million share program, bringing that program-to-date purchases to 1,261,000 shares at an average price of $63.07 per share. As of June 30, there were 56.5 million shares outstanding.

The second quarter 2008 tax rate was 44.1% compared to the prior year tax rate of 37.6%. The current period tax rate reflects the adverse impact of higher non-deductible foreign losses, mostly in Brazil. Last year’s tax rate reflects the benefit of 1.2% due to the impact of income tax changes in New York. The balance of the year we anticipate our tax rate to be modestly below our initial full year plan rate which was 39.1%.

Page 7 highlights key financial statistics for the year-to-date period. Operating revenue again was up by 5%, reported earnings per share were up by 8%, comparable earnings per share were $2.18, up by 15% from $1.90 in the prior year. The average number of diluted shares outstanding were 57.7 million, down by 3.4 million shares. The year-to-date tax rate was 41.9%, compared to the prior tax year rate of 38.5%. The tax rates in each year were impacted by the second quarter items I discussed previously.

Return on capital, which is calculated on a rolling 12-month basis, was 7.4% versus 7.6% in the prior year second quarter. Return on capital was impacted by the change in our year-over-year tax rate including the impact of non-deductible foreign losses.

Now I’ll turn to Page 8 to discuss our second quarter results for the business segments. In fleet management solutions, operating revenue was up by 5%, driven by a 5% contractual revenue growth with 1% growth in the smaller commercial rental product line. Total revenue increased by 16%, due both to this operating revenue growth and higher fuel cost passed through to customers. Total FMS revenue also included a 1% favorable foreign exchange impacted. Fleet management solutions earnings were up by $18.3 million or 19%.

In lease, we continued solid revenue growth driven primarily by our three recently closed acquisitions. Organic net lease sales are running ahead of last year to date, primarily due to improved customer retention resulting from several initiatives in this area. Miles driven per vehicle per work day on US leased power units were up 3% versus the second quarter 2007 and were seasonably up 5% as compared to last quarter. Contract maintenance grew 5% due to continued new sales to the private fleet market, partially offset by lower miles per unit.

US commercial rental utilization on power units was 72.8%, up 220 basis points from 70.6% in the second quarter 2007, due to our actions to reduce the size and change the mix of the rental fleet. This is the third consecutive quarter of improving rental utilization comparisons. US rental pricing on power units was seasonably stable in both the first and second quarters of 2008 compared to the prior year quarters. This represents an improvement from last year where rental pricing was down by around 4%.

In supply chain solutions, total revenue was down 25% 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 the impact of foreign exchange rates, higher fuel costs, as well as new and expanded customer contracts. SCS net before tax earnings were down $8.4 million for the quarter. Segment earnings exclude the impact of the Brazil charge related to prior years as this item is shown below segment margins in the restructuring and other charges net line.

Two items impacted supply chains operating margins during the second quarter. First, Brazil’s earnings were negatively impacted by $8.1 million due to several operational issues including higher subcontracted transportation costs, the impact of customs and cross-border strikes, and adverse developments of litigation related matters. The impact of the strikes and litigation development are expected to be largely limited to the second quarter while the impact of higher purchased transportation costs will be an ongoing challenge for Brazil that we’re working to offset through operational efficiencies. As a result, we do not expect the same magnitude of an operational impact or earnings in Brazil in future quarters.

The impact of the second quarter operational issues had not been known or factored into the EPS forecast we provided on our prior earnings call. Second, SCS results during the quarter were also negatively impacted by $3 million related to North American automotive strikes which concluded in May. The North American auto strikes had been previously identified and discussed during our first quarter earnings call and had been factored into our EPS forecast range for the quarter and the full year. As a result of these items, earnings as a percent of operating revenue declined from 4.7% in the prior year period to 1.9% in the current quarter.

In dedicated contract carriage, total revenue and operating revenue were both up by 2% due to passed through fuel costs partially offset by non-renewed contracts. DCC’s net before tax earnings were down by 1% due to higher safety and insurance costs, partially offset by improved operating performance. Our total central support services costs were down by $3.1 million due primarily to a charge last year of $1.8 million related to an adjustment in the amortization period of restricted stock units. A portion of central support costs allocated to the business segments and included in segment net earnings was up by $800,000. The unallocated share which is shown separately on the P&L decreased by $3.9 million. Net earnings were $62.9 million, down 3%. Comparable net earnings were $69.8 million, up by 7% from $65.1 million in the prior year.

Page 9 highlights our year-to-date results by business segment and 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 excluding the Brazil charge were $125.9 million as compared to $116.4 million in the prior year. This represents an increase of $9.5 million or 8%.

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

Robert E. Sanchez

Turning to Page 10, second quarter gross capital expenditures totaled $639 million, down from $149 million from the prior year. Full service lease vehicle spending was down $91 million. The reduction in lease spending reflected lower expansions of customer fleets and increased term extensions on existing vehicles. Additionally, lease spending was elevated in the prior year due to the pre-buy of 2006 model year engines which continue to be placed into service with customers in early 2007.

Commercial rental vehicle spending was down by $69 million from the prior year. We realized proceeds primarily from the sale of revenue earning equipment of $143 million, down by $52 million from the prior year, reflecting fewer units sold as a result of having a smaller used vehicle inventory.

In the second quarter 2007, we executed $150 million sale lease back but did not have a sale lease back in the current year-to-date period. Including proceeds from sale, net capital expenditures were $496 million, up by $53 million from the prior year. We also spent a little over $200 million on fleet management acquisitions of Lilly in the northeast US and Gator in Florida.

Turning to the next page, you’ll see that we generated cash from operating activity of $522 million year-to-date, up by $17 million from the prior year. This increase was due primarily to increased depreciation. Increased depreciation was largely due to spending on new contractual leased vehicles and to foreign exchange rate changes. Including the impact of used vehicle sales activity, we generated $698 million in total cash, down by $185 million from the prior year. This decline was primarily due to the $150 million sale lease back in the prior year.

Cash payments for capital expenditures were $609 million, down by $276 million versus the prior year. Including our capital spending, the company generated $89 million of positive free cash flow in the current year to date, as compared to essentially break even free cash flow in the prior year period.

On Page 12, you can see total obligations of approximately $3.2 billion are up by $205 million as compared to year-to-date 2007. The increased debt level is largely due to spending on acquisition and net stock repurchases. Balance sheet debt to equity was 162% 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 171% versus 157% at the end of 2007.

Our recently closed acquisitions as well as the share repurchase activity is 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 as the total obligations to equity ratio of 171% is well below our target of 250% to 300% for our current mix of businesses. We remain committed to increasing our financial leverage in a balanced way over the next few years through organic growth, acquisition, and share buy backs.

Our equity balance at the end of the quarter was $1.85 billion, down by $37 million versus year end 2007. Our ending equity balance reflects net share repurchases and dividends which more than offset our net earnings.

Turning to Page 13, I’d like to cover some revisions we’re making to some of our financial forecasts for the year. Many of you will recall that on February 1, we communicated our 2008 business plan targets. As the year has unfolded, a few items have changed which have resulted in a revision to some of these projections. First we’re planning to spend an additional $30 million in commercial rental, bringing our new rental capital forecast for the full year to $170 million. Our rental spending this year will still be below our 2007 spending of approximately $220 million. The additional capital will modestly increase the rental fleet size in a certain vehicle class with very high utilization and will also reduce the fleet age.

Second, we’re forecasting a reduction of $165 million in full service lease spending, bringing the total lease capital forecast to $1 billion for the year. This change reflects fewer new lease sales than originally forecast due to the soft economy and the impact of increased term extensions on existing vehicles, which reduces the need to buy replacement units. Although new lease sales are somewhat below the original forecast as Greg mentioned earlier, our retention rates with existing customers are better than in the prior year, reflecting the impact of our initiatives in this area. As a result, net lease sales have improved as compared to the prior year.

Third, we’re forecasting a reduction of $70 million in used vehicle sales proceeds to $265 million. This change reflects primarily fewer units to be sold due to increased term extensions on existing vehicles and secondarily somewhat softer market conditions. As a result of the change in our used vehicle sales forecast, our forecast for total cash generated is changing from $1.6 billion to $1.55 billion. Gross capital spending is now forecast at $1.28 billion, down from over $1.44 billion previously. Free cash flow is projected to increase from $205 million to $300 million.

Finally, our total obligations to equity ratio is projected to increase from the prior forecast of 158% to a new forecast of 170%. The leverage forecast does not include the potential impact of any future acquisitions that have not been announced and closed.

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

Gregory T. Swienton

Page 15 summarizes the key results in our US asset management area. At quarter end, our used vehicle inventory for sale was approximately 4600 vehicles, down 14% from 5300 units at the end of the first quarter. Used inventories were less than half the over 10,000 units we held for sale at the end of the second quarter last year. 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 4400 used vehicles during the quarter, down 32% from the prior year, and in line with our expectations. Because our inventories are now 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 on sales of used tractors were up by 8%, while proceeds per vehicle on sales of used trucks were down by 11% as compared to the second quarter last year. Both tractor and truck proceeds per unit were modestly up from the first quarter. Because our inventories are so much lower than last year, we’re able to be much more selective and can focus on maximizing the price per unit sold.

At the end of the quarter, approximately 5,500 units were classified as no longer earning revenue. This number is down by 6,500 units from the prior year and down by 1,000 units from the first quarter, primarily due to a decrease in the number of units available for sale. Our total US commercial rental fleet in the second quarter was down on average by 6% for the prior year. The rental fleet reductions we made last year have accomplished their objective by significantly improving rental utilization levels by 220 basis points in the second quarter versus the prior year. As I mentioned earlier, this is the third consecutive quarter of significantly improved rental utilization levels.

If you’ll turn to Page 17 regarding the forecast, we’re holding our full year 2008 EPS forecast to a narrowed range. Our prior forecast was a range of $4.55 to $4.75 while our narrowed range is now $4.60 to $4.70. This represents an increase of 9% to 12% over the prior year comparable EPS of $4.21. We’re also establishing a third quarter EPS forecast of $1.25 to $1.30, up 10% to 14% from the $1.14 in the prior year. While the North American automotive strikes that impacted our supply chain business in the second quarter are behind us, we have some additional headwinds in the automotive sector. Automotive volumes are down in general. Toyota has also announced the temporary closure of two production facilities we serve as they transition these sites to production of different models. This will impact our second half earnings in supply chain. Additionally, we expect to continue to face some operational challenges in Brazil as we focus on improving our results there.

Fleet management, however, continues to solidly outperform our original expectations for the year. A strong performance in FMS is driven by continued contractual revenue growth, improved rental performance, a lower used vehicle fleet, and our recently closed acquisitions. We expect FMS to have a solid second half due to these factors. As with our original business plan, our current forecast does not assume an improving economic or transportation environment. Our good results and expectations for the year are driven by continued sales of new long-term contractual business, improved performance in commercial rental versus a very difficult 2007, solid results from our completed acquisitions, continuation of our share repurchase programs, and continued tactical execution by our team.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Art Hatfield – Morgan, Keegan & Company, Inc.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Greg, I heard your comments on the average sale price on the vehicles, but I was still a little surprised hat the tractor number was up 8% given how much capacity we’ve seen leave the trucking industry this spring. Can you kind of give us a little more detail on that, or is that a number that you saw deteriorate as you went further into the quarter?

Gregory T. Swienton

I would say that 2007 was a weaker comparison year because all of the available equipment, and we noticed that. I would say that there can be a number of characteristics that support the used tractor pricing. I’ll let Tony Tegnelia comment, but I think in general, you know that we’re doing more retail selling and not wholesaling because we have fewer to sell and we can move those to our used vehicle centers and we get a higher price there and they also get the full maintenance record of Ryder provided services which adds an extra added value, so I think those are contributors. There may be some value to grandfathered equipment in engines and tractors because of the old EPA standards. That what strikes me. Tony, you may add anything else that you’re aware of.

Anthony G. Tegnelia

I think generally the primary reason whey we’re seeing that increase is because we’re in a position right now with these significantly lower inventory levels to be much more selective in pricing that we take on the units, actually in the wholesale as well as the retail market, even though we are doing much, much more retail this year compared to last year, which was always our plan when reducing these inventory levels, and there is a market for the, as Greg had mentioned, the pre-technology change units as well. But generally speaking, with these dramatically lower inventory levels, which is exactly where we want it to be going into this year, it’s allowing us to be much more selective on the price we accept for the sale of the vehicles.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

And because of the quality you have is much better than what guys will see in the market, that’s helping the price too?

Anthony G. Tegnelia

That’s always been the case with the Ryder reputation for the fleet ready unit in the marketplace. We maintain them well over the life. We have all the maintenance records when they are sold, so that definitely helps us in the marketplace, there’s no question about that.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Greg, on Page 29, on the asset management update, I think one question I know I’m getting is the big jump in extensions. Is it fair to say that that big jump is somewhat of a positive in the customers realize they need the vehicle but they’re not seeing an uptick in their business yet to commit to a long term lease, but yet they’re not seeing their business deteriorate at this point in time where they want to turn the vehicle back in.

Gregory T. Swienton

For those of you who are following on the Power Point and can get to Page 29, it’s in the appendix on the asset management update and for those of you that can grab it later, but Art is referring to the fact that there was about through the year to date ’08 extensions totaled 2789 whereas last year’s year to date was 1800, so that’s a big jump, and it’s a big jump when you look at the graph, and I think that is a positive.

I think that’s an indication that even though customers may be reluctant to ink a new, longer term contract because they’re not sure about the long term prospects for their businesses, they know that they need some equipment for the short term, they continue to lease that equipment from us on an extended basis, and then I think the other positive to come from that is you don’t lose a customer, you don’t lose the equipment, you continue the revenue stream, and we also don’t en d up spending additional capital and it all helps the returns and the bottom line, so I think that for a lot of combinations of reasons, and if I’ve missed any, Tony, you can jump in, but I would say that in answer to your statement, it is a positive, considering this very challenging operating environment and economic environment.

Anthony G. Tegnelia

I think, Greg, you covered all the primary points. There’s another point there as well that some customers are extending the use of these vehicles and then in ’09, they’ll re-up to avoid the 2010 technology change, so you’re seeing some fleet planning with some of the customers as well.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

Greg I think I ask you this every quarter, but on the commercial rental fleet utilization, I know the way you calculate it 100% is never achievable. Where’s kind of been the maximum number where that number’s topped out in last cycle?

Gregory T. Swienton

I think you’re right, first of all, in that the way we calculate it, it’s not a 7 day work week, and since these are commercial units, somebody’s bringing it back on Friday. You knock out 2/7 of that over a weekend. We also include in that calculation equipment that’s down for service and maintenance, so it’s pretty rigorous. I would say that in the best of times when things are really heavy you’d get in the upper 70’s.

Arthur Hatfield - Morgan, Keegan & Company, Inc.

First, the incremental $100 million in free cash, do you have any plans for that or are you just going to put that to work in your share repurchase? Then, the one question I’m getting a lot of, people are concerned about your exposure to the automotive business and supply chain. Is there anything you can do in the short run to maybe reduce that a little bit?

Gregory T. Swienton

First on the use of the $100 million, I would say that it’s primarily there to support our efforts in continuing acquisitions, as well as share repurchase, which you’ve noted. If there’s any other that Robert wants to add as CFO he can tell me, but I don’t think there are. That’s it primarily.

Then the second question was on automotive exposure. In the short run not a lot. In the long term, and this is certainly part of what John Williford and his team will be working on, is to also diversify into some other industries that we think we can continue to serve well and that’s a longer term issue, to rebalance the portfolio, so a little less in the short run. In the short run, we do a lot to handle physical truck and tractor and trailer equipment with our sister division, but in the long run is really the efforts to re-balance that portfolio among customers and other industries.

Operator

Your next question comes from John Larkin – Stifel Nicolaus & Company, Inc.

John Larkin - Stifel Nicolaus & Company, Inc.

I had a question on the rapid rise on fuel prices during the quarter and how your margin and fleet management solutions reacts to that. Does the margin stay constant on the fuel portion of the sale? Does it shrink a little bit as fuel prices go up? How does that dynamic work?

Gregory T. Swienton

The margin over the long run should really be consistent by customer and that is per gallon there is x cents per gallon that is kind of a constant margin. Over the long run and over kind of normal periods of time, that is the case. If you had a rapid run up as you may recall happened during the Hurricane Katrina period or even in the recent past, or you have a rapid decline, although we don’t have a lot of inventory in the tanks, usually about a week or five workdays, if there is a rapid run up, the prices are adjusted on a market basis, so if you have a rapid rise or a rapid fall, you could gain a little bit more or lose a little bit more when you have those very rapid periods of rising and falling. Tony, is there anything else you want to add?

Anthony G. Tegnelia

I think Greg’s exactly right. Our Ryder program on fuel is passed through to the customers. There’s only a small portion of the pure rental where there’s real profitability on fuel. So over time we recapture our total cost. Rapidly rising prices or rapidly falling prices will put us in a position where we may incur in-ground inventory gains or losses on the P&L, but overall we are a pass through program with our customers on fuel over a period of time.

John Larkin - Stifel Nicolaus & Company, Inc.

So it’s safe to say that the margin expansion we saw in fleet management solution was totally unrelated to the spike in fuel prices during the quarter?

Gregory T. Swienton

I wouldn’t say 100%, but I think the fact is that 80% of the incremental margin came from contractual sales and the other 20% came from a variety of factors, some of which was fuel.

John Larkin - Stifel Nicolaus & Company, Inc.

Just wanted to have you perhaps, Greg, remind us of just how big the foreign operations are. We tend not to talk about that too much on these calls, but with the issues in Brazil, I think it might be worth reviewing that. Is it really large enough to consider that a growth arena, is it something you would consider perhaps moving away form over time? What is your general thought process regarding the foreign operations?

Gregory T. Swienton

In foreign operations, I know that Robert’s probably got his page out, but it probably accounts for I would guess 15% to 20% in total gross revenue, so about a fifth. There certainly are growth opportunities. I think that we certainly see them in supply chain, especially in the [NAFTA] related countries. I think that in Canada and in Mexico, you have significant growth opportunities and profitable ones. The other parts of the world in South America, in Asia, perhaps some in Europe, we have been less prominent. We’ve tried to match up with where our customers would like us to be. There’s certainly no thought or comment from us at this point to say we had any reason to think about leaving where we are. I think that the strategic question, John and his team, we talk about for the future is, what level of emphasis an what locations, and I think we want to be appropriately focused and targeted in those areas, but there certainly are growth opportunities and there should be profitable growth opportunities, that’s the key.

John Larkin - Stifel Nicolaus & Company, Inc.

There has been a lot of talk over the last few weeks and months about customers thinking about re-designing their supply chains, perhaps more so due to the rapid rise in fuel costs then anything else. Could you talk a little bit about how Ryder is participating in that? I suppose the one hand it could be a positive where they’re sort of tapping into your expertise to get some help with the supply chain redesign, but on the other hand, to the extent that they’re taking ton miles out of their network, it could be a little bit of a negative. How do you see that playing out here over the next few quarters and the next few years?

Gregory T. Swienton

Generally, although I’m not one to sound like PollyAnna, I think that in our case for Ryder, both of those could be a positive. I think that where you have already extended supply chains, the ability for us to effectively manage and design networks and do transportation management and carrier management ensures that when you have disruptions or costs, you’ve got to be as efficient as you ever were. So I think that plays to our network design, engineering and transportation management strengths. On the other hand, if US customers for example, and we’re beginning to see some of this already, if they are becoming concerned over the total landed costs, including the fuel and transport costs, they may actually be going back to in some cases where they were before and adding more distribution centers, in which case, one of our areas of expertise, is running and managing networks with distribution facilities including ground transportation that handles that, so I think that at this point because of concerns over disruption and costs, including transportation, for a total landed cost of a final product to the final utilizer or user, I think we can play well because of our expertise there.

John Larkin - Stifel Nicolaus & Company, Inc.

Excellent answer, thank you, and then one final question. Based on some of the trucking companies that we’ve talked to here with respect to he month of June in particular, it’s been so much truck load capacity that it has been either shipped over to eastern Europe or to Asia or just parked up against the fence that there were quite a few pockets around the country where there wasn’t enough truck load capacity when the quarter came to an end, and I was just wondering if you saw that really reflected in a spike in commercial rental activity during the month of June and whether or not you’d expect to see more of that perhaps as more and more truck load capacity falls out of the marketplace.

Gregory T. Swienton

I would say that the details by the geographies. I’ll let Tony comment, but when you head that we were going to spend a little bit additional in one category of commercial rental equipment, I think that’s a reflection that there is some very specific demand in some locations for some equipment, so maybe that is a part of that, but I’ll let Tony answer.

Anthony G. Tegnelia

What we are seeing is that our tractor portion of our rental fleet is clearly our highest utilization rates that we have right now. They are very attractively high in the 80s. It is a heavier investment unit, so we like to see that utilization in the high 80s, but generally we are seeing as companies don’t make commitments to capital, whether they’re private fleet operators or carriers, that they are turning to our rental fleet. We are seeing upward pricing with that asset class as well, and also higher utilization, so we’re enjoying a very nice revenue per unit on those vehicles, yes.

John Larkin - Stifel Nicolaus & Company, Inc.

Did you see a bit of a spike in the month of June in particular?

Anthony G. Tegnelia

Yes we did, and that is where, as Greg had mentioned, we put the additional capital in so we could generate more revenue and profitability with that dynamic happening in the marketplace with the tractors.

John Larkin - Stifel Nicolaus & Company, Inc.

Got it. Thank you very much.

Operator

Your next question comes from John Lagenfeld. – Robert W. Baird.

Jon Lagenfeld – Robert W. Baird

Can you comment on the pipeline, what you’re seeing on the contractual leasing in size and also time to close a deal, if you’re seeing any changes on that end?

Gregory T. Swienton

I know that it’s not getting easier and it’s tough out there, but I’ll let Tony comment.

Anthony G. Tegnelia

John, we are seeing our pipeline continue to grow. As we had discussed a number of quarters in a row, we continue to invest in a very, very strong sales force that we have in the marketplace, and they’re all required to develop and work a pipeline, so our pipeline continues to grow, it’s a very strong pipeline, we like the component of the pipeline that relates to large deals. I’ll also tell you that customers are deferring some of their decisions. They are delaying a bit. We’re also seeing that impact to some extent in the rental utilization at the same time, but it is a strong pipeline, we’re very happy with where that pipeline is, we’ll be there whenever those customers make decisions. Now there is somewhat of a mixed bag. We are seeing some defer, we’re also seeing a number of other customers, really can’t wait any longer as a result of the ages of their private fleet and some things of that nature, so where we feel very good about the pipeline as we go into the future. It’s solid and growing.

Jon Lagenfeld – Robert W. Baird

Does the pipeline feel a similar way back in 2001 or 2000? How quickly did the pipeline dry up I guess is my question when you look back.

Anthony G. Tegnelia

I’ll tell you our processes here for evaluating the pipeline and determining the pipeline are dramatically different now than they were in 2001 and 2002, so I would say the quality of that pipeline and the probability of converting that pipeline to genuine sales is dramatically improved and much higher than it was in those earlier years. As a matter of fact, we’re seeing that on our closing ratios right now. Our closing ratios continue to improve. Our replacement ratios continue to improve, while at the same time the pipeline is higher, and also the higher quality. We cleansed the pipeline process a number of years ago and the value of the pipeline really determines on the quality of the pipeline and the closeabilty of that pipeline, and we’ve made a lot of progress in proving that.

Jon Lagenfeld – Robert W. Baird

And would you say the pipeline is a similar size to where it was 12 months ago?

Anthony G. Tegnelia

No, it’s larger than it was 12 months ago, clearly.

Jon Lagenfeld – Robert W. Baird

And then what would, I think at the beginning of the year you guys had a growth CapEx and full service leads of $100 million to $170 million and I know you have a number of moving parts here with extensions and probably lower maintenance CapEx, but where would you suspect that you are relative to that range?

Anthony G. Tegnelia

I think, and Robert’s probably finding the right page, I think that we’re down a little bit with pure top line growth CapEx. I think that’s down a bit from the original forecast, but what has improved in terms of the performance is better retention on existing equipment and plus you have the extensions.

Robert E. Sanchez

The extension is what’s driving some of the CapEx down because clearly as you see 1,000 more extensions in the year to date, that equates to a significant amount of CapEx. You’re looking at just year to date, could represent $100 million in CapEx as being deferred.

Jon Lagenfeld – Robert W. Baird

That’s what I was thinking, in effect, really, your maintenance CapEx is coming down in one respect, so the growth CapEx, would that stay in a similar range, $100 million to $170 million or is even that towards the lower end?

Anthony G. Tegnelia

More towards the lower end.

Jon Lagenfeld – Robert W. Baird

And why would that be if your pipeline is bigger today?

Gregory T. Swienton

Because even though the pipeline is bigger, the ink and pulling the trigger by those customers that time frame is extending.

Jon Lagenfeld – Robert W. Baird

Okay, that makes sense. I think you gave this in the first quarter, I don’t know if you have an estimate this quarter, of what the organic full service lease revenue growth would have been?

Gregory T. Swienton

I think it would have been about 2% to 4%, if you can confirm that, Tony.

Anthony G. Tegnelia

Slightly more than half of our total contractual revenue growth in the second quarter came from the acquisition which is greater than it was in the first quarter and our commitment that we’ve made for total contractual growth throughout the year remains solid but the mix between acquisition and organic is dynamic.

Jon Lagenfeld – Robert W. Baird

Good, and then on the unallocated corporate expense side, you made the comment in the press release how relative to the prior year, I understood the delta there, but what about relative to the first quarter? It looks like the corporate unallocated amount was down $2 million or $3 million.

Gregory T. Swienton

Yes, it was down a little bit.

Jon Lagenfeld – Robert W. Baird

Is there a reason why? I’m just trying to understand what a go-forward rate on that unallocated. I think in the first quarter it was $11 million or $11.5 million and in this quarter it was $8 million or $8.5 million, somewhere in that range.

Gregory T. Swienton

I would say that for the second quarter, there’s always an effort when you have challenging times to try to control your expenses, so that’s a part of it. I think going forward unless we did something more dramatic, it’ll probably be around $10 million a quarter.

Jon Lagenfeld – Robert W. Baird

Okay, and then what about the credit environment, Greg. How have you guys looked at that as a positive, negative, how is that impacting your leasing business?

Gregory T. Swienton

Robert, do you want to talk about credit and fund availability and how it’s affecting our business?

Robert E. Sanchez

Sure. From a funds availability, clearly the spreads with the banks has increased a bit. We’re seeing that rising, although the base rate had come down clearly for the year. Our access to capital still remains strong. I think we’re still seeing interest from the banks, certainly as some of them rebalance their portfolios. We’re still viewed as a strong company in terms of the fact that our debt is backed by assets and long term contracts, so even though clearly the spreads have increased a bit, we’re still in a very good position and have a lot of access to capital.

Jon Lagenfeld – Robert W. Baird

Does it help the value proposition to customers, I don’t know if it’s even noticeable, that says, “Look, we have better access to capital than you” so maybe that part of the value proposition helps?

Robert E. Sanchez

Yes, that’s part of it, and it’s also the fact that our asset management program, we’re able to buy the vehicles cheaper, we’re able to manage them better, and then we’ve got better sales proceeds at the end, therefore the full package for them is much better, so as things tighten up for customers, they’re looking for spending their capital on their core business and looking to Ryder to leverage our infrastructure to capitalize their fleet.

Gregory T. Swienton

I think the critical thing to reiterate is that they must be credit-worthy, so these have to be good credit quality customers and the fact as Robert says that we have better buying power, we have better leverage, and then they can invest their limited capital into their core operation of the business is exactly the value proposition that we are selling.

Operator

Your next question comes from Edward Wolfe – Wolfe Research.

Ed Wolfe – Wolfe Research

The stock has fallen. It’s down over $6 on what seems like a very strong report. Maybe there’s a little confusion on the guidance range, so we can we just start... You gave guidance at $465 in the mid range. Are you assuming $1.10 or $1.22 in second quarter as part of that?

Gregory T. Swienton

We are assuming $1.22 in the second quarter as part of that.

Ed Wolfe – Wolfe Research

But for the second half of the year, you’re implying a number well below where consensus is, yet I don’t get a sense from you going forward that that’s your implication that these trends are not keeping up.

Gregory T. Swienton

That’s the way the numbers work. The third quarter, obviously where we’re saying $1.25 to $1.30 versus $1.14, that’s probably up I guess about 11% or so if that’s the way the numbers work out, so the issue is probably what are we thinking or what are people interpreting? We’re thinking about the fourth quarter. I would say that where we have more visibility as we do in the third quarter, we have more confidence in the numbers. In this environment where there’s an awful lot of uncertainty regarding economic environment and activity, the further out you look, the less certainty we have of what may be happening, more like 4 to 6 months from now. That doesn’t mean we expect that things are going to fall off the edge or that it’s going to be particularly problematic but because of the longer time horizon in this environment, including things like the Toyota strike that we talked about and they and us trying to figure out what the true impact will be or the full impact will be or whatever, any other customer may be doing in that regard, we probably are pre-disposed to give more weight in the fourth quarter to the downside we know than the upside we’re not sure of.

Ed Wolfe – Wolfe Research

Generally though, is fourth quarter a seasonally... It’s recently been a better quarter than third quarter, certainly not a dramatically worse quarter, is that fair?

Gregory T. Swienton

It’s been usually about the same, a little less or a little better. In fact, if you were to plot the long term moves of activity between quarters, we had always kind of planted to be just about the same as the third quarter or a little bit less. That’s in a normal environment. In this sort of uncertain environment, again, I think that what we’ve kind of looked at our numbers, is that we put more weight on the downside that we know than the upside that we’re unsure of, and I think that’s probably why the fourth quarter comes out to be shorter that way.

Ed Wolfe – Wolfe Research

Do you feel any differently than you did a quarter ago when you gave guidance because you were short and proved to be very conservative then? Has the climate gone dramatically different so that you feel even less visibility or is it the same?

Gregory T. Swienton

I think that we probably feel the same about confidence and visibility more than a quarter out. I don’t think that’s changed a lot. We had a wider range previously because we knew there were uncertainties, we talked about strikes before, we’ve had things happen that we knew would happen and some that didn’t, and some of them we overcame, so we’ve tightened up the range. It’s still essentially at $4.65 with a tighter range, a higher bottom and a lower top. I think that from our standpoint that’s prudent. I don’t see the value in going out on a bigger limb at this point considering the environment we’re in.

Ed Wolfe – Wolfe Research

I understand and I agree with you. Switching gears, the $8.1 million drag you mentioned from Brazil on SCS, how much of that was related to litigation and strikes that’s not ongoing?

Gregory T. Swienton

I think that there’s about $1 million from litigation in the second quarter. I don’t know that that will require anything additional. I think from what I just heard it’s maybe more like $2 million. Strikes were about $2 million to $3 million and that wouldn’t be continuing.

Ed Wolfe – Wolfe Research

Okay, so $4 million to $5 million kind of.

Gregory T. Swienton

Yes, and I think what we’ll be struggling with is about a $2 million quarterly run rate on transport costs and volume issues.

Ed Wolfe – Wolfe Research

And that’s a matter of time is your best guess to get that under control?

Gregory T. Swienton

Yes. Time and focus.

Ed Wolfe – Wolfe Research

And are we talking quarters or years when you think about that?

Gregory T. Swienton

Quarters.

Ed Wolfe – Wolfe Research

The au to side of things, can you talk a little bit about, obviously the axle strike has a tremendous impact as you alluded to and as you talked about in your guidance last time. How is that different from just auto sales being atrocious?

Gregory T. Swienton

Well it’s an issue of what particular plants you serve, so I think that the one you mentioned and a couple of others were very plant-specific and that cost us about $0.03 a share in the second quarter. That was about in the range that we had anticipated. Since it ended in May, that was the end of it. When we talked in the first quarter, we said it could be $0.03 a month in the quarter, so that’s why we didn’t take the $0.03 hit in June. For sales generally, I think what you see from all the manufacturers is they’re all moving away from SUVs and trucks. That in fact was the impetus of the Toyota announcement. They’re all going to try to go to cars smaller and hybrids that clearly will sell in the marketplace. I think as those conversions occur, and people are going to be wanting to drive more fuel-efficient vehicles at these prices, you’re going to see volumes pick up again, I mean notwithstanding people’s levels of disposable income to buy cars, but I think that again it’s a matter of longer term direction and the cars that people want to buy, and in the plants we serve, and a number of the plants we serve are still for the several manufacturers that we serve are largely those that are associated with vehicles that are being built that I think the public will want to buy in the long term.

Ed Wolfe – Wolfe Research

So if I look at auto volumes say in terms of railroad volumes, there’s been no improvement since the strikes were solved that’s noticeable. It sounds like from your view there has been improvement both in volume and in cost, is that a way to think about it?

Gregory T. Swienton

Well I think there will be. I think that there will be over time, but I don’t think we’re there yet.

Ed Wolfe – Wolfe Research

Okay, because why, they’re slow to get back to where they were, or what’s going on?

Gregory T. Swienton

It takes a while to retool plants to put in a different line.

Ed Wolfe – Wolfe Research

What’s the timing on that?

Gregory T. Swienton

It could be three months or more.

Ed Wolfe – Wolfe Research

When I think about ongoing SCS and FMS margins, is there anything in this quarter obviously with supply chain we’ve got to add back some of those one-timers in Brazil, and over time the tool up that we just talked about with the strikes in the US. What’s the right... This margin has been moving around a little bit, there are different things in it. Is the MBT margin for supply chain closer to 4% or 5%? How do we think about it versus the less than 2% that you printed?

Gregory T. Swienton

I think that’s sort of the floor that we’d like to operate at. T hat’s where we’ve been and over time we’d like to move that up by 100 or 200 basis points as well. I think that depending on the economy and depending on our ability to sell not only to additional industries but to gain more incremental sales, I think all of that, when you leverage that over existing technology and workforce and process, that’s what over time will get the overall MBT as a percent of operating revenue moving up, but I think at least as a floor, it ought to be 4% to 5% and that’s where we had been in the somewhat recent past except for this environment and special events.

Ed Wolfe – Wolfe Research

How quickly can you get back to 4% do you think?

Gregory T. Swienton

If I was too aggressive then I wouldn’t match my last comments about the fourth quarter. I think we’ll take a hard look at that and see what level of improvement we can have as we go into 2009, but we haven’t put that plan together yet.

Ed Wolfe – Wolfe Research

Fair enough, and the almost 15% MVT at FMS this quarter, is that sustainable? We obviously have to take out a little bit for fuel but is that something that... Is there anything else unusual here?

Gregory T. Swienton

I’ll let Tony comment on this segment.

Anthony G. Tegnelia

I think you do need to take a little bit out for fuel but generally speaking, with the [inaudible] acquisitions that we’ve talked about and with a lot of the productivity improvement and productivity programs that we have in place in our operating locations, we are seeing expanded margins, but you would have to take a little bit out for fuel but there’s a lot of good work being done in productivity improvement with our technicians.

Ed Wolfe – Wolfe Research

The average length of a lease extension is about how long?

Anthony G. Tegnelia

It’s about 12 to 18 months generally, varies by the condition of the vehicle and also the customer’s asset plan. Typically 18 months.

Ed Wolfe – Wolfe Research

Are there more acquisitions? It seems like these 100 million give or take acquisitions are very incremental as you’re saying to the margin. Are there more of these on the horizon?

Gregory T. Swienton

Our pipeline for acquisitions is very opportunistic. Individuals who own the companies, as you’ve seen, they’re all privately held companies. They’re personal family, personal financial conditions change. Sometimes we get a call, sometimes relationships from the year and the past reinvigorate, so it’s very opportunistic, but the pipeline is fine.

Ed Wolfe – Wolfe Research

Okay, and were the floods any benefit in the quarter and going forward with all this FEMA money going to the Midwest, do you see an opportunity for some benefit there?

Gregory T. Swienton

Unfortunately, climactic catastrophes do help the rental business, actually.

Ed Wolfe – Wolfe Research

Did they actually help though in the second quarter, and what’s your expectation for third?

Gregory T. Swienton

Well the climactic conditions in the second quarter impact those regions. I can’t predict any kind of activity as we go into the future from that source of revenue.

Ed Wolfe – Wolfe Research

Fair enough. Thanks a lot for the time, everybody.

Operator

Your next question comes from Todd Fowler - KeyBanc Capital Markets.

Todd Fowler – KeyBanc Capital Markets

Good morning. Greg, I guess looking historically and back along the same lines in the lease extensions, can you talk about how many quarters you see the growth in the lease extension, is that something we should expect to see for 4 or 5 quarters, or is it generally a 2 or 3 quarter thing before people go back and then start signing the leases for the vehicles again?

Gregory T. Swienton

I think it’s really a shorter period. I don’t think we’ve seen... If things start picking up, you’ll see some movement away from that, and people may be making longer term commitments, so I would say it’s normally shorter and Tony, I don’t know if you have any other color on that.

Anthony G. Tegnelia

I think it relates to the confidence factor on the part of these private fleet operators. If they see their business volumes firming up and starting to expand, then they’ll make longer term commitments. There is a 2010 technology change coming and we believe that there will be some impact on the 2009 lease sales because of that, probably somewhat tempered from what we saw in 2006 going into 2007, but we think the extensions will be another quarter or so, then they’ll have to make a decision in ’09 to avoid the 2010 uplift and the higher new vehicle investment. Their volumes are there then they may be more confident to make the longer term decisions.

Todd Fowler – KeyBanc Capital Markets

And then historically you’ve seen when somebody does extend the lease, generally they do come back in at some point after the 12 or 18 month period and pick up a new vehicle.

Gregory T. Swienton

We have a very high renewal rate on extensions, yes.

Todd Fowler – KeyBanc Capital Markets

Okay good, that’s helpful and then what about the profitability on the leased extensions versus the new leases? My sense is that they are a little bit less profitable but it helps on the working capital side.

Gregory T. Swienton

No, that’s actually not true. Our return on assets for extensions are actually a very, very high return. We don’t discount or lower the price on an extension. We keep the price steady state during the extension period. The book value of the assets decline and interest expense related to that unit is declining, and those declines more than offset any possible increases in renting cost, so there is actually improved returns and profitability on extensions. We like extensions and of course it does preserve our capital.

Todd Fowler – KeyBanc Capital Markets

I don’t want to focus too much on just a little blurb that was in the release, but there was a comment in the dedicated business about the non-renewal of certain customer contracts. I was hoping that you could provide a little bit of color around what you saw here in the quarter and what the issues were with people not renewing the dedicated business and if that’s something that should subside here, it’s kind of a one-time issue, or something that you could see as the environment remains soft and the higher fuel costs persist?

Gregory T. Swienton

I think that the comment refers to what sometimes happens in certain periods of time. You sometimes have some churning. You sometimes have business that you upon time of renewal an sometimes they come up for renewal that based on the returns or the profitability or the decisions are sometimes the decisions impacting a customer. You may have some turnover. Sometimes there are customers you don’t want to lose, and sometimes there are some that you end up by negotiation not renewing. I think that’s just what happened here. I don’t think it’s a significant comment other than one that occurred during the quarter and happens in various quarters over time.

Todd Fowler – KeyBanc Capital Markets

Okay good, and that was one customer or that was multiple customers during the quarter?

Gregory T. Swienton

I think there were probably a couple.

Todd Fowler – KeyBanc Capital Markets

And then just lastly here, with the guidance, what is the tax rate this year kind of we should think about with the guidance going forward?

Gregory T. Swienton

Robert?

Robert E. Sanchez

I think going forward what you should use is something just slightly lower than the 39.1% that we had originally put out.

Todd Fowler – KeyBanc Capital Markets

And on the share count?

Anthony G. Tegnelia

55 million, 56 million?

Gregory T. Swienton

That assumes we continue to repurchase at the rate we did this quarter and we did 920,000 in the discretionary plan?

Robert E. Sanchez

Right.

Todd Fowler – KeyBanc Capital Markets

Okay, thanks a lot.

Operator

Your next question comes from John Barnes – BB&T Capital Markets.

John Barnes – BB&T Capital Markets

Looking at the extensions and the early terminations, first on the extensions, can you give us a feeling for... You said it was more profitable because you’ve got the depreciation I guess coming off, interest expense coming off, can you talk a little bit about the magnitude of the incremental margins on that? Do you expect the level of extensions to continue at this pace or do you think they’ll moderate some through the balance of the year?

Gregory T. Swienton

The first part of the question we probably won’t answer for competitive answers. The second part of the question I’ll let Tony answer.

Anthony G. Tegnelia

I think you’ll see that moderate in probably the first quarter, second quarter of next year, something like that. I think you may see it continue throughout the rest of this year. Yet also is a factor of the leases that are actually coming to term. So we do have dramatically fewer leases coming to term this year, but yet the extensions are still quite a bit higher, so the terms coming, the contracts coming to term in the third and fourth quarter have a lot to do with the rate of extensions at the same time, but the economic drivers I’ll think you’ll see depending on how the economic environment firms up for those customers. If it weakens, you’ll probably see some more extensions. If it strengthens, I think you’ll see and make the longer term commitments.

John Barnes – BB&T Capital Markets

And then on the early terminations, it looks like a fairly stable number versus a year ago. Can you just talk about, is that just a function of the economy and do you expect it to kind of stay at maybe around this 2300 level or do you anticipate that maybe it begins to improve? Is it very much similar to your comments just now on the extensions?

Gregory T. Swienton

I think the early terminations do continue to decline. We’d like to get it to a lower level than it is, but we’re not particularly concerned about it. We’ve had a very, very high success rate on the redeploys, and typically the early terminations that you’re seeing now are negotiated and worked out with existing customers who had needs to reduce the size of their fleet. We turned that into an opportunity to solidify that customer relationship. We’ll take a few units back form that customer, solidify the relationship, do an exchange for future commitments when their business comes back. We very quickly redeploy those units. You can see our redeploys went up. We like the profitability on the redeploys. It gives us an opportunity to win over a new customer with perhaps a less expensive unit because it isn’t brand new, and overall Ryder comes out quite well, preserves our capital, solidifies our relationship with that customer, and we almost always trade a early term fleet reduction with a future commitment with that customer.

John Barnes – BB&T Capital Markets

Very good, thanks for your time guys.

Operator

Your next question comes from David Campbell – Thompson, Davis & Co.

David Campbell - Thompson, Davis, & Co.

What did Gator add to the second quarter operating revenues and pretax if you can say?

Gregory T. Swienton

I think generally speaking, Gator will be accretive to us this year. It did come in during the quarter and we’re very pleased with that acquisition. They have an excellent reputation in the Florida market. They are a very good player. We like their rates. They had very excellent real estate locations which will become part of our network. They have many employees that we have held in high regard for a long period of time, so they will be accretive for us this year and we’re very pleased to have them as part of our portfolio.

David Campbell - Thompson, Davis, & Co.

So they might have added $4 million in revenues?

Gregory T. Swienton

The portion of our contractual growth that came from acquisitions in the quarter was really the previously negotiated acquisitions, Lilly and Pollack last year of course.

David Campbell - Thompson, Davis, & Co.

I know, that 50% includes them, but I was just saying just Gator alone would have added some revenues --

Robert E. Sanchez

It did add some revenues. It did not add meaningful MBT in the quarter because of the transaction closing costs that were incurred during the quarter at the same time. The real profitability form the acquisition typically comes in subsequent quarters when we have the margin expansion from the tuck in concept and also do not incur the transaction costs at the same time.

David Campbell - Thompson, Davis, & Co.

Okay, thanks, and foreign exchange, you mentioned 1% of FMS revenues growth in the quarter. What about the supply chain solutions division?

Robert E. Sanchez

On supply chain, FX was given about 2% or 2.5%.

David Campbell - Thompson, Davis, & Co.

Okay, 2.5% of the revenue growth, right?

Robert E. Sanchez

Of gross revenue.

David Campbell - Thompson, Davis, & Co.

And the full year tax rate that you mentioned, the 39%, I guess that’s the full year that includes 44% in the second quarter?

Anthony G. Tegnelia

That’s taking out the outer period portions of the 44% which gets you to 41% so 41% for the second quarter and then the full year would be slightly below 39%. I’m sorry, the second half would be slightly below 39%, full year right around 39%.

David Campbell - Thompson, Davis, & Co.

Right. Second half less than 39%. Okay, and in a general sense, you mentioned the fourth quarter your forecasts are implying relatively flat fourth quarter earnings. What does it say, or does it say anything about 2009? I mean, in order to get growth in earnings, do you need a better economy next year or should we not look at this fourth quarter forecast and assume it means anything for 2009?

Gregory T. Swienton

No, you really can’t extrapolate any meaning yet into 2009 because in 2007 we didn’t have a good economy and we had a growth in revenue and a growth in earnings. We don’t’ have a good economy in 2008 and we have a growth in revenue and a growth in earnings, so we’d like to think that there might be some recovery in 2009 but until we get later in the year, we’ll determine what that business plan is. Clearly our intention is because of the value proposition of outsourcing it, we are selling throughout all of our segments, we believe that we will grind it out and work on getting good contractual revenue and earnings from that but it’s too early to say what our prediction will be on 2009 economic environment.

David Campbell - Thompson, Davis, & Co.

Okay, and in your prepared remarks you mentioned that there was a $3 million cost of North American strikes included in the second quarter. I didn’t remember if that’s revenue or pre-tax.

Gregory T. Swienton

That was earnings, so it’s $0.03 EPS, earnings per share.

David Campbell - Thompson, Davis, & Co.

That’s earnings per share of $0.03. Okay, but you didn’t give us a revenue impact then.

Gregory T. Swienton

About $7 million lost revenue.

David Campbell - Thompson, Davis, & Co.

Okay, good and then I think, I’m trying to go through my numbers here, I think that’s probably it. Most of my other questions have been asked. Thank you very much.

Gregory T. Swienton

You’re welcome. Normally I’d continue taking calls but we’re almost 20 minutes over time and I actually have to head to a TV studio to do some TV interviews on the quarter, so if there are any additional callers in queue for questions, we’ll ask them to get in touch with Bob Brunn, our Director of Investor Relations, 305-500-4210, and you can follow up with him. We’ve had a lot of questions, a lot of discussion today, and we’re considerably over time, so we’ll have to ask the operator to wrap it up.

Operator

Thank you. At this time I would like to turn the conference over to Greg Swienton.

Gregory T. Swienton

You’ve heard my summary. For those of you who hung on this long, thank you. For those calls we couldn’t get to, we apologize, but again, you can follow up with Bob Brunn. Thanks for your attendance and have a good, safe day.

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Source: Ryder System, Inc. Q2 2008 Earnings Call Transcript
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